On June 18, the German Marshall Fund hosted a public discussion entitled "Is Europe doing enough? Economics and policies in the wake of the global financial crisis." The discussion featured Marek Belka, director of the European department of the International Monetary Fund and former prime minister of Poland. Sean Mulvaney, director of the Economic Policy Program at GMF, gave a brief introduction.
- The size of fiscal stimulus in the EU is similar to the one in the U.S. given the role of automatic stabilizers in Europe. However, the nature of the EU brings unique challenges and the financial crisis has exacerbated problems associated with the EU's lack of a single fiscal jurisdiction and lack of fiscal competencies at the EU level.
- In the realm of monetary policy, where the EU institutions do have substantial competencies, Dr. Belka believed that the EU acted robustly in addressing challenges posed by the financial crisis. He thought that the critique of the European Central Bank has been overstated.
- Stress tests of banks raise a number of difficulties in the EU where there are twenty-seven national banking systems. Twenty-two of the major European banks will undergo stress tests whose results will not be made public. Dr. Belka raised the concern of what to do with the information these tests will provide. The major question that has not been yet answered by European governments is who is responsible to recapitalizing a major cross-national bank in financial troubles.
- Dr. Belka argued that a macro and micro surveillance system to supervise the economy and banks should be established as part of the financial stability framework in order to minimize systemic risks leading to potential future economic crises.
DESCRIPTION OF DISCUSSION
Sean Mulvaney opened the discussion by highlighting transatlantic tensions over the financial crisis. He cited examples of American opinions, that Europe is not contributing their fair share, and that they are not providing the economic stimulus needed to help prevent a prolonged worldwide recession. He noted that the IMF recommends that Europe should follow the United States' lead with stress tests. Are Europe's current attempts at stress tests halfhearted? Sean noted that Dr. Belka published an op-ed piece in the Financial Times relating the gravitas of the current situation, namely that the choices we are making now in the area of financial regulation hold the potential to be around for generations. He pointed out that there is much at stake, particularly concerning the future of Europe's focus for the past fifty years: the single market. In light of the financial crisis, is Europe on track?
Dr. Belka answered the question of "Is Europe doing enough?" with another question: "of what?" is it doing enough? Is it possible or even advisable for Europe to do the same things as the United States? Dr. Belka touched on a number of themes to address these questions. He began with fiscal stimulus, which he argued, is almost the same size in the EU as in the United States when one adds the fiscal stimulus provided by automatic stabilizers. Is it enough? Dr. Belka indicated that it depends on how protracted the crisis will be. There is however a fundamental difference between the US and the EU. The EU is not a country like the US; as a union of sovereign states it is thus inherently different and it faces unique challenges, especially in the area of common economic governance. For example, Dr. Belka observed, the EU does not have a single, unified fiscal jurisdiction. The Stability and Growth Pact provides for some fiscal regulation, including the budget deficit cap and some surveillance mechanisms. However, at time of crisis the problems associated with a lack of fiscal jurisdiction are exacerbated, and Dr. Belka advocated a coordination of fiscal behavior in order to prevent free-riding of one country by another.
Regarding monetary policy, Dr. Belka thinks that there has been a robust reaction from Europeans facilitated by the central bank, common institutions, and a common currency. He believes that the ECB's reaction was proper, noting that some individuals even think that it is ahead of the curve like in liquidity provision. He also noted that there is a difference between the United States and the Euro area in the structure of credit easing. Unlike the United States, the ECB encounters difficulties when buying sovereign securities.
What should be done in cleaning up the banks? Stress tests are one such tool that have raised significant attention in the United States but have failed to do so in Europe. The EU has twenty-seven different banking systems, and twenty-two of the biggest cross-border financial institutions agreed to stress tests. The results will not be public, but they will give the regulators some information on the health of the system. The reaction of the market was positive, even though it was agreed that the exercise would not be public. Dr. Belka noted that a personal concern of his with conducting stress tests the American way is how to address the results when a bank is in trouble. There are no real pan-European banks, but there are banks that operate across Europe, raising the questions of who should pay the bill when banks go under and how should this be coordinated? He cited this as a reason why Europeans are less enthusiastic about conducting these stress tests despite the pressure and need to conduct them.
Dr. Belka proceeded to address the financial stability framework with the recent release of a report by the de Larosière group. The main recommendation of this report is to establish a body to conduct a macro surveillance framework: an EU systemic risk board. The role of such a board would be to keep an eye on the safety of the system as a whole. A micro surveillance system would deal with the banks, namely the structure of their assets and liabilities, liquidity ratios, etc. He stressed the need for both macro and micro supervision reasoning that even if all banks behave correctly, the system as a whole may still not be safe. Furthermore, he also proposed to strengthen coordination between cross national banks with the national supervisors maintaining their prominent roles. Following his presentation, Dr. Belka addressed questions from the audience. The initial questions focused on Central and Eastern Europe. Why was it hit so hard? What is Western Europe doing to stabilize the situation in the "new Europe." Why is it not decoupling? Dr. Belka related that new Europe was dependent on Western Europe for both trade and capital, the Czech Republic being the best example. New Europe depends on "old" Europe because Eastern European is a net importer of capital. In normal times it's desirable that capital flows from rich and advanced economies to the less advanced ones, but the financial crisis suddenly dried these flows putting several economies in the region under duress.
What is the EU doing to help? Dr. Belka emphasized the importance of putting the banks in order. The most significant danger for the heath and development of the financial sector in CEE is the weakness of parent banks in Western Europe. If parent banks are not healthy their subsidies are at risk, and the weakness of western banks weakened banks in Eastern Europe. He predicts however that the rebound in Eastern Europe will be more robust due to a higher rate of potential growth.
The reaction of the ECB was further addressed in the question and answer period. A member of the audience asked if the ECB was late on the game? Were they less innovative? Dr. Belka stated that he does not share this view. As Dr. Belka sees it, the ECB framework proved to be quite proficient and that it is unwise to say that the ECB has behaved poorly. Rather, they have succeeded in anchoring price stability, which is something that the ECB prioritize over other targets.