Statement by Minister for National Economy György MATOLCSY,

Statement by Minister for National Economy György MATOLCSY,

in his capacity as Chairman of the EU Council of Economic and Finance Ministers, at the IMFC Spring Meeting, Washington, D.C.

1. I submit, in my capacity as Chairman of the EU Council of Economic and Finance Ministers, this statement which focuses notably on the world economy, in particular the outlook and policies for the EU, and on IMF policy issues.

I. ECONOMIC SITUATION AND OUTLOOK

2. The economic recovery in the EU continues to make headway. After a strong performance in the first half of 2010, real GDP growth in both the EU and the euro area slowed down in the second half of last year. The deceleration was expected and in line with a soft patch in global growth and trade, which reflected the withdrawal of stimulus measures and the fading of positive impulses from the inventory cycle. Nonetheless, the global economy, particularly the US and emerging market economies, proved more dynamic in the fourth quarter than expected in the 2010 autumn forecast, in particular thanks to the strengthening of (private) domestic growth drivers. This provided a positive offsetting impulse to the adverse weather effects observed in the final part of the year in some Member States.

3. Looking ahead, EU GDP growth in 2011 is set to gather pace, despite lingering vulnerabilities in financial markets. This outlook is supported, inter alia, by better prospects for the global economy and by upbeat EU business sentiment. The former owes mainly to a better outlook for the US, while growth in major emerging market economies continues to be

buoyant. The latter generally points to economic activity gathering pace going forward and shows signs that the recovery is also broadening across sectors. Moreover, developments in profitability, order books, lending to households, saving ratio also point to a gradually firming pace of domestic activity. However, developments remain uneven across member states. The encouraging progress in economic sentiment stands in contrast with the tensions observed in some sovereign-bond markets in the EU since autumn.

4. Amid still high uncertainty on the global recovery, risks to the EU economic growth outlook at the current juncture appear broadly balanced for 2011. The main downside risks are on the external side and related to the events in the MENA (Middle East and North Africa) region (and their impact on commodity prices and especially on oil prices, which are increasing despite the spare capacity in OPEC countries) and Japan (and their impact on confidence).

5. The resurfacing of global imbalances, a major medium-term challenge for global

macro-economic and financial stability, weighs on the outlook. Global imbalances narrowed considerably during the crisis but remain large and are widening again. This issue is part and parcel of the G20 Framework for Strong, Sustainable and Balanced Growth and the Action Plan adopted in Seoul. All the major economies should do their part, otherwise previous

efforts risk being erased by possible future crises. The euro area dimension needs to be duly taken into account when assessing global imbalances.

6. Financial markets and institutions have over the past months continued to stabilise. This trend was supported by signs of an ongoing and broadening global economic recovery. In particular, the financial situation of the EU banking sector has overall improved, risk

spreads have slightly narrowed and financial asset prices increased. However, more recently, events in the MENA region, and their effects on global commodity prices, and the earthquake in Japan were again sources of instability in financial markets at large. In addition, the

evolution in euro-area sovereign bond markets, driven by investor concerns about public debt sustainability in several euro-area Member States, has continued to weigh on the EU financial sector. The main risk to macro-financial stability continues to be the situation in euro-area sovereign bond markets.

7. With regard to price developments, euro area annual HICP inflation was 2.4% in February 2011. The increase in inflation rates in early 2011 largely reflects higher commodity prices. Pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. Inflation is seen to moderate again below 2% in 2012 but such projections do not take into account the most recent oil

price increases and assume continued moderate wage and price-setting behaviour.

8. Risks to the medium-term outlook for price developments are on the upside. They relate, in particular, to second-round effects, to higher increases in energy and non-energy commodity prices—a risk that may be exacerbated by recent events in Japan and MENA countries. Furthermore, increases in indirect taxes and administered prices may be greater than currently assumed, owing to the need for fiscal consolidation in the coming years.

Finally, risks also relate to stronger than expected domestic price pressures in the context of the ongoing recovery in activity.

