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Economic policy priorities after the Spring European Council

Presentation by Marco BUTI, DG Economic and Financial Affairs

BUSINESSEUROPE Economic and Financial Affairs Committee5 April 2011

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EU recovery continues to make headway, inflation projected to increase

European Commission

Source: European Commission Source: European Commission

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0.0

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4.0

5.0

DE ES FR IT NL EA PL UK EU

2010 Outcome2011 as projected in Autumn 20102011 as projected in Interim forecast Feb. 2011

GDP growth in 2010 and 2011

0.0

1.0

2.0

3.0

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5.0

DE ES FR IT NL EA PL UK EU

2010 Outcome as in Interim forecast Feb. 20112011 as projected in Autumn 20102011 as projected in Interim forecast Feb. 2011

HICP in 2010 and 2011

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High uncertainty, main risks to growth outlook:

European Commission

On the upside:

Stronger global growth

More pronounced spill-over from German growth

Stronger domestic demand as a result of strong business confidence

On the downside:

Further tensions in financial markets

Stronger short-run impact of fiscal consolidation

Further geopolitical tensions in the MENA region

Impact of the events in Japan

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Financial markets still fragile

European Commission

Source: Reuters and European Commission

Sovereign-bond spreadsBank lending to households and non-financial

corporations, euro area

Source: ECB

0

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08 09 10 11

PT ES IT EL IE

pps

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12

16

00 01 02 03 04 05 06 07 08 09 10 11

Loans to households Loans to non-financial corporations

y-o-y%

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A comprehensive approach

European Commission

Financial repair

Fiscal consolidation Growth and competitiveness

Vulnerable countries

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Short-term Response

European Commission

1. Financial repair: stress tests + recaps

2. Fiscal consolidation: more than 0.5% of GDP a year

3. Vulnerable countries: implementation of programmes (EL, IE) + enhanced surveillance (PT) + EFSF + lowering of pricing and increased maturity of loans

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Systemic Response

European Commission

4. Strengthened surveillance: 6 legislative proposals

5. Permanent crisis resolution tool: European Stability Mechanism

6. Euro Plus Pact

Integrated surveillance: European Semester

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Where will the growth come from?

European Commission

• Do EU policies lower growth? Fiscal consolidation, bank recaps, monetary normalisation

• Some avenues: - Tapping the single market

- Financial sector reforms

- Project bonds

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Single Market Act

European Commission

• Relaunching the Single Market is a key priority as stressed by the Monti

Report (May 2010)

• A cross-cutting policy initiative of the Europe 2020 strategy

• Improve adjustment capacity of the EU economy through better

functioning of markets (especially in services)

– Removal of barriers to cross-border activity would translate into increased

competition and facilitate market entry. This competition effect will have a

positive impact on demand through lower prices and a positive income effect.

– Removal of barriers to investment should lead to increased total FDI, which

would have a positive effect on productivity.

• This price adjustment is particularly important for the Euro Area and in

less tradable sectors

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Single Market Act

European Commission

• Relevant growth-enhancing measures by removing

persistent restrictions to the four freedoms

– improving infrastructure in energy, transport and telecommunications

– facilitating cross-border trade or investment by eliminating tax or

regulatory treatment that disadvantages cross-border transaction

– adopting measures to facilitate access to finance, especially for

SMEs and availability of venture capital

– improving cross-border activity in services sectors

– fostering labour mobility

– The final SMA to be adopted by the Commission on 13 April 2011

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Financial ReformReshaping the architecture for financial regulation

Four priorities:

Develop a more efficient supervisory

response

More and better capital in the banking system

Extend the perimeter of regulation and

supervision: the reform agenda

Complete the tools to ensure financial stability

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Financial ReformThe macroeconomic impact of stronger standards for

capital and liquidity requirements on banks

• On banks, the Basel Committee concluded that costs are manageable

Over the short term some modest impact on growth and aggregate output…

– A 4-year phasing-in has only a modest impact on aggregate output: an ex post decline by about 0.20% decline in GDP compared to baseline path (the GDP returns to its baseline path in subsequent years).

– GDP growth rate would be reduced by an average of 0.04 pp over a four and a half year period…

– …mainly due to banks passing on higher costs to borrowers—slowing down investment.

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Financial ReformOverall, the cumulative impact of financial reforms on

GDP is negative but within moderate limits

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2012 2013 2014 2015 2016 2017 2018 2019

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Capital requirement Liquidity requirement DGS

Graph 1: Impact on GDP

Source: Commission Services calculations

Within stringent assumption, the impact on GDP is moderate and consumption rises above trend due to increase in the opportunity costs of saving.

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2012 2013 2014 2015 2016 2017 2018 2019

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GDP Consumption

Graph 2: Cumulative impact Cumulative impact on GDP and consumptionon GDP and consumption

(1) Deposit Guarantee Scheme

(1)

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Europe 2020 Project Bond Initiative:Objective and Definition

European Commission

Objective

To increase the debt financing availability for

large scale infrastructure projects

Target areas•Transport•Energy•Broadband

How?

EU/EIB joint support to project companies issuing

bonds to finance infrastructure projects

Form of support

Debt service guarantee or a subordinated loan by EIB to ensure sufficient

rating of the bonds

Result

More private sector financing attracted from the capital markets to

implement key EU infrastructure projects

Potential investors

Long-term institutional investors – pension funds,

insurance companies

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Project Bonds

Target rating

minimum A-

Bond Issue and underwriting

SPV

ProjectCosts

EIB Sub-debt

Equity & Quasi-equity

EIB Sub-debt participation can be combined with different types of funding sources (bonds and other senior loans)

EIB Unfunded Sub-debt participation can be flexibly used and structured in order to ensure target rating. •Covers funding shortfalls during construction•Comes on top of a fully funded structure

Project Bond

Investor

up to 20% of total

Bond issue

Europe 2020 Project Bond Initiative:Subordinated Instruments

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Europe 2020 Project Bond Initiative:

Role of EU and EIB

European Commission

• EU determines eligibility criteria for projects:

− Focus on TEN-T, TEN-E and broadband rollout

− Technically and economically feasible projects with strong and stable cash flows

• The EIB selects projects and type of support (guarantee or loan) using eligibility criteria and credit risk policies

• Initiative based on existing EU/EIB risk sharing mechanisms

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Europe 2020 Project Bond Initiative

European Commission

• Stakeholders’ consultation launched:

− Purpose – to find out the interest and needs of the market

− Duration: February 28 – May 2, 2011

− Consultative conference on April 11, 2011

• Commission proposal to be ready in summer 2011

• Target – to have the Europe 2020 Project Bond Initiative fully operational in 2014

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Conclusions

• A fundamental reshaping of economic governance is being implemented

• Financial vulnerabilities to be tackled in earnest

• Comprehensive strategy

• Role of stakeholders

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Thank you!