LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 1
LBMA Precious Metals Conference 2013, Rome Monday 30th September.
Is Europe waisting its crisis?Intervention of Francesco Papadia*
With the assistance of Mădălina Norocea1
2
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
PLAN OF THE PRESENTATION
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 2
3
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
Progressing through crises
4
Pro-active vs. Re-active
“the euro will survive and emerge stronger from the crisis”
“ J’ai toujours pensé que l’Europe se feraitdans les crises, et qu’elle serait la somme dessolutions qu’on apporterait à ces crises ”Jean Monnet
Adequate speed of speed of reaction?
“Delors fu capo, con un gesto che pochi ricordano.Il gesto fu di anticipare al 1988 la liberalizzazionedei movimenti di capitale, la liberalizzazionefinanziaria, innescando così quello stringersi dicontraddizioni che portò a riconoscere come solavia d´uscita la moneta unica”
Tommaso Padoa-Schioppa
If it’s not broken don’t fix it
...“Because deep national sovereignty is relinquished only
during an extraordinary crisis, the euro area policy response can only
be reactive” Bergsten, Kirkegaard
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 3
5
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
Crisis
GDP developments
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Ind
ex (
1999
bas
e ye
ar)
Germany Greece Ireland Italy Portugal Spain Euro area
Source: IMF
6
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 4
Budget deficit (% of GDP)
-35
-30
-25
-20
-15
-10
-5
0
519
91
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%
Germany Greece Ireland Italy Portugal Spain
Crisis
Source: IMF
7
Public gross debt (%of GDP)
0
20
40
60
80
100
120
140
160
180
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%
Germany Greece Ireland Italy Portugal Spain
Crisis
Source: IMF
8
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 5
9
Nominal unit labour costs
Source: EU Commission, AMECO
1.0
1.1
1.2
1.3
1.420
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Reb
ased
ind
ex (
200
5=10
0)
Germany Ireland Greece Spain Italy Portugal
Crisis
Current account balances (% of GDP)
-20
-15
-10
-5
0
5
10
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%
Germany Greece Ireland Italy Portugal Spain
Crisis
Source: IMF
10
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 6
11
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
EONIA-MRO spread
Source: ECB
12
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
Jan-
03
Aug
-03
Mar
-04
Sep
-04
Apr
-05
Oct
-05
May
-06
Nov
-06
Jun-
07
Jan-
08
Jul-
08
Feb
-09
Aug
-09
Mar
-10
Sep
-10
Apr
-11
Nov
-11
May
-12
Dec
-12
bp
s
21 7653 4
Notes:(1) Lehman Brothers Collapse; Injection of liquidity via fine tuning operations(2) Narrowing of the corridor & Full allotment at fixed rate(3) 1st 1 year LTRO(4) Start of SMP(5) & (6)The 3 year LTROs(7) Deposit rate cut to 0
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 7
0.00
0.50
1.00
1.50
2.00
2.50
%
Euribor 3mth-OIS
Euribor 6mth-OIS
Euribor 12 mth-OIS
0
5
10
%
Spain IrelandPortugal Italy
10 yr govies spread to DE:
0
4
8
An
nu
al y
ield
%
DE and ES covered bond spread
Unprecedented spreads
13
Source: ECB, Markit
14
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 8
15
Economic and Fiscal Union
Idiosyncratic shocks
mutualizing tool
Banking union
Maastricht Treaty
Growth and Stability Pact
Single currency
Single payment system
National supervisi
on“doom loop”
Single currency
Shock absorbance alternative tool
Monetarists vs. Economists
Monetary Union
Mild version
Missing institutional components :
Crisis
16
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 9
Current account balances (% of GDP)
-20
-15
-10
-5
0
5
1019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
1720
18
%
Germany Greece Ireland Italy Portugal Spain
Estimates
Source: IMF
17
Budget deficit (% of GDP)
-35
-30
-25
-20
-15
-10
-5
0
5
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
%
Germany Greece Ireland Italy Portugal Spain
Estimates
Source: IMF
18
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 10
19
Nominal unit labour costs
Source: EU Commission, AMECO
0.9
1.0
1.1
1.2
1.3
1.4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Reb
ased
ind
ex (
200
5=10
0)
Germany Ireland Greece Spain Italy Portugal
Public gross debt (%of GDP)
020406080
100120140160180200
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
%
Germany Greece Ireland Italy Portugal Spain
Estimates
Source: IMF
20
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 11
Estimates
GDP developments
