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Informal meeting of members of the European Council and Euro area summit follow-up © The Council of the European Union European leaders achieve breakthrough to end euro area crisis
- All parties reach agreement on next steps to contain Greek debt crisis
- EFSF to be leveraged to lower funding costs and expand available resources
- Bank capital ratio to be raised to 9% to create “temporary buffer”
- Review mission praises Ireland’s economic efforts
- Commission sets out thinking on innovative financial instruments
- Project Bonds Initiative set for 2012 pilot kick-off
- Connecting Europe: Commission proposes plan for €50 billion boost to European networks
- Commission looks for tighter regulation of EU financial markets
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Informal meeting of members of the European Council and Euro area summit follow-up © The Council of the European Union European leaders achieve breakthrough to end euro area crisis

European leaders achieved a breakthrough during a session extending into the early hours of 27 October. They agreed on new funding of up to €100 billion for Greece and obtained agreement from private creditors to write off half of Greece’s debt. New mechanisms will also be put in place that could leverage the lending capacity of the European Financial Stability Facility (EFSF) by a factor of four or five. To create a “temporary buffer” and greater stability in the banking sector, leaders also decided to raise the bank capital requirement to 9% by mid-2012. To strengthen euro area governance and ensure closer integration, heads of state of the euro area agreed to meet regularly – at least twice a year – in Euro Summits.

Viewpoint
"
The bold decisions taken over the last days, and indeed over the last weeks and months, allow us to take a message to our partners at the G20 summit in Cannes of a Europe that is determined, that is responsible, that is united.”

José Barroso, President of the European Commission
"
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Acropolis, Greece © IStockphoto.com
All parties reach agreement on next steps to contain Greek debt crisis

In order to contain the Greek debt crisis, European leaders have agreed on a new EU-IMF programme of up to €100 billion in funding that will be put in place by the end of the year. Moreover, private creditors have agreed to accept a 50 percent loss on holdings of Greek government bonds. To ensure the timely and full implementation of reforms, the Commission will in cooperation with the other Troika partners establish a continuous monitoring capacity on the ground in Greece, with the involvement of national experts. The new programme is designed to reduce Greece’s public debt to 120% of GDP by 2020. The current ratio is 159%.

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Informal meeting of members of the European Council and follow-up of Euro Summit © The Council of the European Union
EFSF to be leveraged to lower funding costs and expand available resources

European leaders have agreed on two options to leverage the resources of the European Financial Stability Facility (EFSF). Under the first option, private investors will be offered optional risk insurance when they purchase new debt issued by Member States. This will reduce funding costs. The second option will bundle resources from private and public financial institutions and investors to increase the amount of funds available to provide stability support. The leverage effect of the two options could be up to a factor of four or five.

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Bank sign © John Foxx – Thinkstock.com
Bank capital ratio to be raised to 9% to create “temporary buffer”

At their meeting on 26 October, there was broad agreement among European leaders on the need create a temporary buffer by raising banks’ capital ratio. As of 30 June 2012, banks must attain the higher capital ratio of 9% on the highest quality capital, after writing down their holdings of sovereign debt. Leaders also agreed that to finance the capital increase, banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Moreover, banks will be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.

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The Ha'penny bridge in Dublin © Thinkstock.com
Review mission praises Ireland’s economic efforts

Implementation of Ireland’s EU/IMF-supported economic programme continues to be strong. That was the conclusion of staff teams from the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) that visited Dublin during 11-20 October for the regular quarterly programme review. The Irish authorities have completed the key initial phase of the comprehensive financial sector reforms launched in March. The fiscal deficit limit of 10½ percent of GDP in 2011 is expected to be met and important structural reforms are being put in place. Once the review has been approved by the European Council and the IMF Executive Board, further financial support of €3.8 billion (from the IMF) and €4.2 billion (from the EU) can be disbursed. The mission for the next programme review is scheduled for January 2012.


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Light bulb with Euro sign © IStockphoto.com
Commission sets out thinking on innovative financial instruments

Innovative financial instruments have the potential to play an important role in achieving the Europe 2020 Strategy's objectives of smart, sustainable and inclusive growth, the European Commission argues in a Communication on "A new framework for the next generation of innovative financial instruments – the EU equity and debt platforms". The Communication – published on 19 October – presents the Commission's view on the future of innovative financial instruments in EU budget spending. Such instruments can cover a rather broad range of interventions such as participation in venture capital funds for high-growth businesses, or guarantees to local banks lending to a large number of final beneficiaries, for instance small and medium-sized enterprises. Other possible interventions are risk-sharing with financial institutions to boost investment. Examples of such interventions are to be found in the areas of research, development or innovation, or in large infrastructure projects such as the Europe 2020 Project Bonds Initiative.

