Transcript The BRICs AND THE CRISIS

Transatlantic Macroeconomic and
Financial Cooperation during and
beyond the Crisis
by
Mr. Moreno Bertoldi
European Commission
DG Economic and Financial Affairs
The views expressed are those of the author and do not necessarily reflect the positions of the European
Commission.
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Summary of the presentation
• Recession and recovery
• Do the US and the EU agree on the root-causes of
the crisis?
• Do the US and the EU agree on the policy responses
needed?
• The Transatlantic dimension of the international
policy response
• Did the Transatlantic response matter?
• Will the Transatlantic relation continue to matter in
the management of the global economy?
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
We fell off the cliff together …
US GDP growth 2005-2008
(percentage change on preceding year)
EU
Source: European Commission Autumn Forecast
2009
2008
2007
2006
2005
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
US
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
… and we are climbing our way back together
EU and US GDP Growth
(percentage change from previous quarter)
EU
Source: European Commission Autumn Forecast
2011/4
2011/3
2011/2
2011/1
2010/4
2010/3
2010/2
2010/1
2009/4
2009/3
2009/2
2009/1
2008/4
2008/3
2008/2
2008/1
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
US
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
… but on both sides of the Atlantic we are paying
a very high cost for this crisis.
Number of unemployed
(as percentage of total labour force)
10%
8%
6%
4%
2%
EU
Source: European Commission Autumn Forecast
2009
2008
2007
2006
2005
0%
US
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The Great Recession: Did the Transatlantic
Response matter?
• Do the US and the EU agree on the root-causes of the
crisis?
• Do the US and the EU agree on the policy responses
needed?
• Did the Transatlantic response matter?
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Do the US and the EU agree on the root-causes
of the crisis?
• Development of risk-taking chains with systemic
implications (excesses of securitization, overextension of the shadow or alternative banking
system, development of ‘structured’ financial
products, perverse incentive structure, etc.)
• Insufficient and inadequate regulation and supervision
of these risk-taking chains
• Global imbalances
• The illusion of a global economy regulated by (as
much as possible) hands-off national authorities
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Do the EU and the US agree on the policy
responses needed?
• The De Larosière Report and the creation of the
European Systemic Risk Board and the three
European Supervisory Authorities, and the US
Treasury: “Financial Regulatory Reform: A New
Foundation”.
• Very expansionary monetary policy, including
through unconventional measures
• The “European Economic Recovery Plan” (EERP – 200
billion euros) and the “American Recovery and
Reinvestment Act” (787 billion US dollars)
• Avoid protectionism as much as possible
• Involve emerging market economies in the crisis
resolution
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The EU and the US financial responses to the
crisis
Rescue measures
• Avoid the collapse of the financial system through the
rescue and recapitalization of banks and other
financial institutions which are systemically
important.
• Disposal of impaired assets
• Assess the real situation of the financial sector so as
to put in place the right rescue policies (e.g., bank
stress tests)
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The EU and the US financial responses to the
crisis
Financial regulatory reform
• Creation of institutions aimed at identifying systemic
risks and tackle them
- EU: The European Systemic Risk Board (ESRB)
- US: Financial Services Oversight Council (FSOC)
- EU: The European Supervisory Authorities
(banking, securities, and insurance)
- US: Reviewing the Fed’s governance structure
and supervision of banks
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
(con’t)
• Comprehensive regulation of financial markets
- Raise capital standards
- Enhance regulation of securitization markets;
- Introduce comprehensive regulation for over-thecounter derivatives;
- Strengthen prudential requirements;
- Implement strong international compensation
standards.
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Expansionary monetary policy, including through
unconventional measures
Short Term Interest Rate
EU
US
Source: European Commission Autumn Forecast
US
EURO AREA
2009
2008
2007
2006
2005
2004
2003
2002
2001
2009
0%
2008
1%
0%
2007
2%
1%
2006
3%
2%
2005
4%
3%
2004
5%
4%
2003
6%
5%
2002
6%
2001
7%
2000
7%
2000
Long Term Interest Rate
EU
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The fiscal response: The “European Economic Recovery Plan” and
the “American Recovery and Reinvestment Act”
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Avoid protectionism
• Unintended side effect of the financial rescue
packages: financial protectionism.