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ind
ex (
199
9 b
ase
year
)
Germany Greece Ireland Italy Portugal Spain Euro area
Source: IMF
21
22
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 12
EONIA-MRO spread
Source: ECB
23
Notes:(1) Lehman Brothers Collapse; Injection of liquidity via fine tunning operations(2) Narrowing of the corridor & Full allotment at fixed rate(3) 1st 1 year LTRO(4) Start of SMP(5) & (6)The 3 year LTROs(8) Start of 3 yr LTROs early repayment (9) MRO rate cut
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4Ja
n-03
Aug
-03
Mar
-04
Sep
-04
Apr
-05
Oct
-05
May
-06
Nov
-06
Jun-
07
Jan-
08
Jul-
08
Feb
-09
Aug
-09
Mar
-10
Sep
-10
Apr
-11
Nov
-11
May
-12
Dec
-12
Jun-
13
bp
s
21 7653 4 8 9
Unprecedented spreads
Source: ECB, Markit
0
1
2
3
%
Euribor 3mth-OISEuribor 6mth-OISEuribor 12 mth-OIS
0
5
10
%
Spain Ireland
Portugal Italy
10 yr govies spread to DE:
0
2
4
6
8
Oct
-07
Jan-
08
Apr
-08
Jul-
08
Oct
-08
Jan-
09
Apr
-09
Jul-
09
Oct
-09
Jan-
10
Apr
-10
Jul-
10
Oct
-10
Jan-
11
Apr
-11
Jul-
11
Oct
-11
Jan-
12
Apr
-12
Jul-
12
Oct
-12
Jan-
13
Apr
-13
Jul-
13An
nu
al y
ield
%
24
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 13
25
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
26
Single currency
Single payment system
National supervisi
on
Economic and Fiscal Union
Idiosyncratic shocks mutualizing tool
Banking union
Maastricht Treaty
Growth and Stability Pact
“doom loop”
Single currency
Shock absorbance alternative tool
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 14
27
EU Economic Governance Regime1998/1999 Stability and Growth PactPreventive / Corrective Arm: Surveillance of budgetary and economic policies; Excessive deficit procedure implementation.2010 European SemesterSynchronizing the economic and fiscal reporting calendars; Changing the ex-post coordination to ex-ante; Dealing with the prevention part of the MIPMarch 2011 Euro Plus PactCoordination of fiscal policies through structural dialogDecember 2011 "Six Pack" (5 Regulations and 1 Directive)Applies to all 27 MS, with specific sanctioning rules to € area MSStrengthening the SGPs fiscal surveillance procedures: Reinforcing the Preventive and Corrective Arm (i.e. the EDP applied to the MS that breached the deficit/ debt criteria); Operationalizing the debt criteria (launching the EDP on the basis of a debt ratio of above 60% of GDP); Quantitative definition of "significant deviation" from MTO; Financial sanctions for €-area MS imposed gradually from preventive arm to later stages of EDP; Enforcing RQMV;Macroeconomic Scoreboard (MIP): New mechanism to identify and correct macroeconomic imbalances.
(*) “ Two pack” (2 Regulations )€-area MS onlyIntroduce stronger surveillance and assessment mechanism: Setting a common budgetary timeline; budget drafts to be presented to the EC before 15th of October; Common budgetary rules to be monitored by independent institutions
January 2013 Fiscal compactThe fiscal section of the TSCG (Treaty on Stability, Coordination and Governance) Compliance with budgetary and debt rules; Structural balance of general government should be at MTO or automatic adjustments will be triggered.
Note: (*) Proposed by the EC in November 2011 and agreed upon on February 2013
28
Single currency
Single payment system
National supervision
Economic and Fiscal Union
Idiosyncratic shocks mutualizing tool
Banking union
Maastricht Treaty
Growth and Stability Pact
“doom loop”
Single currency
Shock absorbance alternative tool
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 15
29
Banking union
A single Rule Book
A single supervision:
A single resolution mechanism
A common deposit guarantee scheme
ECBPolitical difficulties
Technical difficulties
Idiosyncratic shocks
mutualizing tool
EFSF
ESM
Liquidity provisions
30
I. Monnet and Padoa-Schioppa: on the brink theory. II. A complex crisis
a. Economic, b. Financial/monetary, c. Institutional, limitations in
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
III.The progress so fara. In the economic field, b. In the financial/monetary field, c. In the institutional field as regards
i. banking union, ii. fiscal and economic union,iii. mutualisation of shocks,
IV.An overall assessment.
LBMA/LPPM Precious Metals Conference 9/30/2013
Session 1 ‐ Papadia 16
31
Q: Adequate speed of speed of reaction?
A: Right direction, sufficient speed.
Persisting vulnerabilities
Adjustment fatigue in peripheral countries
Institutional innovation fatigue
North-South divide & lack of growth in Europe
Thank you!
You can find my most recent articles on monetary policy on:
http://moneymatters-monetarypolicy.blogspot.com
Twitter: @francescopapad1