ECB VP: Europe Addressing Structural Problems

In a speech today in Singapore, Vítor Constâncio, ECB Vice-President, said that Europe is responding to its crisis by implementing structural reforms:

Europe is addressing its structural problems which have been holding back growth and at the same time it is ensuring that its banking sector contributes to global stability and growth. Europe is undertaking a process of wide and deep reforms, of which the Banking Union project is a major example, that will ensure a future healthier path of economic progress.

He claims that euro zone members are making good progress in becoming more competitive through product and labor market measures and also deeper reforms to tax systems, public administration, and the judicial system:

They are achieving greater sustainability by moving towards an economic model based less on external borrowing and more on internal competitiveness. Indeed, according to harmonised competitiveness indicators based on unit labour costs have all registered significant improvements since 1999, Ireland (-19% since 1999), Spain (-9.5%), Greece (-9%), and Portugal (-6.6%). The loss of competitiveness accumulated until 2007 has been totally offset since the beginning of the crisis. As a consequence, the EU Commission forecast for this year is that all stressed countries will show a surplus on current account with the exception of Greece with a deficit of just 1.1 % of GDP.

He also notes that European banks are in much better shape than widely recognized:

First, there have been steady improvements in solvency positions of many euro area banks. For large and complex banking groups in the euro area, covering about two thirds of total assets, the median core Tier 1 capital ratio reached 11.1% in the first quarter of this year – up from 9.6% at the end of 2011 and 8.3% at end-2009.

Second, euro area large banks have become less leveraged, from a level of 3.3% of tier 1 equity to 5% now. This was achieved mainly through capital increases....

Third, the restructuring efforts in the stressed countries to strengthen their banks with the help of the European Stability Mechanism (ESM) funds have led to improved funding conditions for euro area banks. With the financing provided by the ESM, banks in Spain, Portugal, Greece and Ireland have been recapitalized. Bank deposits in these countries have risen by around 200 bn since September last year, and the cost of both deposit and bond funding for banks has fallen significantly. Euro area banks’ issuance of medium and long-term debt has increased and we have also seen a noticeable pick-up in repo market activity.