• Efforts to mitigate it as much as possible
• Trade protectionism
• Exchange rate “manipulation”
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The Transatlantic dimension of the international
policy response
• Bilateral cooperation (EU-US Summits, intensification
of contacts at all levels since the beginning of the
crisis, the Camp David decision to provide the main
policy response through the G20)
• The G7/G8: It provided the initial response
(immediately after the collapse of Lehman) and
steered the G20 process until the London Summit
• The G20: Transatlantic convergence or divergence?
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The G20 response to the crisis. Transatlantic
convergence or divergence?
• Issues where there is convergence
- Need for a strong and decisive political message by the
leaders of the major economies in the world
- creation or strengthening of the global infrastructure:
large increase of IMF resources and strengthening of
its mandate and of the instruments to fight the crisis,
creation of the Financial Stability Board, increase of the
resources of the multilateral development banks;
- agreement that unconventional monetary measures
and an extraordinary fiscal stimulus were needed to
avoid the Great Recession mutating in the Great
Depression 2;
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
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(con’t)
- agreement on cooperating at global level to address
some of the financial root-causes of the crisis:
- raise capital standards
- extend the coverage of the regulation to the alternative
banking sector
- more effective oversight of global financial markets
- avoid regulatory arbitrage
- implementation of strong international compensation
standards
- tackle non-cooperative jurisdictions
and avoid the regulation in place acting in a pro-cyclical
way.
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The G20 response to the crisis. Transatlantic
convergence or divergence?
Some divergences have also appeared:
• Timing of exit strategies;
• Degree of regulation of financial markets;
• Possible taxation of financial transactions.
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Did the Transatlantic response made a
difference in the current crisis?
• The mistakes of the ‘30s were avoided
• The Great Recession did not become the Great
Depression
• It opened the way to the reform of the global financial
architecture
• It was key to put in place the measures that are
leading the global economy towards recovery.
• Could the two sides have done more?
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Will the Transatlantic relation continue to matter
in the management of the global economy?
Why it could matter less:
• The EU and its Member States matter less in the G20
than in the G7/G8
• The US is turning its attention from the Atlantic to the
Pacific
• The perspective of a US-China G2
• IFIs will not be run any longer by the old G2
• US and EU policies will take divergent paths with
regard to exit strategies, financial regulation and
supervision, and the new international financial
architecture.
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Will the Transatlantic relation continue to matter
in the management of the global economy?
Why it could matter more:
• Moving towards a more ‘normal’ situation, it will
become difficult for the G20 to deliver concrete results.
Need for a strong EU-US cooperation to ensure that
the G20 will continue to deliver.
• Both the US and the EU are looking East, but on some
issues they share the same concerns and ask for the
same solutions (rebalancing of growth, exchange rate
issues, etc.). The rise of EMEs can provide new fields
of Transatlantic cooperation;
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(con’t)
• Even if IFIs will not be run any longer by the old
G2, they will still require a strong cooperation
between the EU and the US to ensure their sound
and effective management;
 The US and the EU cannot afford to take divergent
policy path without causing permanent damages to
their economies. Furthermore, they are
instrumental to the recovery of the world economy
and the rebalancing of global growth.
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1 December 2009
The challenge of restoring sustainable fiscal
positions and normalize monetary policy.
Source: European Commission Autumn Forecast
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
The challenge of disposing impaired assets
Source: IMF
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Rebalancing is needed to ensure a sustainable
post-crisis growth regime.
Source: IMF
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SIEPS and EUROPEUM Seminar on Transatlantic Relations
1 December 2009
Conclusions
• The crisis has changed the nature of the EU-US relationship
in the field of macroeconomic and financial relations.
• Looking forward, this does not imply that the relationship
will necessarily weaken, but it will be inevitably different from
that in place in the pre-crisis period.
• Strong Transatlantic macroeconomic and financial
cooperation is still needed in the post-Great Recession world,
in particular to ensure stability and good governance.
Source: IMF
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1 December 2009