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The Euro Crisis THE EUROPEAN UNION'S RESPONSE TO THE EURO CRISIS EUROZONE BAILOUTS ECB ACTIONS E BANK STRESS TEST NEW EU RULES So far Greece, Ireland and Portugal have had to apply for emergency loans from special EU funds because their borrowing costs became unaffordable. Any further bailouts would test the funds' capacity to the limit. As well as lowering interest rates, the ECB has intervened by buying government bonds and extending extraordinary liquidity support to banks, some of which in turn bought government bonds. The European Banking Authority stress-tested EU banks in July 2011. The goal was to ensure that in a stress scenario, banks held at least 5 euros for every 100 euros on loan. The EU has passed lots of laws designed to better regulate finance, and it is considering many more. Debt Maturing in 2012 Post-stress test bank leverage 500 ESM 500 Stage 1: Upcoming Stage 3: Approved 35 €489bn GOAL RESULT OUTCOMES Italy 450 | Spain 450 Stage 2: Ongoing Stage 4: In Force 30 assets EFSF common equity Greece 25 90 BANKS TESTED 400 400 5% I Portugal REMUNERATION PRACTICES 1| 2 3 4 20 350 Greece 350 Ireland 8 BANKS FAILED 16 ALMOST FAILED 15 Purchases of Sovereign Bonds Boosted EU Banks core capital under stress scenario * 300 300 1| 2| 3 | 4 still highly leveraged 10 transparency & capital levels PRIVATE EQUITY 250 250 Greece 200 200 HEDGE FUNDS 1 2 150 150 France Greece Portugal 100 100 CREDIT RATING AGENCIES 50 50 EFSM Ireland FINANCIAL Jul 2009 Jan 2010 Jul CREDIT DEFAULT SWAPS 1 2 3 Jan Feb Mar Apr May Jun Jul 'Aug Sep 'Oct Nov Dec Jul Jan ESRB 2010 2011 2011 2012 SUPERVISION European Systematic Risk Board SHORT SELLING 2 STABILITY & GROWTH PACT - NEW SANCTIONS REGIME OO A new system of supervision has been put in place in an attempt to identify potential shocks to the financial system. FURTHER CREDIT RATING AGENCY REFORMS European Supervisory Authorities THE AUDIT SECTOR The SGP was designed to stop government debt from getting out of control. Lots of countries broke the rules. Since 2011 there is a new sanctions regime. EBA EIOPA ESMA THE ACCOUNTING SECTOR REVENUES LOWER BOND BANK BAILOUTS 80% Banks Insurance Security NATIONAL DEBT MARKET ABUSE 70% WEAK FINANCE SECTOR FINANCIAL DERIVATIVES SGP 60% National Supervisors TARGET CAPITAL REQUIREMENTS 50% 40% RETAIL INVESTMENT PROTECTION 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NATIONAL DEBT TARGET 60% EURO17 THE EURO CRISIS EU27 BUDGET DEFICIT TARGET 3% WEAK GOVERNMENTS 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0% REINFORCE FINANCIAL STABILITY EU 2020 SGP -3% TARGET National Bank Resolution Laws EU2020 is a set of ambitious tårgets to reform the European economy by 2020. It addresses employment, education, R&D, poverty, energy and climate change. BUDGET DEFICIT Stress Tests -6% TARGET WEAK REAL ECONOMY HIGHER TAXES & CUTS 7 LOW TAX REVENUE Reduce annually by NEW AUTOMATIC SANCTIONS TARGET 75% DEBT TARGET EMPLOYMENT 66.8% 2% 1/20th. 0.2% GDP Labour Market Reforms OVERRIDE Deposit NON-COMPLIANCE Life-Long Learning Employment R&D Investment Penalties can Tax Reforms 0.2% GDP Fine DEFICIT TARGET only be overturned by Council Majority 3% >0.2% GDP Fine TARGET 20% TARGET - 20% The Euro Plus Pact is a March 2011 11.7% NO DATA initiative agreed by 23 EU member states. COMPETITIVENESS Wage Monitoring EUROPEAN SEMESTER 12 Productivity Measures Renewable Energy Energy Efficiency 2012 Budgetary decisions will be coordinated across the EU and subject to much more scrutiny by the Commission, Parliament and other member states. SUSTAINABILITY OF PUBLIC FINANCES TARGET 80%. ECONOMIC SCORECARD Policy Guidance to EU and Euro Area Country-Specific Surveillance DISCUSSION ON Pensions & Social Benefits 33.6% 83% TAX POLICY TARGET 40% National Fiscal Rules Jan Feb Mar Apr May Jun Jul For the first time, EU scrutiny will extend beyond debts and deficits to consider a range of economic indicators. The exact "scorecard" of 3rd Level Educated Greenhouse Gases Policy guidance European Commission Annual Growth Survey recommendations indicators has yet to be decided but is likely to include: TARGET 10% Council Adoption of guidance SINGLE MARKEŤ ACT Debate TARGET - 19% of Ministers SCORE European O Unemployment 14.1% 23% 12 levers to boost growth and confidence in the EU's common market. Launched Pending Debate Parliament O Market trends European Council Spring Endorsement of guidance O Private debt Ш EU summit Early School Leavers People in Poverty O Competitiveness The SMA covers things