Timeline of the Eurozone debt crisis Analysis of the main legal changes made to the EU framework EFSF - EFSM ESM Fiscal Compact

1. The Eurodebt Crisis
What is going on in Europe?
2012 © ALBERTO ALEMANNO – Jean Monnet Professor of EU Law & Risk Regulation – HEC Paris

2. Not a crisis of the
2

3. A sovereign debt crisis
of (some) Eurozone countries 3

4. i.e.
4

5. Difficulty or impossibility for
Greece
Ireland
Portugal
to re-finance their debts
5
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6. Let’s Contextualise the € debt
Financing needs for the eurozone in 2010 came
to a total of €1.6 trillion, while the USA issued
US $1.7 trillion more Treasury securities, and
Japan had ¥213 trillion of government bonds to
roll over
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7. Yet it is a
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8. ALBERTO ALEMANNO - HEC PARIS
How we got where we are ?
8

9. Multi-factorial explanation
• globalization of finance
• easy credit conditions during the 2002-2008
period that encouraged high-risk lending and
borrowing practices
• international trade imbalances
• real estate bubbles slow economic growth
• national fiscal policies
• national bail outs, assuming private debt burden
or socialising losses
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10. Inherent limits of EMU
• Since countries using the Euro as their
currency have fewer monetary policy choices
(e.g., they cannot print money in their own
currencies to pay debt holders), certain solutions
require multi-national cooperation.
• The ECB has an inflation mandate not an
employment mandate (unlike US Fed)
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11. A crisis of confidence
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12. Timeline
2010 - today
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13. January 2010
• Frightened investors demanded higher
interest rates from several governments with
higher debt levels or deficits
• This in turn made it difficult for governments
to finance further budget deficits and service
existing high debt levels
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14. February 2010
• Greek PM Papandreou openly admitted that
Greece had failed to comply with the terms of
the Stability & Growth Pact:
– Excessive budget deficit ( > 3% of GDP)
– Excessive public debt ( > 60% of GDP)
(these rules bind Eurozone countries since 1992 when
creation of the EU Monetary & Economic Union)
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15. To bail out or not to bail out?
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16. No-bail out clause
• « A member state shall not be liable for or
assume the commitments of central
governments, regional, local or other public
authorities, other bodies governed by public
law, or public undertakings of another
member state, without prejudice to mutual
financial guarantees for the joint execution of
a specific project ». Article 125 TFEU
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17. No-bail out clause
17
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18. Yet
Progressive pooling of risks from particular EMU
states with unsound public finances and,
as a result, extra risks shifted to those countries
providing help and to their taxpayers
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19. Clash with
Principle of National Fiscal Responsibility
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20. February 2010
• (ad hoc) Greek loan facility:
– Bilateral loans
– For a total of € 110 billion
20
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21. Not enough
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22. March 2010
• EU emergency mechanism:
– European Financial Stability Facility (EFSF)
– European Financial Stabilisation Mechanim (EFSM)
– temporary
– worth €750 billion
– supported (also) by the IMF
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23. • EFSF is a Luxembourg-registered company owned
by Euro Area Member States
• EFSF relies on the following instruments linked to
appropriate conditionality:
– Provide loans to countries in financial difficulties
– Intervene in the debt primary and secondary markets
– Finance recapitalisations of financial institutions
through loans to governments
• To fulfill its mission, EFSF issues bonds or other
debt instruments on the capital markets
• EFSF is backed by guarantee commitments from
the euro area Member States for a total of €780
billion and has a lending capacity of €440 billion. 23

24. 2 precedents
• November 2010: it financed €17.7 billion of
the total €67.5 billion rescue package for
Ireland (the rest was loaned from individual
European countries, the European
Commission (EFSM) and the IMF)
• May 2011: it contributed one third of the €78
billion package for Portugal
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25. EFSM
• This mechanism provides financial assistance to EU Member
States in financial difficulties: loan or credit line granted to
Member States
• Memorandum of Understanding between the Member State
and the Commission. European Central Bank supervises it.
• The Commission is the borrower (up to € 60 billion) in
financial markets
• Collateral is EU budget guarantee (EU enjoys AAA)
• The Commission then on-lends the proceeds to Member State
• All interest and loan principal is repaid by MS VIA the
Commission.
• The EFSM has currently been activated for Ireland and
Portugal, for € 48.5 billion to be disbursed over 3 years.
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26. • The EFSM and the EFSF can only be activated
after a request for financial assistance has
been made by the concerned Member State
and a macroeconomic adjustment
programme, incorporating strict
conditionality, has been agreed with the
Commission, in liaison with the European
Central Bank (ECB).
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27. April 2010
Amid fears of default, Standard & Poor's slashed
Greece's sovereign debt rating :
BB+
or "junk" status
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28. May 2010
A series of austerity measures was proposed
Social unrest
http://www.youtube.com/watch?v=nxztGzUb66U&feat
!
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29. December 2010
• Financial emergency support made
permanent:
– EFSF/ESFM will become European Stability
Mechanism (ESM)
– From 2013
– To complement the new framework for reinforced
economic surveillance in the EU:
• stronger focus on debt sustainability
• more effective enforcement measures
• focuses on prevention and will substantially reduce the
probability of a crisis emerging in the future. 29
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30. Legal basis of ‘ESM Treaty’
• Treaty Revision (simplified) :
– addition of third para to Article 136 TFEU
– ratification by all EMU countries
– But intervention of the German Constitutional Court,
then entered into force in June 2011
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CHAIR IN EU LAW & RISK REGULATION - 30
HEC PARIS

