The EU's response to the crisis
Since 2008, the member states, the euro area and the European Union as a whole have taken a broad range of measures to ensure financial stability, support growth and employment and improve economic governance.
The global economic and financial crisis that began in 2008 had a profound impact on the European Union and the euro area member states' economies. The public debt crisis that followed exposed structural weaknesses in some European economies, such as unsustainable levels of public or private debt or declining competitiveness.
It also revealed systematic shortcomings in the architecture of the economic and monetary union itself. In response, national governments and the European institutions took a wide range of measures to safeguard the euro area's financial stability and strengthen the institutional architecture of the euro area and of the EU as a whole. They agreed on a comprehensive reform of economic governance in order to avoid similar shocks occurring in the future.
At EU level, policy coordination between member states had to be improved.
To this end, in 2011 the Council and the European Parliament adopted a legislative package on economic governance (also called the "six-pack"). In the area of fiscal policy, this package strengthened the existing Stability and Growth Pact (SGP). The SGP originally focused on monitoring member states' compliance with the agreed targets for their budget deficits. Now, a similar process is also in place for their public debt levels. Furthermore, the focus has shifted from correction to prevention - member states must focus more on long-term sustainability and correct unsustainable policies as soon as they are identified, before acute problems arise.
Further improvements in this area are underway. The Council and the European Parliament are currently discussing the Commission's proposal for two legal acts on enhanced monitoring of euro area countries' budgetary policies (the so-called "two-pack").
With the six-pack, the Council and the European Parliament extended the cooperation beyond mere budgetary policies. They introduced a new process for preventing and correcting macroeconomic imbalances. The objective here is to detect underlying structural weaknesses in the economy as a whole, rather than just budgetary overruns, and thus identify the causes of persistent economic divergences within the EU. Addressing these helps ensure a high level of competitiveness in all member states (and thus a high level of economic convergence in the euro area).
These processes, together with the Europe 2020 strategy, which focuses on growth and jobs, are now aligned in a single coordination cycle – the European Semester.
Efforts to improve coordination of economic policies did not stop here. In March 2011 the euro area and six non-euro area countries adopted the Euro Plus Pact, building upon and going beyond the European Semester.
Furthermore, the euro area and eight non-euro area countries concluded the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the "fiscal compact"). This treaty, which entered into force on 1 January 2013, mainly aims to further strengthen fiscal discipline by enshrining strong fiscal rules, with both balanced budget provisions and a 'debt brake', into national legislation, at constitutional or equivalent level.
In 2010, the first short-term priority was to address the difficulties faced by the most exposed euro area economies. Three temporary mechanisms were set up – the Council of the EU established the European Financial Stabilisation Mechanism (set up by the EU); whereas the Eurogroup laid foundations for the Greek Loan Facility and the European Financial Stability Facility.
These mechanisms have been providing financial support to euro area member states facing financial difficulties.
On the sidelines of October 2012 Eurogroup meeting, euro area finance ministers inaugurated a permanent crisis management mechanism - the European Stability Mechanism (ESM). With a maximum lending capacity of €500 billion, the ESM will be the mechanism that finances all future financial support for the euro area.
Support is granted on strict conditions - to help governments bring their economies onto a sustainable path.
Greece, Ireland, Portugal, Spain and Cyprus currently benefit from financial support.
Supervision of financial institutions
The crisis revealed severe weaknesses in the financial sector. Governments had to step in to prevent a number of banks from collapse.
To avoid a similar situation arising in the future, the EU set up new supervisory authorities in 2011: the European Banking Authority, the European Insurance and Occupational Pensions Authority, the European Securities and Markets Authority and the European Systemic Risk Board for macroprudential supervision.
In June 2012, European leaders decided that a single supervisory mechanism (SSM) for banks should be created as a part of a wider effort to further develop economic and monetary union. Under the SSM, the European Central Bank and national supervisors will closely coordinate the oversight of banking institutions in the euro area as well as in those non-euro area countries that participate in the mechanism. Once the SSM is fully operational, the ESM will be able to directly recapitalise banks in the euro area.
The SSM is the first step towards a future "banking union", which will also feature a single rulebook, an enhanced framework for deposit protection and a single resolution mechanism.
Growth and jobs
Efforts to ensure stability are not an end in themselves: stability is a precondition for economic growth and employment.
Therefore efforts to strengthen the economic and monetary union – through enhanced supervision for banks, improved surveillance of budgetary policies and better coordination and enforcement of economic policy – have been supplemented by additional initiatives to boost growth and employment.
In 2010, the EU adopted common targets to promote growth in its Europe 2020 strategy, which provides a framework for smart, sustainable and inclusive growth.
Additionally, in 2012 the EU leaders adopted a compact for growth and jobs, aimed at re-launching growth, investment and employment and making the EU more competitive. It provides a framework for action at national, EU and euro area levels to strengthen growth. Furthermore, it mobilised €120 billion for immediate investment in the EU economy.
The way forward
Progress on the banking union remains at the top of agenda for 2013. The Council and the Parliament are expected to adopt legislation to set up the single supervisory mechanism (SSM) in the first semester of 2013.The Commission will soon present a proposal on a single resolution mechanism for member states participating in the SSM.
Also in the area of strengthening EMU, European Council President Herman Van Rompuy will present to the June 2013 European Council a roadmap on a number of issues related to economic policy coordination in the euro area.
The EU and the member states are now implementing their commitments for growth and jobs. Implementation is closely monitored by the European Commission, which looks at each country's performance and specific situation. President Van Rompuy reviews progress regularly at leaders' level.
In particular, the completion of the single market is a continuous exercise. The December 2012 European Council called on the Commission to present all key proposals under Single Market Act II by Spring 2013.
The Single Market Act II contains four main "drivers" for growth:
- developing fully integrated networks
- increasing cross-border mobility of citizens and businesses
- supporting the digital economy
- strengthening social entrepreneurship, cohesion and consumer confidence.
The European Council called on the Council and the European Parliament to adopt the relevant legislative acts by Spring 2014. The aim is to complete the internal market for energy by 2014 and the digital single market by 2015.