like energy taxation, intellectual property, access to finance for SMES and worker mobility. Adoption of national reform & convergence programmes Autumn: Decisions at national level Member Productivity States Current account The elements above represent all of the European Union's main responses to Europe's interlinked financial, economic and sovereign debt crisis. A lot has been achieved. However, critics say that not nearly enough has been done to stabilise the situation. Next on the agenda is a 'fiscal compact', due to be agreed by national leaders in early 2012. Beyond that, there are a number of things that may or may not happen but that many people think are necessary components of a sustainable resolution of the crisis. THE FISCAL COMPACT - WHAT'S NEW? EURO SUMMIT BALANCED BUDGET RULE STRONGER SUPERVISION General Government Budget Balances Structural Government Balances ECJ 0.5% NEW EURO SUMMIT STRUCTURAL -2 0.5% 3% NON-COMPLIANCE -4 -4 NEW PRESIDENT DEFICIT TARGET -6 -6 Germany Germany Euro 17 -8 -8 Ireland Ireland -10 -10 The balanced budget rule must be introduced in binding legislation, "preferably constitutional". The budgetary committees of national parliaments will liaise with each other and with the European Parliament to ensure compliance. If a state signs up to the compact, the European Commission, or another state, can sue it before the European Court of Justice for failing to install and obey this rule. The 17 national leaders of Eurozone states will meet at least twice a year. The Fiscal Compact adds a third target to the SGP's existing two. Those who sign up will in future have to keep their structural deficit below 0.5% of GDP. The structural deficit can be defined as the balance between government tax receipts and current spending, adjusted for changes in the business cycle. A new 'President of the Euro Summit' will be be elected by the national leaders. OTHER IDEAS FINANCIAL TRANSACTION TAX AN EU-WIDE BANK RESOLUTION REGIME EUROBONDS | 10 Year Bond Yields 15 Before After VERSIONS: 13 0.01% BANK FAILS • BLUE BONDS • E-BONDS IRELAND €55bn NEW COMMON PORTUGAL BONDS • SAFE BONDS • STABILITY BONDS COST COST 0.1% per year ITALY SPAIN 5 FRANCE GERMANY • REDEMPTION FUND • EU DEBT AGENCY The European Commission announced plans for a tax on financial transactions in September 2011. It claims that taxing share dealing at 0.1% and certain financial products at 0.01% would raise up to €55 billion per year, which could be used to fight future financial crises. The EU allows cross-border banking and free capital movement but it has no centralised system of liability insurance or bank resolution. Installing one would prevent the cost of bank failures from falling unfairly on one state. Pooling some or all of the Eurozone's sovereign debt into 'eurobonds' would ease the pressure on troubled countries but this is resisted by others, who would probably see their borrowing costs rise. UNLIMITED GOVERNMENT DEEPER ECONOMIC POLICY CO-ORDINATION REAL FISCAL UNION BOND PURCHASES BY ECB 300 250 200 Euro 17 150 100 Euro 17 50 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Future An alternative to Eurobonds would be the ECB buying huge amounts of government bonds to bring down borrowing costs. But this is forbidden by EU law, and the ECB is anyway reluctant to increase its exposure to sovereign debt because of risk and inflation aversion. Leading European figures have called for much deeper economic policy co-ordination, possibly including a European Ministry of Finance. Some people say that ultimately the Eurozone must move towards a full fiscal union involving federal taxes and more cash transfers between rich and poor regions. Produced by the Institute of International and European Affairs All data sourced from the European Commission, Eurostat, the European Banking Authority, Eur-Lex, EU AMACO database, Bloomberg and the IMF. This infographic forms part of the E View project, which is part-funded by DG Communication of the European Parliament. Billions of Euro EXISITING FUNDS NEW FUNDS BAILOUTS POTENTIAL DEMANDS DECEMBER 2011 LIQUIDITY SUPPORT PROGRAMME Billions of Euro LOW DEMAND LIMITED FINANCE USA Euro17 Belgium EURO PLUS PACT Germany Ireland Portugal

The Euro Crisis

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The European Union's Response to the Euro Crisis details all of the EU's main policy responses to Europe's interlinked financial, economic and sovereign debt crisis and presents some further options t...




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