The document discusses the role of the European Union in response to the eurozone crisis. It outlines proposals for moving towards a real European economic and fiscal union, including establishing basic principles of economic governance and prioritizing specific actions. The goals would be to increase competitiveness, stimulate employment, ensure sustainable public finances, and increase financial stability. Additionally, the "six-pack" reforms are mentioned as a way to strengthen economic governance and improve fiscal sustainability in the European Union.

1. MFM Alumni present:
Debate
4 Chief economists
17/01/2012
MFM Alumni partner:

2. Keynote speakers
Edwin De Boeck, Chief Economist KBC
Frank Lierman, Chief Economist Dexia Bank
Bart Van Craeynest, Chief Economist Petercam
Peter Vanden Houte, Chief Economist ING
Moderator
Alain Deneef, Bank Degroof
MFM Alumni partner:

3. Agenda
Banking in the new era – Edwin De Boeck, KBC
National governments in trouble – Frank Lierman, Dexia
The perilous Belgian budget – Bart Van Craeynest, Petercam
PIIGS countries – Peter Vanden Houte, ING
Role of the European Union – Frank Lierman, Dexia
Role of the ECB – Bart Van Craeynest, Petercam
The IMF , the USA & the importance of emerging economies – Peter Vanden Houte, ING
Favourite asset class for 2012 – Edwin De Boeck, KBC
MFM Alumni partner:

4. Banking in the new era
Edwin De Boeck, Chief Economist KBC
MFM Alumni partner:

5. EMU crisis
Spilling over…
…into the core countries… … and the banking sector
Intra-EMU interest differentials 5 year CDS premia bank sector (in bps)
(yield 10 y. gov. bonds vs. Germany in bps.)
5 18/01/2012

6. EMU crisis
Spilling over…
…into the core countries… … and the banking sector
Intra-EMU interest differentials Banks’ exposure on peripheral countries
(yield 10 y. gov. bonds vs. Germany in bps.) (% of GDP)
6 18/01/2012

7. European banks
Need to strenghten capital base
Regulatory Capital Leverage Ratio
(Regulatory capital / Risk-Weighted Assets) (Capital / Total Assets)
7 18‐1‐2012
Source: IMF, Financial Soundness Indicators, September 2011

8. European banks
Strengthening of capital base...
...in difficult markets ... ...earlier than initially foreseen
MSCI price index banks
(1/1/10 = 100, nat. currency)
EBA Policy response to the debt crisis:
“exceptional and temporary” capital buffers
against sovereign debt exposure
to reach core tier 1 capital ratio of 9% by
30/6/2012
EU banks’ capital shortfall to reach EBA targets
(bn. €)
8
* Provided for in the second EU-support package

9. European banks
Struggling for long-term funding
Corporate bond spreads Government funding needs (bn EUR)
(EMU, in bps.)
9

10. European economy
At the edge of a credit crunch
Bank Lending Conditions Factors contributing to tightening
for non-financial corporations (EMU – net % of banks contributing to tightening standards)
(tightening – easing)
Tightening
Easing
10

11. ECB
Increasing willingness to play its role as lender of last
resort ?
ECB “Securities Markets Programme“ ECB lending to banks (in bn. EUR)

12. National governments in trouble
Frank Lierman, Chief Economist Dexia Bank
MFM Alumni partner:

13. Governments facing huge fiscal challenges.
Crisis government finances.
o Budget balance (in % of GDP)
13 Source : European commission, Autumn Forecasts 2011.

14. Governments facing huge fiscal challenges.
Crisis government finances. (2)
o Debt of general government (in % of nominal GDP)
14 Source : European commission, Autumn Forecasts 2011. OESO, economic outlook, december 2011.

15. Governments facing huge fiscal challenges.
Crisis government finances. (3)
o Debt of general government (in % of nominal GDP)
o Euro area o US
BE 97,2
DE 81,7
EE 5,8
IE 108,1
EL 162,8
ES 69,6
FR 85,4
IT 120,5
CY 64,9
LU 19,5
MT 69,6
NL 64,2
AT 72,2
PT 101,6
SI 45,5
SK 44,5
FI 49,1
EA 88,0 General government gross debt
Federal debt held by the public
15 Source : ECB, financial Stability Review, december 2011

16. Governments facing huge fiscal challenges.
Crisis government finances. (4)
o Debt of general government (in % of nominal GDP)
16 Source : Eurostat

17. Governments facing huge fiscal challenges.
Debt of households : start of downsizing.
o Debt of households (in % of nominal GDP)
o Euro area o US
Total liabilities
Residential mortgages
Consumer credit
17 Source : ECB, financial Stability Review, december 2011