Policy Developments

9. Since the Autumn 2010 Meetings, the EU has taken further determined action to safeguard financial stability and has put in place additional mechanisms that are at hand to address crises when they occur.

a) Macroeconomic and structural policies

10. Fiscal prudence is important, not only in order to address the significant long-term challenge of ageing, but also and even more urgently in the light of existing market concerns about public finance sustainability. Therefore ambitious fiscal consolidation is required, beyond the withdrawal of the stimulus measures which were necessary to tackle the recent crisis, in order to halt and eventually reverse debt accumulation and restore sound budgetary positions. All EU Member States are committed to start consolidation in 2011 at the latest. In several Member States, however, consolidation has been ongoing since 2010 or even earlier. That consolidation should remain differentiated across countries as regards timing, size and accompanying policies. In countries with particularly severe fiscal challenges, in particular when facing financial stress, consolidation should be frontloaded and indeed numerous

Member States have accelerated the implementation of their consolidation plans. In general, annual structural fiscal adjustments should go well beyond 0.5% of GDP. Consolidation should be growth-friendly and hence combined with the implementation of structural reforms

of pensions, healthcare and labour markets aiming at increasing potential growth.

11. The Stability and Growth Pact, to be strengthened by the forthcoming adoption of the legislative package to enhance economic governance, remains the appropriate framework for coordinating fiscal policies of EU Member States. In particular, for Member States subject to the excessive deficit procedure (EDP), the deficit targets and the structural adjustments

should be fully consistent with a timely correction of the excessive deficits in line with existing Council recommendations and not lead to a back-loading of the necessary adjustment. Moreover, in the context of the newly started cycle of policy coordination called European semester, countries should present in their forthcoming Stability and Convergence

Programmes concrete multi-annual consolidation plans including specific deficit, revenue and expenditure targets and the strategy envisaged to reach these targets. All Member States should keep the growth of expenditure net of discretionary revenue measures clearly below

the medium-term rate of potential GDP growth until they have reached their medium-term budgetary objective (MTO), while prioritising sustainable growth-friendly expenditure and promoting efficiency of public spending. The Stability and Convergence Programmes should

be based on cautious growth and revenue forecasts.

12. The EU has taken major initiatives for tackling structural weaknesses of the European economies. An urgent need for growth-enhancing measures was identified, to be implemented in a frontloaded manner. In summer 2010, EU leaders agreed on a ten year programme "Europe 2020", which sets out a vision for Europe's social market economy for the next decade. The new strategy aims at smart, sustainable and inclusive growth in Europe, making the European economy more resilient to shocks and securing jobs to people. A set of measurable and ambitious headline targets in the areas of labour market, R&D, innovation, education, energy efficiency and social cohesion has been agreed to help ensuring strong

political ownership of national reform agendas. The Commission is putting forward horizontal initiatives ("flagships") to catalyse progress. Addressing the bottlenecks to growth timely in each Member State as well as in the EU as a whole would provide the EU a solid footing for coping with global challenges, also contributing to reach a strong, sustainable and balanced growth at a global level.

13. The EU has worked intensively to strengthen economic governance, in order to eliminate the deficiencies that were revealed during the crisis. The Union has agreed on a comprehensive approach to an enhanced and integrated surveillance of macro-financial challenges in the Member States. A particular emphasis is given to ex ante economic policy

coordination, taking into account the interdependence of the European economies and the EU/euro area dimension. This would be achieved through the launch of a new annual cycle of policy coordination, called the "European Semester". The first European Semester was kicked off in the very beginning of 2011, with the presentation of the Commission's first

Annual Growth Survey. The latter presents horizontal guidance on the policies to carry out with a view to responding to the main economic challenges in Europe, in terms of fiscal consolidation, correction of macro-structural imbalances and job- and growth-enhancing policies (in line with the "Europe 2020" strategy).

14. To underpin the reinforcement of economic governance in the EU and the euro area, the Commission also adopted a comprehensive package of six legislative proposals in September 2010. The legislation is foreseen to be agreed between the Council and the Parliament by summer 2011. The proposals aim at further strengthening the Stability and the

Growth Pact (SGP) and introducing a system to prevent and correct macro-economic imbalances. The new legislative elements for ensuring sound fiscal policies include the consideration of public expenditure growth and better surveillance regarding public debt developments, operationalising the Treaty-based debt criterion. The introduction of minimum requirements for national fiscal frameworks would enhance the rule-based footing of fiscal policy making. Macro-financial stability in the EU would be addressed by the regular surveillance of external and internal macro-economic imbalances of the Member States. An

