5 May 2015

Eurozone crisis: has the dust settled?

In 2010 the financial crisis, that started in the United States, turned first into a Greek sovereign crisis and then into a full-blown bank-sovereign debt crisis that at one point threatened the very existence of the monetary union.
Economists enumerated four major economic challenges the Eurozone is facing: 1) high debt levels and public deficits in some Eurozone countries; 2) a weak European banking system; 3) economic recession and high unemployment in some Eurozone countries; and 4) persistent trade imbalances within the Eurozone. Each of the challenges were addressed by EU policy makers to a greater or lesser degree.
The European Union and the Eurozone have seen a remarkable push for further integration of economic and monetary policies. In order to get high debt levels and public deficits under control, the EU is evaluating, more carefully than before, the public finances and fiscal policies through the Stability and Growth Pact (SGP). The rules of the SGP’s ‘preventive arm’ bind EU governments to their commitments towards sound fiscal policies and coordination by setting each one a budgetary target, known as a Medium-Term Budgetary Objective (MTO). In the ‘corrective arm’ of the SGP, the Excessive Deficit Procedure (EDP) ensures the correction of excessive budget deficits or excessive public debt levels. The EU Treaty defines an excessive budget deficit as one greater than 3 % of GDP. Public debt is considered excessive under the Treaty if it exceeds 60 % of GDP without diminishing at an adequate rate. It is a step-by-step approach for reining in excessive deficits and reducing excessive debts. At this moment still 11 countries (Croatia, Malta, Cyprus, Portugal, Slovenia, Poland, France, Ireland, Greece, Spain and UK) are in excessive deficit procedure.
Tackling the weaknesses in the European Banking system, the European Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market. The EU institutions agreed to establish a Single Supervisory Mechanism and a Single Resolution Mechanism for banks. Banking Union applies to countries in the euro-area. Non-euro-area countries can also join. Both the supervisory and resolution mechanisms are underpinned by a set of common rules for banks in all 28 Member States, known as the ‘single rulebook’. These rules are designed to prevent bank crises from happening in the first place, for example by increasing the amount of capital that banks are required to have  and when they do happen, providing a common framework to manage the process of winding the banks down.
To tackle the economic and trade imbalances, the EU implemented new economic rules which are organised annually in a cycle, known as the European Semester. Each European Semester the European Commission analyses the fiscal and structural reform policies of every Member State, provides recommendations, and monitors their implementation. The EU Member States implement the commonly agreed policies. In addition, the Macroeconomic Imbalance Procedure (MIP) was introduced. This is a surveillance mechanism that aims to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and correct the imbalances that are already in place. Currently 16 countries identified in the Alert Mechanism Report (AMR) of 28 November 2014 as experiencing macroeconomic imbalances.
The EU has done its homework in often difficult circumstances. It is now up to the EU Member States not to be complacent and to continue its structural reforms. Although most observers do not question the Euro itself anymore, it remains to be seen how much the Juncker Commission will be dominated by the recurring debates on Greece, the European banks or the quantitative easing debate. Many challenges persist. One thing is sure: no Eurogroup meeting passes by without a discussion on this topic.
This topic will be debated at the European Business Summit on 6th and 7th of May.