18. Governments facing huge fiscal challenges.
Debt of households : start of downsizing. (2)
o Debt of households (in % of nominal GDP)
18 Source : ECB

19. Governments facing huge fiscal challenges.
Debt of companies : ceiling reached.
o Debt of companies (in % of nominal GDP)
o Euro area o US
Debt-to-GDP ratio (left-hand scale) Ratio of liabilities to financial assets
Debt-to-financial assets ratio Ratio of liabilities
(left-hand scale)
Ratio of credit market liabilities to GDP
Debt-to-equity ratio (right-hand scale)
19 Source : ECB, financial Stability Review, december 2011

20. Governments facing huge fiscal challenges.
Debt of companies : ceiling reached. (2)
o Debt of companies (in % of nominal GDP)
20 Source : ECB.

21. Governments facing huge fiscal challenges.
Why such huge deterioration ?
Debt financing economic growth up to 2007
Violation of stability and growth pact by Germany and France in 2004
Rescue of the financial sector since 2008
« general interest »
too big to fail of systemic intitutions
bail outs
nationalisations
guarantees
Recession 2008 - 2009
Lesser tax revenues (more unemployed, reduced profits, less VAT, …)
Higher expenditures (stimulate the economy, unemploment compensation, …)
Rescue packages for Southern European countries
21

22. Governments facing huge fiscal challenges.
Savings packages
Reduction of expenditures (pensions, salaries, health care, investments, social
advantages, subsidies, …)
Increase of revenues (existing taxes, new taxes, privatisations, battle against
social and fiscal fraude, …)
Structural measures on labour market and in welfare state
Deleveraging private sector (households and companies)
22

23. Governments facing huge fiscal challenges.
Estimated financing needs of the euro area countries in 2012.
in % of nominal GDP
General government deficit
Maturing sovereign debt
23 Source : ECB, financial Stability Review, december 2011

24. Governments facing huge fiscal challenges.
Impact on the economy : the seven lean years.
Lesser economic growth
lower expenditures government
decreased purchasing power households
lesser corporate investments
higher saving ratio households and corporates
Economy supported by
extremely low interest rates (ST and LT)
euro not soo expensive
declining spreads on bonds
better performance economy US and China
24

25. The perilous Belgian budget
Bart Van Craeynest, Chief Economist Petercam
MFM Alumni partner:

26. 26
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27. Doing nothing is not an option
Public debt
180
Public debt Doing nothing
160 Primary balance (incl ageing costs) Towards primary surplus of 4%
140
120
100
80
60
Source: Input gezondheidszorg dec 2011 ‐ layout AWI.xls – sheet overheidsschuld
As a % of GDP
40
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
27
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28. Serious efforts required
Reversal in fiscal policy required
8
Fis
6
ca
l st
im
ul
4
us
2
0
‐2
‐4
Cyclically adjusted primary balance (as a % of GDP)
‐6
‐8
1979 1983 1987 1991 1995 1999 2003 2007
28
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29. No room for higher taxes on labour
Tax on labour
(income tax + social security, OECD)
Single, no children, AW Married, 2 children, AW + 67% AW
Belgium Belgium
Hungary Hungary
Germany France
France Germany
Austria Italy
Italiy Greece
Sweden Austria
Finland Sweden
Czech Republic Turkey
Greece Finland
Denmark Denmark
Spain Spain
Netherlands Czech Repulic
Slovakia Norway
Turkey Portugal
Norway Netherlands
Portugal OECD
OECD Slovakia
Poland Poland
Luxemburg UK
UK Canada
Canada Japan
US US
Switzerland Switzerland
Japan Iceland
Ireland Australia
Iceland Luxemburg
Australia Ireland
Korea Korea
New Zealand New Zealand
Mexico Mexico
0 10 20 30 40 50 60 0 5 10 15 20 25 30 35 40 45 50
29
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30. Looking for spending cuts
Primary spending
60
Required fiscal effort
As a % of GDP
55
2012: weaker 2011 + weaker
economic growth
50
1% (3.7 bn)
By 2020: debt reduction + ageing
45
costs
4.4% (16.3 bn)
40 By 2030: debt reduction + ageing
costs
35
8.5% (31.5 bn)
1970 1975 1980 1985 1990 1995 2000 2005
30
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31. Looking for spending cuts
Spending
80000
Primary spending
70000
60000
50000
40000
30000
20000
10000
0
Federal Regional Local Social security Health care
government government government
31
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32. PIIGS countries
Peter Vanden Houte, Chief Economist ING
MFM Alumni partner:

