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Nicolas Véron, Senior Fellow Bruegel Institute - IFAC Sovereign Debt Seminar Presentation
The Euro CrisisWhere We Stand, Possible ConsequencesNicolas VéronSenior Fellow, Bruegel (Brussels)Visiting Fellow, Peterson Institute for International Economics (Washington)IFAC Conference ‘‘The Sovereign Debt Crisis – From Lessons to Reform’’Vienna, 19 March 2012 1
Multiple Layers Long-term growth / competitiveness – Germany since unification Banking crisis – Comparison with US Sovereign debt crisis – A market failure pre-2009? Institutional crisis – The Eurozone-level decisionmaking (or lack thereof) is the problem itself – ‘‘repair the ship while on the high seas’’ 2
Governments vs Markets ‘‘In a way, it is a struggle between politics and the markets. We must re-establish the primacy of politics over the markets’’ Angela Merkel, May 2010EU financial integration – Capital markets vs banks – Consequences for domestic politicsDistorted narratives – ‘‘speculative attacks’’ vs ‘‘buyers’ strike’’Communication difficulties – Underdeveloped European public space / media – Opaqueness of European politics for investors 3
National vs European ‘‘Politics without policies’’ vs ‘‘policies without politics’’ (Ivan Krastev) – But only if policies can be carried out without politics – Fiscal, banking policies a different category No European executive – Not the Commission, nor the presidency of the Council – Council members have national mandates / no alignment Fixes: French-German couple, ‘‘Frankfurt Group’’, ‘‘Gang of Four’’ – Specialized authorities – but limited mandate European Central Bank Directorate-General Competition (European Commission) European Supervisory Authorities?? – Mario Draghi’s ‘‘campaign’’ in Germany 2011 4
‘‘The New ECB Chief Is So German!’’ Bild-Zeitung cover picture, 29 April 2011 5
Banking Systems Regulatory harmonization Supervisory autonomy – European Banking Authority (EBA) 2011 Resolution authority – Special resolution regimes introduced in some countries since 2008 – ‘‘cross-border banks international in life but national in death’’ Financial linkages – National guarantees on ‘‘domestic’’ banks Reinforced by Oct 27 decisions, ongoing discussion – Home bias in sovereign debt portfolios Political linkages – Different forms in different countries 6
Banking Systems: ‘‘TBTF’’ Risk Concentration 600 500 400 300 1990 200 2006 100 2009 0 U U K S a y t I l n p a S n p a i J n e a F c r w n d e S m G n e a y r N d n h e a s r t l Combined assets of Top 3 Banks compared to GDP Source: BIS; no retreatment of accounting differences 7
Banking Systems: Open / Closed800%700%600%500%400%300%200%100% 0% K E R T S L E E K T E U T R I L Z Y U O K I T G V T E U D F I E N I B D A S L P G F P C C H R S S MB L L E Domestic Subisdiaries Branches Assets of credit institutions to GDP, 2009 Source: ECB 8
Banking Systems: Home Bias 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% e n l a y l y d a i g d e s a i y K n k c i a g a n n n r n c d r m r U e r e p u t I a a l e u a l n n t u i a g d a e r S t m e v o a r a l s g l n e m r r r o b n i F r u e w n G o e I l m F e A u S e P G S e h B H D x t e u L N Share of home-country sovereign debt in total portfolios of sovereign debt of EU member states among each country’s stress-tested banks. Source: 2011 Stress Tests 9
Countervailing Factors Political commitment – ‘‘Religion of the euro’’ – Includes Germany Downsides of alternative options – Managed exit of selected countries? – Possible consequences of Eurozone unraveling Financial / economic Self-image Political stability / security consequences Resilience of political systems – Electoral outcomes since start of crisis – The German case 10
Fiscal Union? Trichet’s Charlemagne Prize address (Aachen, June 2011) – ‘‘tomorrow’’: veto on non-compliant national budgets – ‘‘the day after tomorrow’’: European Finance Ministry Surveillance + ability to take control Banking / financial sector policy External representation Fiscal Compact Common resources / mutual guaranties – Eurobonds – Option of EU tax? Information Systems – Government Accounting 11
Banking Union? Supervision and resolution – Over large / systemically important institutions – Or all institutions with devolution to national authorities Cf EU competition policy Deposit Insurance Burden sharing – Ad hoc, mutualized or both ? Governance – EU vs Eurozone? Gradual evolution of financial structures – Consolidation / privatization – Cf US until 1990s 12
Political Union? Prerequisite for fiscal / banking federalism Executive decision-making capacity / accountability – Role and reform of European Parliament Equal representation Control over executive – Second chamber? – Geographical subsets? Role of European Commission? Process of transformation – Treaty change(s) – Convention? other groupings? 13