How the financial crisis made Europe stronger – CNBC

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Five key responses combined to steer Europe out of the crisis.

First, crisis-hit countries like Ireland and Spain pushed through badly needed reforms, improving public finances and increasing competitiveness.

Second, EU economic governance was strengthened. The European Commission received new powers to enforce the Stability and Growth Pact, issue country-specific recommendations (the ‘European semester’),and underline obstacles that need to be removed to foster growth. Eurostat, Europe’s statistical agency, became more powerful in cross-checking and challenging the data received from each country.

Third, euro area countries created the European Stability Mechanism (ESM),and its predecessor the European Financial Stability Facility. These institutions were a great success: no country was forced to leave the euro area, the cash-for-reform approach worked, and growth accelerated in countries that implemented reforms. Importantly, no European taxpayer money was spent on the rescue programmes. The ESM raises the funds needed in capital markets through highly-rated bonds, and passes on the low funding cost to programme countries at rates today of around 1-2%. This approach produces budget savings for programme countries, particularly Greece, which would pay much more if it were to tap capital markets independently.

Fourth, the European Central Bank’s unconventional measures helped. The ECB expanded its balance sheet like the FED, Bank of Japan and Bank of England, provided unlimited liquidity for banks, started a bond purchasing programme to avoid low inflation, which also made it easier for banks to lend and boost investor sentiment. The euro weakened which helped to increase exports.

Finally, the Banking Union was established: new institutions were created to monitor macro-prudential risks and supervise banks, securities markets and insurance companies. The Single Supervisory Mechanism is the centrepiece of this initiative; it oversees the 130 largest euro area banks. During the crisis, EU banks also padded out their capital, increasing their capital base by €600 billion since 2008.

How the financial crisis made Europe stronger – CNBC