Excessive Imbalances Procedure (EIP) may be launched for Member States that experience imbalances of severe nature, with potential negative economic and financial spillovers or threatening the proper functioning of Economic and Monetary Union. The procedure would

include policy recommendations by the Council setting out the nature and implications of the imbalances to ensure corrective action by the Member State concerned. The legislative package also provides for a strengthened enforcement mechanism for euro area Member

States under both the SGP and EIP, including a system of early sanctions.

b) Financial market policies

15. The European Union is currently in the midst of an ambitious and intensive programme of regulatory reform for the financial sector. The financial market reform package covers several primary areas: better and more integrated supervision and regulation for financial services, greater consumer and investor protection, and the development of appropriate mechanisms for crisis management and resolution to minimise both the cost to taxpayers and disruptions to the financial system and the economy as a whole. These objectives should be achieved while at the same time fostering and deepening the single market for financial services as well as increasing financial stability on a long-term and global basis.

16. The establishment, as of 1 January 2011, of the new supervisory framework – made up of the European Systemic Risk Board (ESRB) and the three European Supervisory Authorities – marked a major step in the implementation of the EU’s reform agenda. The EU continues to progress towards completing work on legislative proposals related to financial

institutions and markets. The financial reform seeks to implement, among other things, appropriate regulation for the banking sector, alternative investment funds, credit rating agencies, and OTC derivatives markets – as well as new rules for short-selling and CDS. The new Basel agreements will be transposed in EU law and the capital requirement rules for the

insurance sector will be modernised via the Solvency II legislative framework. Furthermore, the EU is reviewing Community law with an aim to harmonise regulation for investment services; this entails revisions to the Markets in Financial Instruments and Market Abuse Directives and launching proposals on a Securities Law Directive, Central Securities

Depositories and corporate governance.

17. Policy makers also continue to make progress with respect to financial market repair, inter alia by accelerating the restructuring and return to viability of banks and financial institutions where needed. This is crucial if the sector is to contribute to the economic recovery. As banks gradually proceed with restructuring, the 2011 EU-wide stress test

exercise, coordinated by the newly established European Banking Authority (EBA), will provide insights and examine the health and resilience of the EU banking sector. This exercise, the results of which will be published this summer, is expected to be more severe and more consistent in its application across individual banks compared to previous year's exercise, thanks to a rigorous peer review process carried out by the EBA with the participation of national supervisors, the European Central bank and the ESRB and the Commission. The degree of disclosure will also be enhanced. Among other new elements, this latest round of stress tests will also include an assumed increase in the cost of funding for banks and its corresponding implications for their profitability.

18. The European Council has agreed on the need for euro-area Member States to establish a permanent stability mechanism: the European Stability Mechanism (ESM). The ESM will be activated by mutual agreement1, if indispensable to safeguarding the financial

stability of the euro area as a whole. The ESM will assume the role of the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM) in providing external financial assistance to euro-area Member States after June 2013. Access to

ESM financial assistance will be provided on the basis of strict policy conditionality under a macro-economic adjustment programme and a rigorous analysis of public-debt sustainability, which will be conducted by the Commission together with the IMF and in liaison with the ECB. An adequate and proportionate form of private sector involvement will be expected on a case-by-case basis where financial assistance is received by the beneficiary State. The nature and extent of this involvement will be determined on a case-by-case and will depend on the outcome of the debt sustainability analysis, in line with IMF practices, and on potential implications for euro-area financial stability. The ESM will have an effective

lending capacity of € 500 billion. The ESM will seek to supplement its lending capacity through the participation of the IMF in financial assistance operations, while non-euro area Member States may also participate on an ad hoc basis. Until entry into force of the ESM the

Heads of State or Government of the euro area have decided that the agreed lending capacity of EUR 440 billion of the EFSF will be made fully effective. The lending rates of the EFSF will be lowered to better take into account the debt sustainability of recipient countries, while remaining above the funding costs of the facility, with an adequate mark up for risk and in line with IMF pricing principles. The same principles will apply to the ESM. The EFSF and ESM will also have the possibility, “as an exception,” to intervene in primary debt markets, on the basis of strict conditionality via a macro-economic adjustment programme. It has also been agreed to extend the average maturity of the euro-area Member States loans to Greece to 7.5 years and to reduce the lending rate of the official financial assistance to Greece by 100 basis points.

By spokesperson

Ingiahedi Mduma

Ministry of Finance

Washington D.C

18/4/2011