In an address to the European Parliament on 30 November, Jean-Claude Trichet, the head of the European Central Bank (ECB) warned the Parliament against allowing member states too much leeway when it comes to drafting new “oversight” legislation. Trichet told the Parliament’s Committee on Economic and Monetary Affairs that proposed clauses to allow member states to flout new rules on fiscal prudence “in the case of exceptional economic circumstances” or on the basis of “a reasoned request” would provide far too much wriggle room for national politicians.
While Trichet agreed that EU Commission proposals on economic governance in the EU, now before the Parliament, represented “an improvement over the current fiscal and macroeconomic surveillance framework for EU members”, the EU desperately needs a better functioning economic union to ensure its long term stability.
The topic was addressed by the EU Commissioner for Economic and Monetary Affairs Olli Rehn, at a conference organised by the AFME (Association for Financial Markets in Europe) on the same day as Trichet’s presentation.
Although his primary focus was supervision of the financial sector rather than supervision of each state by all the rest, Rehn’s analysis of how the EU got into its present mess is both trenchant and apposite:
"During last decade, economic divergences were built up among EU member states. Some saw domestic demand thriving with credit booms and increasing wages and prices, harming competitiveness. Other countries experienced slow growth in domestic demand while gaining competitiveness through falling relative costs vis-à-vis their competitors … the euro allowed better access to international capital markets. But neither markets nor politics provided the necessary discipline to prevent the accumulation of harmful imbalances.”
The paradox for the EU, Rehn pointed out, was that while the single market has undoubtedly been the foundation for growth and prosperity, it has also enabled the financing of excessive imbalances. Countries like Greece, Spain and Ireland could never have got access to so much cheap finance if they were outside the EU umbrella, so they could never have got themselves into so much debt. It follows, he says, that “the integrated capital market requires an integrated approach to financial regulation and supervision.”
Where Rehn’s analysis of prudential supervision of institutions meets with Trichet’s call for more stringent fiscal oversight at the national level, is in the new European Systemic Risk Board (ESRB). We dealt with Trichet’s view that the ESRB could be a kind of half way house to full fiscal union in an earlier blog, so it is interesting seeing Rehn giving it a nod in passing. The warnings issued by the ESRB, he told his audience, could be addressed to the Union as a whole, to individual Member States or to supervisory authorities.
Another point where Rehn and Trichet’s concerns meet is in the obvious point that, as he puts it, “major financial crises affect sovereign borrowers as well”. When Ireland’s banks hit the wall, Ireland hits the wall since the banking sector’s debts exceed Ireland’s GDP. Although Rehn’s language is a tad opaque – instead of haircuts for private holders of sovereign debt, he talks vaguely about “private sector involvement in the resolution of sovereign debt problems – he makes it clear that the EU is firmly set down the path of making future holders of EU sovereign debt earn their risk premiums from mid-2013.
If you buy Greek bonds to get in excess of 10%, expect to get burned if Greece defaults. The EU has finally decided to stop issuing get-out-of-jail cheques to bond holders.
However, Rehn pointed out, there have been no defaults, although from some of the headlines you’d think there had been. “Furthermore, there is a strong political will in all countries concerned to bring the houses in order (with) the most affected countries going through unprecedented reform.” The policy failures of the crisis are being addressed, he concluded. The question now is whether the EU can indeed force the interests of all to override the interests of particular national constituencies. Political will is going to be severely tested on the streets of some peripheral EU states before the job is done. Whether national politicians can stay firm, or even keep their seats in the face of public anger, remains to be seen.
Further reading on the European economy and regulation:
- Navigating a Liquidity Crisis Effectively, by Klaus Kremers
- Booms, Busts, and How to Navigate Troubled Waters, by Joachim Klement
- Euro crisis morphs into the sovereigns' subprime, a blog post by Ian Fraser
- “If you ever go across the seas to Ireland…” a blog post by Anthony Harrington
Tags: ECB , ESRB , EU Commissioner , European Systemic Risk Board , fiscal union , Ireland , Jean-Claude Trichet , Olle Rehn , Portugal , sovereign debt , Spain