33. THEME IV: Fears of EMU exit have hit peripheral countries
ING BELGIUM 33

34. The difficult combination
• Peripheral countries have both a
competitiveness problem and a fiscal
problem
• Deflationary policy cannot be the solution
to both problems
ING BELGIUM 34

35. European capital market is fracturing again
Era of reallocation of savings
Era of renewed home country bias
within the whole of the EMU
Average domestic demand growth 1997-
8 6
Domestic demand growth 2011
FN
7 4
IR AT
FR DE
6 2 BE
ES NL
IT
5 0
GR ES
2006
4 -2
FN IR
3 -4
PT FR NL PT
2 IT -6
BE GR
AT
1 -8
DE
0 -10
-15 -10 -5 0 5 10 -15 -10 -5 0 5 10
Average CA balance in % GDP 1997-2006 CA balance in % GDP 2011
Today the risk of credit crunch is the highest in countries with
a lack of savings
ING BELGIUM 35

36. ECB’s monetary policy not equal for everyone
Interest rate on short term loans to non-financial companies
7.50
7.00
Greece
6.50
6.00
5.50
5.00
Spain
4.50
4.00
3.50 Germany
3.00
2008 2009 2010 2011
ING BELGIUM 36

37. What would happen in a break-up scenario?
ING BELGIUM 37

38. GDP impact of a break-up of the Eurozone
105
100
95
90
Real GDP (201 = 1
1 00)
85
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany A UT, FIN, B ENELUX So uthern -Euro pe (GIP S)
After 5 years Belgian GDP would be 11.5% lower than in the
base case. Unemployment would be 3.5% higher.
ING BELGIUM 38

39. Debt dynamics would hardly improve
140
(% of GDP)
130
120
110
100
90
80
70
60
50
40
2000 2002 2004 2006 2008 2010 2012 2014 2016
Italy Germany Base case Breakup
After 5 years, Belgian debt/GDP ratio would be 17.5% higher than in
the base case.
ING BELGIUM 39

40. Role of the European Union
Frank Lierman, Chief Economist Dexia Bank
MFM Alumni partner:

41. Towards a real European economic / fiscal union?
A pact for the euro.
Basic principles
economic governance
prioritisation of specfic actions
each country engaged to make concrete steps yearly
completing internal market
Goals
increase of competitiveness
stimulation of employment
sustainable public finance
increase of financial stability
41

42. Towards a real European economic / fiscal union?
Six-pack.
Goal : strenghtening economic governance and improved fiscal sustainability
surveillance mechanism for prevention and correction of macroeconomic imbalance
(European semester)
government debt criterion (60% of GDP)
expenditure benchmark (no longer finance growth out of revenue windfalls)
new quasi-automatic financial sanctions if budget deficit exceeds 3% of GDP
new minimum requirements for rules and procedures governing national budgetary
frameworks
adoption national fiscal rules introducing balanced budgets in structural terms (annual
structural deficit shall not exceed 0,5% of nominal GDP)
42

43. Towards a real European economic / fiscal union?
Which future for the euro area ?
Monetary Union
Fiscal / Economic Union
Governments have to clean up their deficits
Governments have to stimulate the growth
education
innovation
employment
43 Header and footer options

44. Towards a real European economic / fiscal union?
Alternatives.
Split up of the euro area
Smaller euro area (‘ light ‘ version)
exit problem countries; euro area ≈ German euro area
exit strong countries; euro area ≈ Weak European monetary union
floating of weak and or strong currencies against euro
New Bretton Woods system with more or less fixed rates between USD, EUR
and YUAN or YEN
44 Header and footer options

