The Financial Times has published findings in a previously confidential report by the International Monetary Fund claiming that:
“Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance.”
The IMF goes further to suggest the introduction of Euro in Eastern Europe states even without formally joining the eurozone, as well as a relaxation of entry rules for the eurozone.
Such proposals are objected in principle by the European Central Bank, Member States in the eurozone, and even some governments in Eastern Europe. The IMF is well aware of that fact, so it should have really serious motives for disclosing its report.
Rather surprisingly, the G 20 Summit in London has succeeded in delivering palpable results.
• an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy;
• a call for strengthened financial regulation and supervision;
• establishment of a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
• taking action against non-cooperative jurisdictions, including tax havens;
• extending regulatory oversight and registration to all systemically important financial institutions, instruments and markets, as well as systemically important hedge funds, and Credit Rating Agencies.
This is an impressive list. It remains to be seen what will be accomplished.
The forthcoming G20 meeting is expected to outline a new policy division between the US and EU on fiscal stimulus to counter the financial and economic crisis.
Mr. Jean-Claude Juncker, president of the eurogroup, said “The 16 euro area ministers agreed that recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis was not to our liking (…)Europe and the eurogroup have done what they needed to do.”
This contradicts to appeals by Barack Obama’s top economic adviser, Lawrence Summers, who said that the urgent need for a short-term increase in spending by governments temporarily overrides the longer-term goal of tackling the global imbalances.
The G20 meeting will be the arena of an indeed important debate, since some of the leading economists that predicted this economic crisis (the Nobel laureate Paul Krugman and Nouriel Roubini) say that we need a lot of fiscal stimulus, among other things.
Advising on policy measures from a scientific standpoint is easy; implementing policy measures being an elected politician is quite different. However, it may be useful to at least discuss different views, rather than not.
In its communication to the European Council summit on 19-20 March, the European Commission sets out proposals for coordinated European action to fight the economic crisis.
Regarding the financial system, the Commission endorses – and asks EU leaders to endorse – the key principles set out by the de Larosière Group.
In terms of the support for the real economy, an annexe summarises 500 national measures and concludes that they are broadly in line with the principles that recovery action should be timely, targeted and temporary. The Commission calls on EU leaders to endorse clear principles for further action, in line with the single market, with open trade worldwide, with building a low carbon economy and with returning to sustainable public finances as soon as possible.
According to the EC The EU should make a united push to improve the global financial and regulatory system, focusing on:
• better transparency and accountability;
• appropriate regulation of all financial actors;
• tackling difficulties caused by uncooperative jurisdictions;
• boosting international supervisory cooperation;
• and reforming the IMF, Financial Stability Forum and World Bank.
The extraordinary EU summit on 1 March has not backed proposals for a financial bail-out plan for Eastern Europe, and new member states in particular.
The only specific decision of the summit was to instruct ECOFIN to work closely with the European Commission to draw up elements to help countries facing temporary imbalances “on the basis of all available instruments”.
It remains to be seen what these instruments will and will not include.
The High level Group on Financial Supervision in the EU has published its long-awaited report. The group is chaired by Jacques de Larosière, and includes Leszek Balcerowicz and Otmar Issing, among others.
The report first analyses the causes of the financial crisis. One of the main reasons in the report is that “very low US interest rates helped create a widespread housing bubble“.The report claims that “the credit expansion in the US was financed by massive capital inflows from the major emerging countries with external surpluses, notably China”.
The HLG believes that there have been fundamental failures in the assessment of risk, both by financial firms and by those who regulated and supervised them. The members of the group believe that insufficient attention was given to the liquidity of markets. An important point of the report is that regulators and supervisors focused on the micro-prudential supervision of individual financial institutions and not sufficiently on the macro-systemic risks of a contagion of correlated horizontal shocks.
The report suggests some counter-cyclical regulation measures:
– introducing dynamic provisioning or counter-cyclical reserves on banks in “good times” to limit credit expansion and so alleviate pro-cyclicality effects in the “bad times”;
– making rules on loans to value more restrictive;
– modifying tax rules that excessively stimulate the demand for assets.
The HLG believes that the Basel 2 framework nevertheless needs fundamental review. The report suggests that:
• the assets of the banking system should be examined in terms not only of their levels, but also of their quality;
• stricter rules should be applied for off-balance sheet vehicles;
• the EU should agree on a clear, common and comprehensive definition of own funds.
As for credit rating agencies (CRA), the report suggests a fundamental review of CRAs’ business model, its financing and of the scope for separating rating and advisory activities should be undertaken. More, the report demands that the use of ratings in financial regulations should be significantly reduced over time.
Some of the other important ideas include:
• at least one well-capitalised central clearing house for credit default swaps in the EU;
• the assessment of bonuses for should be set in a multi-year framework, spreading bonus payments over the cycle;
• Deposit Guarantee Schemes (DGS) in the EU should be harmonized and preferably be pre-funded by the private sector.
The HLG states that “while the Group supports an extended role for the ECB in macro-prudential oversight, it does not support any role for the ECB for micro-prudential supervision“. The report suggests a new group, replacing the current Banking Supervision Committee (BSC) of the ECB, called the European Systemic Risk Council (ESRC) should be set up under the auspices and with the logistical support of the ECB. Its task would be to form judgements and make recommendations on macroprudential policy, issue risk warnings, compare observations on macro-economic and prudential developments and give direction on these issues.