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Light Tunnel Speed © IStockphoto.com
Project Bonds Initiative set for 2012 pilot kick-off

A pilot phase in 2012-2013 will see the launch of the Europe 2020 Project Bonds Initiative, according to plans unveiled by the European Commission on 19 October to boost investment in Europe's transport, energy and digital networks. The Initiative aims to revive project-bond markets and to help the promoters of individual infrastructure projects to attract long-term private-sector debt financing. In the pilot phase, the initiative will be implemented together with the European Investment Bank, and will focus on 5-10 projects that are at a relatively developed stage of the bidding and financing process or that require refinancing after the construction phase. It will address one or more of the three targeted sectors of transport, energy and broadband. Funding of €230 million for the Initiative is expected to mobilise investments of up to €4.6 billion. In the future, project bonds can finance some of the infrastructure projects under the "Connecting Europe Facility".

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Connecting Europe Facility and the Project Bond Initiative © European Union, 2011
Connecting Europe: Commission proposes plan for €50 billion boost to European networks

The European Commission tabled on 19 October a plan to fund €50 billion-worth of investment to improve Europe's transport, energy and digital networks via a new "Connecting Europe Facility". The Facility would finance projects that fill in the missing links in Europe's transport, energy and digital backbone – giving the EU for the first time a single funding instrument for the three network sectors. The Facility aims to make Europe's economy greener by promoting cleaner transport modes and high-speed broadband connections and facilitating the use of renewable energy in line with the Europe 2020 strategy. In addition, the funding available for energy networks should help to further integrate the internal energy market, reduce the EU's energy dependency and bolster the security of supply.

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Financial markets © European Union, 2011
Commission looks for tighter regulation of EU financial markets

New EU rules should be introduced to make financial markets more efficient and more transparent, and to counter market abuse, the European Commission proposed on 20 October. Consisting of a Directive and a Regulation, proposals to revise the Markets in Financial Instruments Directive (MiFID) aim in particular to strengthen the regulation of the financial sector by improving the oversight of less regulated markets and by addressing the issue of excessive price volatility in commodity derivatives markets. The Commission also proposed a Regulation on market abuse and a Directive designed to ensure effective sanctions at European level for insider-dealing and market manipulation.

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Publications
The improbable renaissance of the Phillips curve © European Union, 2011

The improbable renaissance of the Phillips curve: The crisis and euro area inflation dynamics, Economic Paper 446

Why has euro-area (core) inflation not fallen further during and after the "great recession"? How different are inflation dynamics across Member States? This paper analyses core inflation dynamics in the euro area and its Member States using a hybrid specification of the Phillips curve. Although the heterogeneity of Phillips curve relationships across Member States is not large, the exceptionally large output gap caused by the crisis is one driver (among others) of the recently observed inflation differentials in the euro area.



Upcoming: European economic forecast, autumn 2011
 
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Agenda Calls
3-4 November
Cannes
G20 Summit
7-8 November
Brussels
Eurogroup/ECOFIN meetings
8 November
Brussels
Joint EC-EPEC Private Sector Forum
10 November
Brussels
European economic forecast, autumn 2011
14-17 November
Strasbourg
European Parliament Plenary
21 November
Brussels
DG ECFIN. Annual Research Conference 2011 - New growth models for Europe
24 November
Brussels
Property taxation and enhanced tax administration in challenging times
29-30 November
Brussels
Eurogroup/ECOFIN meetings
9 December
Brussels
European Council
12-15 December
Strasbourg
European Parliament Plenary
16-19 January 2012
Strasbourg
European Parliament Plenary
23-24 January
Brussels
Eurogroup/ECOFIN meetings
25 - 29 January
Davos-Klosters, Switzerland
World Economic Forum annual meeting 2012
 
Call for papers. "EU balance-of-payments assistance for Latvia: Foundations of Success" (working title). Deadline for selected authors: 31 January 2012
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Directorate-General for Economic and Financial Affairs