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The Shape of the EU P ost Crisis. Peter O’Shea Monash European and EU Centre January 2014. The Background. Started with US housing crash in 2008 Led to bailouts and loans - US bought bad assets - UK capital injections - EU bailouts funds - PowerPoint PPT Presentation
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The Shape of the EU Post Crisis
Peter O’SheaMonash European and EU Centre
January 2014
The Background• Started with US housing crash in 2008• Led to bailouts and loans
- US bought bad assets - UK capital injections- EU bailouts funds
• High levels of global coordination: G8 G20
• One outcome was transformation of the FSF to Financial Stability Board as a quasi global regulator
• Kicked off efforts to address regulatory shortcomings and markets supervision
GFC History: One Crisis to the Next
Began as a subprime mortgage
crisis in the US when housing
market turned sour.
US subprime mortgages
Financial institutions
Sovereign debt
Sent major banks under, incl. Lehman Bros in Sept 2008. Effects spread to European banks.
Govts step in to maintain liquidity and prevent bank insolvency. Coordinated action at international level G20, IMF; transfer of debt to public sector.
2007-08 2008-10 2010-
The EU Response: Three Pillars• Regulatory reforms (financial supervision, banking supervision,
prudential standards, derivatives, securities etc)
• Fiscal coordination (notably the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and the EC’s “six-pack” legislative reforms) – a small step towards fiscal union?
• Financial Stability and Loan Assistance – now called the ESM based in Luxembourg)
Transformed Banking Sector
• Banking supervision overhaul• A big problem earlier identified with the crisis• Regulation of everything from derivatives, directors’
pay, credit ratings agencies, hedge funds, credit default swaps, banking prudential requirements
• Ring-fencing of banks – commercial and retail separation – the UK cannot believe the EU is so slow
• Moves to banking union – ECB as supervisor and maybe deposit guarantee scheme
New Shared Economic GovernanceA logical step if union is to complete
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ….
• Closer coordination of state fiscal policies• Closer Commission oversight of state budgets• Reinforced deficit and debt levels • A penalty mechanism• Will it work? All based on peer pressure• Growth pact and growth targets - Hollande’s re-election?
Financial Stability & Loans- The Greek Loan Facility - The EFSM & EFSF – soon to be ESM – in
Luxembourg (which can be seen from Germany!) - Some facts: no member state has given any
funds to the facilities – they are all loans
- Money is raised via bonds, guaranteed by states, only in default do states pay up- EFSM funds guaranteed by the EU budget, also IMF funds and some bilateral - You can buy bonds on the Luxembourg stock exchange- No different from lending through EIB or IMF
Divergent Growth Patterns
The Culprit: Government Debt
Austerity
Unemployment
Immigration vs. Emigration
Dubious relationship with unemployment
Also caution urged in drawing causal links
Intra-EU Migration… the UK• Most immigrants come from China• Nevertheless some net flows to some countries, incl.
the UK• Spanish migration (27,000 in 12 mths June 13)• Low levels of
UK emmigration
• Growth of resistance:UK caps on immigration from outside EU
Anti-EU Sentiment• Rise of anti-EU parties• Rise in anti-EU sentiment• Rise in anti-German sentiment• Anti-Globalisation, Anti-elite,
Anti-Brussels, Anti-Muslim
Eurozone vs. Non-Eurozone
• As a result of the fiscal reforms, Nov 2011, which UK refused to join
• Rise of the Eurogroup in political decision-making… and of the ECB
Conclusion
• Wide ranging reforms after GFC• Led to a closer political EU but greater social
and political tensions• Is EU integration on hold? Yes socially, but
perhaps no politically?