From late 2009 and early 2010, certain euro area countries were beginning to have problems financing their debts. Market uncertainty led to normal government borrowing operations becoming costly and eventually impossible.
At the time, EU countries reacted quickly by putting in place so-called ‘firewall’ confidence-building measures to help to finance the debts of countries facing temporary difficulties in borrowing money from financial markets.
In parallel the EU also set to work on resolving the root causes of its weaknesses. A twin track approach was followed. Temporary assistance mechanisms were established to cope with the immediate crisis, and long-term measures to create permanent support facilities and to help prevent a reoccurrence of future crises were set in motion.
The financing facilities for euro area countries experiencing severe financing problems were set up with considerable speed. When Greece lost access to affordable market financing, the EU moved quickly to help by pooling bilateral loans from European governments with the European Commission. It then set up two temporary funds, the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) with a total lending capacity of E500 billion. The creation of these instruments is testament to the willing of euro area and EU countries to show solidarity.
As these two financial backstops were constructed as temporary measures, the euro area countries in the autumn of 2012 created a new and permanent financial backstop — the European Stability Mechanism (ESM). It is now the cornerstone of the European firewall and an integral part of the EU’s comprehensive strategy to ensure financial stability in the euro area. Its lending capacity is currently set at € 500 billion and conditional financial assistance will be available to those countries that have ratified the treaty on stability, coordination and governance. The ESM thus complements the reinforced surveillance by giving the possibility to offer conditional financial assistance to euro area countries when needed.
These ‘firewall’ facilities have not only resolved the immediate difficulties experienced by some countries in repaying their debts, but have also boosted the confidence of financial markets and helped to ensure financial stability of the euro area as a whole.
Help from the EU is also available for non-euro area countries that are faced with serious difficulties or problems attaining international financing. Countries that use the EU’s EUR 50 billion Balance of Payments Assistance fund must also agree to make reforms to fix their economic problems.
The EU introduced new stronger rules to keep a tighter check on public debt and deficits to make sure countries don’t spend beyond their means. A new fiscal treaty was also signed to further strengthen confidence limiting yearly structural deficits to 0.5 % of the GDP. This crisis clearly shows that a debt filled economy is not sustainable. European Commission will now make sure that the limits on debts and deficits are applied and that national budgets do not put at risk other European economies.
Ensuring sound public finances
The euro offers many potential benefits, but only if participating countries run sound economic policies. This is why membership of the euro, since the outset, has come with a firm obligation to avoid large and excessive budget deficits and to keep public debt at sustainable levels. This commitment to run sound fiscal policies is monitored through a framework known as the Stability and Growth Pact.
This Pact has been considerably reinforced as a result of the economic crisis. Governments must now submit their draft budget plans for scrutiny by the Commission and other euro area countries. Rigorous surveillance mechanisms are in place to check that countries indeed will meet the budget targets which all euro area countries have committed themselves to achieve, and sanctions can be imposed if needed.
Ensuring competitiveness and promoting growth
Sound public finances are not the only key to having a thriving economy in the euro area. The crisis also revealed the need for a new approach to the regulation of financial services and for closely monitoring financial market developments. New surveillance instruments have also been established to make sure that euro area countries adopt economies policies that ensure competitiveness and promote growth as well as jobs. Prevention is better than cure, and these new surveillance instruments also aim to avoiding damaging bubbles in housing markets.
… on the macroeconomic side
In addition to strengthening the fiscal rules, the EU has introduced a new framework for the surveillance and timely correction of macroeconomic imbalances. The aim is to address risky developments, e. g. related to asset bubbles and weakening competitiveness, before they become a threat to the stability of an EU country, the euro area, or the EU as a whole.
Therefore, the Commission regularly monitors for potential macroeconomic imbalances (in areas such as labour cost, house prices or unemployment). EU countries that show potentially worrying trends are analysed in-depth. If an imbalance is found to exist, the country concerned is asked to take action to prevent the situation worsening. If an imbalance is deemed excessive, the country has to take action to correct the situation. For euro area countries enforcement of the rules is backed up by a sanctions mechanism.
... on the growth side
Europe 2020 is the EU’s growth strategy for this decade with the aim of fostering a smart, sustainable and inclusive economy. With these three mutually reinforcing priorities, EU countries aim to establish high levels of employment, productivity and social cohesion. To measure progress towards these goals the EU has set five ambitious targets to be reached by 2020 on: employment, innovation, education, social inclusion and climate/energy policy. Each country has adopted its own national targets in each of these areas. Actions at the EU and national levels and Structural Funds for EU countries will help implement these goals.
… on economic reforms
The European Semester is an annual cycle of policy coordination at EU level (the first half of the year) during which EU countries have the chance to review each other’s economic and fiscal policies before they are implemented. At the end of the cycle, the EU addresses specific reform recommendations to each country. Implementation is monitored throughout the year. In addition, euro area countries have to publish their draft budgets for the following year by 15 October for the Commission to assess their conformity with agreed requirements.