31. in the meantime
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HEC PARIS

32. ALBERTO ALEMANNO - JEAN MONNET
CHAIR IN EU LAW & RISK REGULATION - 32
HEC PARIS

33. The ‘six-pack’
• EU Commission proposed in 2010:
- To strenghten economic/fiscal policy coordination
and surveillance
- EMU Member States agreed on:
- European Semester – preventive coordination of
budgetary and economic policies of € members
- EUROPLUS PACT – signed by EMU members but
open to non-members
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34. Eurosemester
34

35. 35
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36. Not enough
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37. June 2011
Standard and Poor's downgraded Greece's
sovereign debt rating to CCC
the lowest in the world
following the findings of a bilateral EU-IMF audit
which called for further austerity measures
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38. ALBERTO ALEMANNO
July 2011
• Additional €109 billion to Greece
• Private sector agreed on debt restructuring of
21% (so called ‘hair-cut’)
38

39. Not enough
ALBERTO ALEMANNO - JEAN MONNET
CHAIR IN EU LAW & RISK REGULATION - 39
HEC PARIS

40. September 2011
• Greek debt turned bigger than expected
• Growing concern for French bank system
(highly exposed to Greek debt)
• Italy on the radar of the bond markets, due to
its 120% debt and low economic growth
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41. October 2011
• All EU members agreed on new Rescue Plan:
– 50% debt restructuring for Greece (no 21%) to
enable Greece to reach 120% GDP debt ration by
2020
– EFSF from €440 to €1000 billion
– Higher core-capital ration of 9% on EU banks
– Economic governace:
• Golden rules in national constitutions
• Euro Summit Meetings + Euro-group
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42. Rescue Plan
buying some extra time
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43. A video on the Scr, ehm
Rescue Plan
http://www.xtranormal.com/watch/12611732/the-e
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44. • Doubts about viability of Rescue Plan
– EU members did not chip in into the boosted EFSF
– No real banking deal yet in Greece (bank lobby
conditioned the 50% haircut to a 90% voluntarily
acceptance rate among its banks): why voluntary?
• Only way to avoid activation of CDS contracts, what
would trigger billion € claims against insurances
– In any event, only 120% debt GDP ratio by 2020:
the double the maximum allowed
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45. November 2011
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46. 46
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47. 2 scenarios
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48. No Treaty Change
Finding a workable solution w/o changes:
Article 136 TFEU offers special powers to (only)
eurozone countries to:
- Strenghten coordination/surveillance budgetary
discipline
- Set out economic policy guidelines
dismessed as SHORT TERM PERSPECTIVE
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49. We got a fan!

50. Treaty Change
Fixing Euro’s birth defect:
Transferring economic policy to the EU
(not only monetary)
Unpopular and excuse to open a Pandora’s box (UK
claims for special treatment, etc)
Dismissed as LONG TERM PERSPECTIVE 50
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51. We got 2 fans
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52. December 5, 2011
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CHAIR IN EU LAW & RISK REGULATION - 52
HEC PARIS

53. December 8-9, 2011
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CHAIR IN EU LAW & RISK REGULATION - 53
HEC PARIS

54. Ideas on the table
• Transform the EFSF into a European Monetary
Fund (EMF):
– to provide governments with fixed interest rate
Eurobonds at preferential rate
• Eurobonds issued jointly by the 17 euro nations
• Fiscal union across the eurozone with strict and
enforceable fiscal rules and automatic penalties
embedded in the EU treaties; the European court
of justice ensuring that countries meet their
obligations
 All seem to require a TREATY CHANGE
54
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55. Fiscal compact
• An intergovernmental treaty which was
signed by all of the MS of the EU except Czech
Republic and UK on March 2, 2011
• The treaty will enter into force on Jan 2 2013
if by that time 12 Member States of the euro
area have ratified it
55

56. Fiscal compact
• national requirement to have national
budgets that are in balance or in surplus:
– Balance budget rule (deficit no > 0,5 % GDP)
• ECJ would fine a country up to 0.1 % of GDP if
this was not done a year after ratification
• Membership required to be eligible to ESM
56

57. ESM
• the European Stability Mechanism will be an
intergovernmental organisation under public
international law
• Located in Luxembourg
• Permanent bail-out mechanism
• Open to all Members in Fiscal Compact
57

58. 58
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59. 59
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60. A glimpse of hope
“I do absolutely believe in the European project.
I think it is the most noble political ideal in
human history in a thousand years”
Peter Sutherland, former WTO Director General
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HEC PARIS