45. Role of the ECB
Bart Van Craeynest, Chief Economist Petercam
MFM Alumni partner:

46. 46
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47. ECB
Objectives
"The primary objective of the ESCB shall be to maintain price stability".
And: "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a
view to contributing to the achievement of the objectives of the Community as laid down in Article 2." (Treaty article 105.1)
The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and
non‐inflationary growth.
Further tasks
Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area.
Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary for fulfilling the tasks, either from national
authorities or directly from economic agents.
Financial stability & supervision: the Eurosystem contributes to the smooth conduct of policies pursued by the authorities in
charge related to the prudential supervision of credit institutions and the stability of the financial system.
International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and fora both within
the EU and internationally in respect of tasks entrusted to the Eurosystem.
47
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48. ECB meets its primary objective
Inflation under control Unreasonably high unemployment
5 10.5
10.0
4
UNEMPLOYMENT RATE
CPI
9.5
3
9.0
2
8.5
1
8.0
Core
0
7.5
G940
‐1
Source : Input vlerick debat 17 Jan 2012.xls ‐ Sheet balance sheet 1
7.0
Jan‐99 Jan‐01 Jan‐03 Jan‐05 Jan‐07 Jan‐09 Jan‐11 99 00 01 02 03 04 05 06 07 08 09 10 11 12
48
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49. Eurocrisis: financial stability at risk
Eurozone bond yields
12/01/2012
40
Greece
35
30
25
20
15
Portugal
10
Ireland
Italy
5 Spain
Belgium
Source: Slides US Layout AWI.xls– sheet EMU Spreads Germany
0
Aug‐09 Nov‐09 Feb‐10 May‐10 Aug‐10 Nov‐10 Feb‐11 May‐11 Aug‐11 Nov‐11
49
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50. Eurocrisis: waiting for the ECB
ECB bond purchases
25000
Looking to Frankfurt
Mandate: financial stability in the
20000
eurozone
15000
Unlimited means
10000
Risks
Inflation
5000 Moral hazard
0
Alternative???
Dec‐10 Mar‐11 Jun‐11 Sep‐11 Dec‐11
Source: Eco strat August2011.xls – Sheet ECB
50
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51. Massive monetary expansion
Central bank balance sheet
3000000 3000000
Fed ECB
2500000 2500000
%
0%
00
2000000 2000000
+ 9
+ 2
1500000 1500000
1000000 1000000
500000 500000
Mln USD Mln EUR
Source : Eco strat April2011 ‐ sheets world inflation ‐ Core Inflation ‐ Inflation Asia.xls ‐ Sheet balance sheet Source : Eco strat April2011 ‐ sheets world inflation ‐ Core Inflation ‐ Inflation Asia.xls ‐ Sheet balance sheet
0 0
Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11 Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11
51
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52. Petercam N.V. Bart Van Craeynest
Sint Goedeleplein 19 Hoofdeconoom
bart.vancraeynest@petercam.be
1000 Brussel Tel.: +32 (0)2 229 62 32
Tel.: +32 (0)2 229 63 11
Fax : +32 (0)2 229 65 98
Brussels – Frankfurt – London ‐ Luxemburg ‐ Madrid ‐ Geneva
52
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53. The IMF , the USA & the importance of emerging economies
Peter Vanden Houte, Chief Economist ING
MFM Alumni partner:

54. THEME VII: Slowdown or recession in the US and emerging
world?
ING BELGIUM 54

55. Signs of improvement in the US
110 250
300
105
Unemployment claims 350
(inverted scale)
100 400
450
95
500
90 550
600
85
650
US small business optimism
80 700
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ING BELGIUM 55

56. Debt households, companies and government
(Weighted average debt in % GDP)
350
300
250
200
150
100
1980 1990 2000 2010
Source: BIS
ING BELGIUM 56

57. Increase in total debt (2000-2010)
140
120
100
80
60
40
20
0
Avg
IT
PT
GR
NL
FI
AT
FR
JP
US
CA
UK
GE
BE
ES
SW
ING BELGIUM 57

58. Emerging markets lead the way…
Emerging world output surges ahead of developed
Index Fo recasts
1Q08=100
170 170
C hina
160 160
India
B razil
150 P o land 150
US
140 R ussia 140
Euro zo ne
130 130
120 120
110 110
100 100
90 90
08 09 10 11 12 13
ING BELGIUM 58

59. Chinese economy is softening
40 Chinese Business Confidence 145
140
35
135
30 130
125
25
120
115
20
110
15 105
100
10
95
Chinese M1 growth 3m lead
5 90
2005 2006 2007 2008 2009 2010 2011 2012
ING BELGIUM 59

60. Favourite asset class for 2012
Edwin De Boeck, Chief Economist KBC
MFM Alumni partner:

61. Equity
…and improving growth prospects
Stabilisation of OECD leading indicators… …supports equities
3-monthly change in % 3-monthly change in %

62. Equity
Attractive valuation…
Expected earnings growth Forward PE ratios well below long-term
average

63. Equity
Globalisation of regional equity markets
Expected earnings growth converges to Developed Valuation discount has largely
Markets disappeared

64. Government bonds
Extremely expensive as safe haven…
Real 10 year benchmark yields are negative… … but high risk premia may offer
opportunities

65. Corporate bonds
…but corporate spreads are offering value
Non-financial corporates… …offer attractive spread
EMU, Spread to benchmark, in basis points

66. Commodities over their peak
Oil price rises again on Iran worries Commodity prices
(January 2007=100 in USD)

67. Thank you
MFM Alumni, Your Financial Network
MFM Alumni partner:

68. Reception
MFM Alumni, Your Financial Network
MFM Alumni partner: