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Focus: the EU's Comprehensive Policy Focus I. The EU's comprehensive policy response to the crisis This Focus section aims to provide an overview of recent milestones in strengthening economic governance, financial stability and economic growth potential in the euro area. The exceptionally challenging circumstances in the euro area since the onset of the crisis have necessitated swift yet profound action by Member States in cooperation with the Commission, supported by the ECB's policy stance, in order to regain financial stability and deal with a very deep recession. The policy measures adopted since the crisis can be broadly divided into crisis management measures and permanent systemic responses. Additional important policy decisions to address the euro area's ongoing challenges have been taken by the European Council at its meeting of 24/25 March 2011. The Council has notably introduced further systemic innovations that represent an overhaul of the legislative and operational framework governing EU economic policy coordination. Specifically, the Council has established a permanent crisis resolution mechanism and strengthened the political commitment within the euro area to spur economic adjustment and support growth and convergence. This Focus concludes that EU's comprehensive policy response will go a long way towards setting the euro area back on course towards stability, growth and employment. I.1. Introduction crisis elaborated in the euro area and the EU since the beginning of the crisis. The economic and financial crisis that struck the euro area in 2008 and 2009 has had wide-ranging I.2. Immediate crisis responses and long-lasting repercussions, which notably accompanied by systemic overhaul manifested themselves in 2010 as a number of Member States experienced rising yields and CDS Policy action designed to mitigate the adverse spreads amidst sizeable rollover needs. The scale effects of the crisis and reducing future risks has and scope of the euro-area's challenges remains spanned virtually all realms of economic and considerable, primarily in terms of ensuring financial policy in the euro area. It has also public debt sustainability, fostering growth, involved a combination of the immediate crisis providing financial assistance to Member States in management response, aimed at responding to need, and strengthening the framework for pressing needs in specific countries or sectors, and governance. more systemic measures aimed at improving the euro-area's governance system. While measures to tackle these challenges were already been put in place over the course of the The crisis management measures are the result of crisis, additional important policy responses have a search for a comprehensive approach to the been taken by the European Council at its meeting immediate adverse effects and threats posed by of 24/25 March 2011. These cover both the the crisis. The aim of safeguarding the integrity of immediate crisis response as well as permanent the euro and all economies of the euro area in the systemic measures, and the Council notably face of unprecedented market turmoil lies at the agreed two major improvements to economic and heart of this strategy, which comprises action on financial policy coordination in the euro area: A three fronts: permanent crisis resolution mechanism has now been agreed, and euro-area Member States are • In the early stages of the crisis, action has been now bound more closely together by a so-called taken to stabilize the financial system and its Euro Plus Pact, which solidifies their commitment institutions through various measures, to foster competitiveness, growth and including the granting of public guarantees, convergence. capital injections and liquidity support to financial institutions via central banks. The focus section at hand provides an overview of the comprehensive policy package adopted by the • Secondly, subsequent to the expiry of national March European Council and sets it in the context stimulus measures taken in accordance with of the broad and ambitious policy response to the the European Economic Recovery Programme (EERP) of December 2008, sizeable budgetary - 7 - Quarterly Report on the Euro Area I/2011 consolidation is necessary to bring public • Thirdly, supporting vulnerable countries is finances in the euro area back on a sustainable essential to ensure stability within the euro path. The consolidation strategy agreed at the area. Adjustment programmes for Greece and EU level is differentiated in that the more Ireland have therefore been developed over the vulnerable Member States have begun to course of 2010 between the respective national consolidate sooner. The fiscal stance is set to authorities and the European Commission in turn restrictive in 2011 in all euro-area partnership with the IMF and the ECB. The Member States. However, fiscal efforts vary programmes notably feature detailed strategies substantially in the short to medium term, as for consolidation and rebalancing in troubled deadlines for correction and required structural economies, as well as medium-term loans via efforts under the Excessive Deficit Procedures the European Financial Stability Facility (EDP) have been differentiated across Member (EFSF) and European Financial Stabilisation States, taking into account country-specific Mechanism (EFSM) to prevent sovereign circumstances. Once an excessive deficit has funding needs in these economies being been corrected, Member States are required to obstructed by prohibitive market conditions. continue their consolidation to bring their The Euro Area Summit of 11 March 2011 budgetary positions in line with the country- decided to grant an effective lending capacity specific medium-term objectives, which of €440bn to the EFSF until its expiry in require either a structural position close to 2013(1) and to lower the interest rate balance or a surplus. applicable to the pooled loan from euro-area Member States to Greece by 100bps while Table I.1: Overview of EU economic policy extending its maturity to 7½ years on average. measures since the crisis Systemic Response Crisis management measures Financial Rescue Looking beyond the more short-term initiatives, a Emergency public interventions more fundamental and permanent overhaul of Macroeconomic stabilisation economic policy coordination at the EU level has European Economic Recovery Plan proven necessary in light of the crisis. The Differentiated fiscal consolidation principal elements of this systemic response Excessive Deficit Procedure agreed at the EU level are a strengthened Support for vulnerable countries economic surveillance framework (six new Programmes for Greece and Ireland, EFSF and EFSM (combined lending capacity €500bn) legislative proposals, the so-called 'governance package'), an integrated annual surveillance cycle Systemic measures ("European Semester"), a permanent crisis resolution tool (European Stability Mechanism, or Strengthened surveillance 6 legislative proposals on imbalances, SGP reform, 'ESM'), a Euro Plus Pact, and a European System national fiscal frameworks, sanctions of Financial Supervisors. In conjunction with the European Semester aforementioned crisis management measures Integrated annual surveillance cycle these systemic responses constitute the EU's Ex-ante guidance of national economic policies comprehensive approach to tackling the crisis. Permanent crisis resolution mechanism European Stability Mechanism The strengthened surveillance framework Europe 2020 Comprehensive strategy for growth, employment comprises six legislative proposals which were and social cohesion adopted by the Commission on 29 September Euro Plus Pact 2010. (2) They aim at overhauling the EU Strengthen economic pillar of EMU and improve economic policy framework by reinforcing the policy coordination and competitiveness rules of the Stability and Growth Pact, Financial Repair Restructuring and stress testing strengthening national budgetary frameworks, Strengthening Financial Regulation preventing and correcting harmful Regulating hedge funds and rating agencies macroeconomic imbalances, and establishing an Prudential regulation changes; crisis mechanism for banks effective enforcement arm for euro-area countries. European System of Financial Supervisors European Systemic Risk Board European Supervisory Authorities (1) For more details on the EFSF please consult http://www.efsf.europa.eu/ Source: Commission services. (2) For a detailed overview of the September 2010 governance package see the editorial of the Quarterly Report on the Euro Area, Vol.9, No. 3 (2010). - 8 - I. The EU's comprehensive policy response to the crisis The new surveillance framework is expected to be will ensure a more rigorous and timely oversight enacted in mid-2011, once agreement between the of individual financial market sections. This Commission, Council and Parliament has been overhaul of the supervisory framework is reached. complemented by improvements in the financial regulatory environment, including for banks, The integrated annual surveillance cycle hedge funds and credit rating agencies, by the enshrined in the 'European Semester' will draw development of crisis resolution mechanisms for together all the elements of EU economic banks and by improvements in consumer surveillance, including policies to ensure fiscal protection. The revised Capital Requirement discipline, macroeconomic stability, and to foster Directive further transposes capital requirements growth. The processes under the SGP and the for banks under Basel III
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