Economic and Financial Integration in Europe Recent Stresses

Economic and Financial Integration in Europe Recent Stresses and Policy Challenges Mahmood Pradhan European Department IMF

Economic and Financial Integration in Europe A. Greater Economic Integration, but widening imbalances B. Sovereigns and Banks face difficult market conditions C. Fiscal and Financial Integration: Remaining challenges

Economic Integration goes beyond the Euro Area

Integration pre-Euro

Euro deepens integration, across Europe

Before the Euro, wide disparity in borrowing costs and external positions

The Euro “promotes” financial market integration (yields) but external positions diverge

Extreme imbalances eventually lead to higher borrowing costs for some countries

External competitiveness did not converge over 19992010

…. . Leading to wide differences in current account balances

Public sector debt of the Euro Area broadly similar to other advanced countries

But very few countries complied with fiscal rules (SGP)

Economic and Financial Integration in Europe A. Greater Economic Integration but widening imbalances B. Sovereigns and Banks face difficult market conditions C. Fiscal and Financial Integration: Remaining challenges

Now Sovereigns and Banks both face high borrowing costs

and large financing requirements

Similarly for banks

Central bank support (LTRO) has been essential

The economic impact will be very widespread

Economic and Financial Integration in Europe A. Greater Economic Integration but widening imbalances B. Sovereigns and Banks face difficult market conditions C. Fiscal and Financial Integration: Remaining challenges

Very limited progress on fiscal integration

And no cross border banking resolution authority

Stronger growth Deeper integration Thank you! Higher firewall Global effort