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Sovereign Debt Poster Presentation
- 1. Consequences and Solution:Banking Union Is the European Sovereign Debt Crisis the Best Thing to Have Happened to the Union? The Banking Union’s Role in the Future of European Union BACKGROUND Decision Making Within the European Central Bank Orsolya Buzas, Dr. Debra Miller School of Policy, Government, and International Affairs, George Mason University DISCUSSION • The idea that the sovereign debt crisis may have been the best event in the European Union since the introduction of the single currency in 2001 is a controversial one. Just as the financial crisis has influenced the markets and lives of countries around the world, EU member states suffered with low economic growth and stagnation. However; has the crisis not placed some of the concerns on the spotlight. • Though the stability of the union was shaken, it was necessary to shatter the fake ten-year political and economic equilibrium between the core and periphery countries that followed the initial shock. • The sort of financial credit risk assessments that allowed Greece to borrow at the same rates as Germany will no longer put the state of the union at the brink of a collapse. Weather the storms by creating more momentum • Capital Markets Union • Uniform banking regulation among members through the Banking Union • Corrected interest rates based on calibrated financial credit risk assessments • Exposure of inconsistent banking regulations and leverage policy among members • Confirmation of commitment by both original EU members and recently added members A very vocal group exists within the EU that must not be forgotten, who represent those member state officials who argue that an erosion of national identity and national sovereignty has been the cost of the economic integration. EU leaders must confront the choice of either taking up the challenge of transnational democracy by breaking up the Euro to decrease economic interdependence and preserve national democratic institutions or to usher in a post-democratic future within the union. ACKNOWLEDGEMENTS I would like to express my very great appreciation for the School of Policy, Government, and International Policy for encouraging undergraduate research through URAP. I am beyond grateful for the endless support of Professor Debra Miller and her wealth of knowledge and experiences that lead to the idea for this research. Her work will serve as an inspiration for many years to come. REFERENCES 1. Whelan, K. (2013). Ireland's economic crisis: The good, the bad and the ugly(No. 13/06) Working Paper Series, UCD Centre for Economic Research. 2. Celio, Claudio. "Italy Has Lowest Share of Public Debt Held by Non-residents." ItalyEurope24 15 Nov. 2014: Web. 13 Feb. 3. Knight, Laurence. "What's the Matter with Italy? - BBC News." BBC News. BBC News, 28 Dec. 2011. Web. 05 Feb. 2016. 4. http://www.globalpropertyguide.com/real-estate-house-prices/S#spain 5. Tiffin, Andrew. European Productivity, Innovation and Competitiveness: The Case of Italy. IMF Working Paper. WP/14/79 ECB institution breakdown: https://www.ecb.europa.eu/paym/t2s/governance/html/index.en.html 6. Oliva, Ramon. The Competitiveness of the Spanish Economy: A Bird’s-eye View of the Four Largest Euro Area Economies 7. Sivey. Michael. Why Europe’s Downgrades Matter. TIME 8. Poggioli, Sylvia. "Spain's Boom to Bust Illustrates Euro Dilemma." NPR. Morning Edition, 15 July 2010. 9. IMF Ex Post Evaluation of Exceptional Access Under the 2010 Stand-by Arrangement (Greece) Share of City GDP provided by the construction industry graph: http://www.citymetric.com/business/europe-s-post-crash-ghost- towns-776 • Economic Monetary Union built on decades of economic integration developed on mutual trust, and a long record of cooperation • Likely benefits of the union: price transparency, lower inflation, and abolition of currency exchange rates within the single currency system. • Initial concerns: disparity in economic performance and inflationary pressures, stability of “one size fits all” monetary policy for national economies that seemed to be diverging and not converging • Given the diversity of the member states, monetary loosening and tightening influences countries differently. Simultaneous operation of 16 different bond markets. What led to European Sovereign Debt? Real-estate and construction boom Loss of Competitiveness • Following the introduction of the euro in 2002 and the changes in interest rates at which member states could borrow, diverging management of national economics is amplified among members. • The 2008 global financial crisis created rippling effects world-wide and caused many of these initial concerns to become reality within the European Union. • This research focuses on the different variables that caused sovereign debt among member states, some of which include real estate/construction boom, excessive government borrowing, overwhelming foreign capital infusion, and more. Sovereign Debt Crisis in Numbers • In a highly integrated system, minimizing moral hazard and excessive risk taking requires: • Consistent set of regulatory incentives and common rules • Integrated supranational powers in banking supervision • Deposit insurance and crisis management, including resolution Source: Eurostat • The three functions are interconnected and only joint management can establish proper incentives against reckless risk taking by banks in the internal markets. • Deposit insurance should only protect depositors and never be used to cover bank losses and safeguard managers, shareholders, and creditors. • Factors according to ECB that incite a boom: short-term interest rates, local and global money and credit developments, and incidence of mortgage market deregulation • Following a bust in real estate prices plummeting home prices and mounting personal debt can be observed • To this day empty “ghost towns” around Europe are reminders of unfinished construction projects and failed investments • Construction/Real-estate burst also lead to rising unemployment and “When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB … …neither the ECB, nor a national central bank, nor any member of their decision-making bodies Shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State from another body” Article 130 of the Treaty on the Functioning of the European Union • ECB is a central bank serving a similar purpose to the Federal Reserve Bank of the United States • A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. • Primary responsibility is to maintain the stability of the national currency and money supply • More active duties include controlling subsidized loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis • It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. • With the recent introduction of the Banking Union, the Single Supervisory Mechanism has fulfilled that role • External competitiveness of an economy refers to outperforming others in sales in a given market. Internal competitiveness refers to price-cost competitiveness related to all sorts of determinants of an economy’s productivity. • With the introduction of Euro, member states like Italy and Spain lost competitiveness to nations with lower prices and costs of production. • Germany was able to increase competitiveness both internally and externally based on measurements of ULC (unit labor costs)6 . Greece Ireland Italy Spain Reasons for Financial Crisis Construction Boom X1 X3 X4 Overleveraging by banks X X3 "Capital Flow Bonanza" Current Account Deficit X1 X4 Large Deficit X9 X2 Slow Economic Growth X2 Loss of Competitiveness Following Euro Prices X5 X5 Excessive Government Spending X9 Low Initial Borrowing Costs X9 X2 X8 High Personal Debt of Citizens X8 Downgraded Bond Credit Rating (post-crisis) X X7 X7 X7