Public gross debt and deficits As a % of GDP, 2011
240
12 Gross debt (left)
The crisis has spurred European and other international policymakers into action. Substantial changes are being made to learn the lessons of the crisis, both at European level and in individual countries. Many of these changes would have seemed unimaginable before the crisis. A good example is the euro area’s European Stability Mechanism (ESM) coming into operation from July 2012 as a permanent crisis management fund. With a capacity to lend up to €500 billion (around 5% of euro area GDP), it is a firewall needed to help make sure that solvent countries can finance themselves even if markets turn against them. Rules governing the euro area are stronger as the result of a wide-ranging legislative package, the so-called “six pack” covering fiscal and macroeconomic issues, and a new Treaty around the “fiscal compact” designed to keep national budgets in good shape. These initiatives should make sure that there is more surveillance of the build-up 66
Source: 2112 OECD economic surveys: Euro area
of imbalances in the future, including in private debt, and put pressure on countries to respond. But the main focus is on strengthening fiscal institutions both at EU and at national level. This is needed to make sure that fiscal management improves, as well as to ensure that the new rescue funds do not weaken budgetary discipline. With major new measures in place, the
Monetary union can work but more bold political decisions will have to be taken key challenge now is implementation. The past cycle of failure of countries—and that includes France and Germany—fully to apply the rules has to be broken. The weak financial oversight that fuelled the imbalances is being tackled too. Europe is taking part in the international overhaul of its regulatory architecture. It has taken steps to improve cross-border oversight, creating upgraded authorities to co-ordinate supervision of banking, insurance and securities markets across the EU. There is a now a European Systemic Risk Board to look at macro-prudential risks. However, little progress has been made in some crucial areas. The close relationship between domestic banks and their governments has proven risky during the crisis. The lack of effective resolution
US
Japan
UK
Greece
Canada
Italy
Ireland
0 Portugal
0 France
2
Belgium
40
Germany
4
Euro area
80
Spain
6
Netherlands
120
Finland
8
Slovenia
160
Slovak Rep.
10
Estonia
200
Luxembourg
To get out of this crisis, Europe needs to act in the short term so that the underlying excessive build-up of imbalances and debt can be resolved. That means putting in place a credible “firewall” against the sovereign debt crisis and supporting demand as much as possible. At the same time, the public finances need to be put back on track and banks’ balance sheets need to be cleaned up and strengthened. More importantly, ambitious structural reforms are needed to boost growth prospects, improve debt sustainability and strengthen the cohesion of the whole euro area. The clear lesson from the first decade of monetary union is that major changes are needed to make monetary union work as it was intended. Economic and financial policies need to be much more effective than they were over the past decade in creating sustainable growth and financial stability.
Government deficit (right)
Austria
requiring financial assistance from the EU and IMF. Rebalancing euro area economies and restoring growth will be a difficult task that will last for many years.
http://dx.doi.org/10.1787/888932589658
mechanisms for banks, particularly across borders, if they get into trouble, needs to be addressed as a priority. Ultimately, the best protection against any recurrence of the current crisis is to make Europe’s economies and financial system fundamentally more sound. Better surveillance and supervision can only do so much against an economy that is prone to instability. To become more stable within the euro area, national economies need to become more adaptable. Labour institutions have to ensure that wages stay in line with productivity. Tax incentives that encourage property bubbles need to be removed and planning laws reviewed. The banking system needs to become more integrated and diversified. The euro area can be made to work economically. European policymakers have taken some important steps, but more time and effort will be needed to weather the sovereign debt crisis and ensure that excessive imbalances do not build up again in the future. Monetary union can work but more bold political decisions will have to be taken. References OECD (2012), Economic Survey of the Euro Area, Paris Visit www.oecd.org/eu