25 Dec 2011

Many have accused Europe of being slow to solve its sovereign debt crisis that began early last year in Greece. However, decisive steps were taken at the euro area summit held on 26 October 2011.

Many have accused Europe of being slow to solve its sovereign debt crisis that began early last year in Greece. However, decisive steps were taken at the euro area summit held on 26 October 2011. Decisions were taken on a second rescue package for Greece, the recapitalisation of European banks and the maximisation of resources for the European Financial Stability Facility (EFSF).

In July, the euro area member states increased the fi repower of the EFSF by raising its guarantee commitments to €780 billion and bringing its effective lending capacity up to €440 billion. The member states have also increased the scope of activity of the EFSF, authorising it to intervene in the primary and secondary bond markets; to provide loans to euro area member states that are not within a macroeconomic adjustment programme to allow them to recapitalise financial institutions; and to provide precautionary credit lines.

These measures aim to resolve the crisis at the current juncture. The creation of the EFSF and the decision to create a permanent rescue mechanism, the European Stability Mechanism, are important steps in solving this crisis and averting future ones. However, we also need to look at the bigger picture and at the longer-term actions that have been taken to create a better functioning euro area. Although often overlooked in favour of more headlinegrabbing crisis-resolution measures, many other decisions have been taken at the European level over the past 18 months. Progress is being made, though this is not often recognised by the media and, by consequence, communicated suffi ciently to the general public.

The cornerstone of the strategy to move towards closer integration within the euro area is enhanced economic governance. This has been put into place in order to prevent future crises taking place and providing the euro area with an “early warning system” and better tools for enforcing debt levels. The European Semester, which took place for the fi rst time this year, allows the European Commission and member states to review the budgets of all member states on an ex-ante basis to avoid negative spillovers. The reform of the Stability and Growth Pact will mean a faster sanctions procedure and more focus on public debt. The introduction of the Excessive Imbalances Procedure provides a formal framework for multilateral surveillance to tackle macroeconomic imbalances early. It also has the power to impose sanctions should a country repeatedly fail to reduce economic imbalances. These measures are complemented by the “Euro Plus Pact”, an additional commitment to improve competitiveness, promote employment and reach debt sustainability. Several member states have already written the tough European fi scal rules into their constitutions.

Another important aspect has been the creation of a real pan-European supervisory architecture. The European Systemic Risk Board is in charge of monitoring macro prudential risks, a very signifi cant feature for countries within a monetary union. If the ESRB had already been in place, it would have been able to identify asset bubbles (such as the banking sector in Ireland or the property sector in Spain) and take action in time. Furthermore, three new supervisory boards were set up at the beginning of this year – European Banking Authority (EBA), European Insurance and Occupational Pensions Association (EIOPA) and the European Securities Markets Association (ESMA) – to oversee respectively the banking, insurance and securities markets in a pan-European way.

At the national level, too, diffi cult adjustment measures – both in terms of fi scal and structural reforms – have been voted on and implemented in many member states. The fi rst positive results are becoming visible. Ireland’s current account balance, for example, has moved into surplus and its long-term interest rates have fallen by two-fi fths.

Finding a solution to the euro zone debt crisis is an extremely difficult and complicated process; there are no ‘miracle’ solutions. Although the crisis has not yet been fully resolved, an extraordinary amount of measures have been passed – within a very short space of time when you consider that the euro zone consists of 17 democracies – to improve the functioning of the European Monetary Union. This will put Europe back on the path to fi nancial stability and sustainable growth. Europe’s monetary union will function better in the future than it did in the past.

Klaus Regling is CEO of the European Financial Stability Facility (EFSF).