Feature - 27/10/2011

Strengthened capacity to tackle the crisis

At the Euro Summit on 26 October 2011, Heads of State and Government of the eurozone put in place a comprehensive strategy aimed at ensuring fiscal consolidation, growth, support to countries in difficulty, and a strengthening of eurozone governance.

The strategy and the economic and fiscal tools available

The European Council meeting on 23 October 2011 concluded on growth enhancing measures, economic governance, and financial regulation and the subsequent Euro Summit produced objectives for a comprehensive strategy to tackle the sovereign debt crisis. At the Euro Summit on 26 October 2011 discussions focused on four interrelated issues on which agreement must be reached to conclude the comprehensive strategy: The economic and fiscal tools involved in implementing the strategy are outlined below. The four issues are highlighted in blue.

Financial instruments

EFSM

On 21 July, eurozone leaders agreed to increase the efficiency of the EFSF. Originally, financial assistance was meant to be provided only in the form of bilateral loans to individual member states facing difficulties in accessing financial markets

Now, the EFSF will be able to:

• Intervene in primary markets - purchase of newly issued member state bonds.
• Intervene in secondary markets - purchase existing member state bonds.
• Grant the use of a precautionary instrument, activated only if necessary - either through an EFSF loan or EFSF interventions in primary markets.
• Recapitalise financial institutions - help to member states after they have exhausted all other possible resources.

 

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On 26 October, two options were examined by eurozone leaders for increasing the impact of the EFSF without extending the guarantees provided by member states.

• Option 1:  Credit enhancement of sovereign primary issuance
• Option 2:  Generator of new funding sources.

 

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EFSF Q&A

Adjustment programmes, euro area member states

Heads of State or Government have welcomed the disbursement agreed by the Eurogroup on 21 October of the sixth instalment of the bilateral loan to Greece.

The first instalment was disbursed in May 2010.

A new adjustment programme is being negotiated to cover Greece's financing needs up to 2014.

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On 21 July, eurozone leaders decided that in connection with the future second financial assistance programme for Greece, and in order to render its debt profile more sustainable, private sector holders of Greek government debt should agree to a voluntary reduction in their claims.

Bank recapitalisation

A coordinated scheme to strengthen the banks

While banks in Europe have made significant progress in building up capital and liquidity buffers, current concerns about their sovereign debt exposure and uncertainty about macro-economic developments are affecting banks' ability to provide credit.

The ECB has launched several initiatives to grant banks' access to short-term funding.

On 26 October, Heads of States or Governments agreed on measures to strengthen the EU banking sector, using a two-step approach:

•  ensuring banks' longer term access to funding markets, and
•  building up significant capital buffers against possible losses.

 

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Eurozone governance

Improving policy coordination

The governance of the euro-zone is to be improved so as to strengthen policy coordination and surveillance, improve the effectiveness of decision-making and ensure more consistent communication.

The structure is illustrated in the image below. 

The most important changes:

• The Euro Summit (Heads of the Eurozone, President of the Commission and President of the Euro Summit) will meet at least twice a year.
• The President of the Euro Summit will keep non euro-area member states closely informed of preparations and outcomes of summits. The European Parliament will also be informed of summit outcomes.
• The Eurogroup will prepare the Euro Summit and ensure follow-up.
• The President of the Euro Summit will meet regularly, at least once a month, with the President of the Commission and the President of the Eurogroup. The President of the ECB may be invited to participate. The presidents of the supervisory authorities and the EFSF CEO / ESM Managing Director may be invited on an ad hoc basis.

Laws, rules and procedures

Fiscal discipline & economic coordination

Market watchdogs

Competitiveness

Informal ECOFIN meeting
Copenhagen

Eurogroup meeting
Brussels

ECOFIN meeting
Brussels

Eurogroup meeting
Luxembourg

ECOFIN meeting
Luxembourg