Tag Archives: crisis

Trichet States the Obvious

The President of the ECB, Jean-Claude Trichet, has called for a “quasi-budget federation” in front of the Economic and Monetary Affairs Committee of the European Parliament. The “f” word, however, is ominously missing from the EP’s press release. Mr. Trichet went on to say that “pundits are tending to underestimate the determination of [EU] governments”.

The determination of EU to rescue the euro notwithstanding, things continue to look bad. The interest rate spread between Italian bonds and benchmark German Bunds have come to a euro-lifetime high. Belgian 10-year bonds spread to German bunds of similar maturity widened to the highest levels since at least 1993. In other words, markets are not buying the “determination” stunt, at least for now.

Hence Mr. Trichet’s comments. He is quite aware that in the long term the current institutional framework of the eurozone is NOT sustainable. Even if the ECB manages to calm the markets for the moment (which is by no means certain), new, more powerful crises may follow in the next decade, vastly undermining economic growth in the whole European Union.

So Mr. Trichet is doing two things. First, he is trying to calm the markets, which is a very sensible thing to do. Second, he is telling European politicians that the complacency on the eurozone institutional framework is no longer possible and discussions must start now. Now the question is are they listening?

 

 

Report on the Public Finances of the EU

The European Commission has published the 2010 Report on Public Finances in EMU. The report reviews how Member States’ fiscal policies have evolved in the wake of the financial and economic crisis. It assesses the prospects for public finances and policy needs ahead.

The report says that both government deficits and debt have deteriorated markedly, reaching levels unprecedented in recent times in the EU. This strong deterioration in the public finances is due to both the automatic effect of economic performance and the support measures introduced by EU governments. According to the Commission these temporary measures have had positive effects on employment and economic activity during the crisis, by supporting private demand and maintaining fundamentally sound activities and jobs that could otherwise have been lost.

The report further notes that reduced fertility and increased life expectancy are set to have a considerable impact on both the growth potential of Member States’ economies and on public budgets. Member States with large deficits and large projected costs from ageing facing the biggest risks, and the most urgency in terms of addressing long-term sustainability issues.

An alarming finding of the report is that the significant consolidation of budgets set out in the Stability and Convergence Programmes are not sufficient to stem or reverse the increases in debt from
the crisis. According to the Commission Member States should seek to shift the tax burden from labour to energy and environmental taxes as part of a “greening” of taxation systems. The report says that expenditure-based consolidations have better track records of success than ones based on tax increases, while gradual consolidations tend to have higher success rates than “cold shower” ones.

Are Bank Resolution Funds Necessary?

The Commission proposes the establishment of ex ante resolution funds, funded by a levy on banks, to facilitate the resolution of failing banks in ways which avoid contagion, allow the bank to be wound down in an orderly manner and in a timeframe which avoids the “fire sale” of assets.

This should create a harmonized network of national funds linked to a set of coordinated national crisis management arrangements. The Commission also thinks that an EU Resolution Fund is possible in the longer term.

However, many think that the proposal institutionalizes moral hazard and will encourage banks to hold riskier asset portfolios. France and the UK in particular do not support the idea, and prefer to use the proceeds from any bank tax to finance their budgets.

So are bank resolution funds really necessary? It depends how you look at it. I very much like the analysis by Anthony M. Santomero and Paul Hoffman, saying that:

“(T)hese policy options may offer some hope to sustain the institutions’ lending capacity and consumer confidence for a short period of time. However, in the end, all of these options are no replacement for sound bank management and a sound balance sheet.”

I also don’t see how such funds will resolve typical weaknesses of the legal framework that have resulted in (i) incentives to postpone adequate treatment of failing banks; (ii) higher costs for bank resolution; and (iii) weaknesses in the banking system itself.

Stefano Micossi has said it quite clearly: if supervisors behave correctly, then large residual losses from bank failures become unlikely.

The Missing Link in the Eurozone Governance Debate

The President of the European Council Herman Van Rompuy proposed a “crisis cabinet”. He said that “there is not much hierarchy or organic links between the main players and the main institutions”. The idea is to include the European Comission President Jose Manuel Barroso, the head of the European Central Bank Jean-Claude Trichet and Mr Van Rompuy himself in this “crisis cabinet”.

At the same time the President of the European Commission called Germany’s plans on improving economic governance in the eurozone as “naïve”. He believes that any treaty reform is not feasible in the moment.

To me it is apparent that the debate is triangular – among the Commission, the ECB, and the European Council, leaving one player out. The European Parliament, that is.

In a way this is understandable. Any further integration of economic governance will encroach on state sovereignty. That is why it is essential to have sound support in the Member States for any further reform.

Then again, the weak conditionality of the Stability and Growth pact, as negotiated by the Member States, failed to perform. Any coordination mechanism short of Treaty reform will probably go the same way. We can see this in the conceptual disputes between Germany and France during the years and even today.

True, the EP did have a debate on economic governance coordination last week. But did it really influence the debate in the EU? Did it reach the European citizens? I am not so sure.

The dark scenario is political divergence rather then convergence. This may well be happening, given some unilateral steps made by Germany. But it should not surprise us – governments do calculate their own tactical interest, betting against the other participants in the currency union. In fact, history is full of such examples where currency unions dissolute due to political disagreement.

The European leaders seem to believe that they can “fix” the eurozone on an intergovernmental level with the support of the ECB, preferably without introducing Treaty reform. It would be great, but it is not possible.

That is why it would be much, much better if the European Parliament had a stronger voice in the debate. It is in the moment the only institution that can provide a forum for open deliberation of diverging political ideas for reform.

On a bitterer note – Member States may well circumvent the public discussion, but they will not fool the markets.

There Will Be Measures on Greece

We know that some measures will be taken to support Greece. The decision was taken during a meeting of the eurogroup on Monday. Officially we don’t know what the measures will be. Unofficially we know that most likely they will come in the form of coordinated bilateral loans. The final decision will probably be taken by the European Council.

The question now is – is this really enough?

The European Court of Human Rights is in Crisis?

A new report by Chatham House claims that the European Court of Human Rights is in real crisis, with over 50000 cases filed in 2008, as compared to 43000 cases for the first 43 years of existence of the Court.

The report says that four states (Russia, Turkey, Romania and Ukraine) account for about 57% of the Court’s workload. It also notes that Protocol 14 of the European Convention on Human Rights and Fundamental Freedoms has not yet entered into force due to Russia’s failure to ratify it.