Transcript The Global Crisis: a European Perspective

The Global Crisis:
a EU Perspective
Vitor Gaspar, Director General of BEPA
(Bureau of European Policy Advisers)
European Commission
Higher School of Economics X th International
Conference
Moscow, Russia, 7-9 April 2009
The views expressed are my own and do not necessarily reflect those of the European Commission.
BOTTOM LINE
1.
2.
3.
4.
The crisis has spread globally through strong economic
and financial linkages. The crisis is global in character.
Experience of Great Depression shows unilateral
national action leads to negative spillovers and
retaliation deepening and prolonging the crisis. It is
necessary to engage multilaterally to preserve open
trade.
EU is the largest economic entity in the world (and most
Russia’s most important partner). It is also the most
integrated international economy in the world.
Coordinated action is key to explore synergies and to
avoid negative spillovers.
Policy responses are (and have been) based on the
judgment according to which the current financial and
economic crisis is an exceptional event that justifies
exceptional responses. Restoring financial stability is a
necessary – albeit not sufficient- condition for
sustainable recovery.
Outline
1.
2.
3.
4.
5.
Factors contributing to the current global
crisis.
Events in economic and financial
markets after October 2008.
Policy responses to the global crisis.
G 20.
Conclusion.
1. Factors contributing to the
current global crisis


Macroeconomic factors - The “Great Moderation”. Low
nominal interest rates. Compressed risk premia. Real
estate and asset price inflation. Strong growth of money
and credit. Large global imbalances.
Microeconomic factors - Financial innovation: new
financial instruments of unprecedented complexity,
development of the “originate and distribute” of bank
operations, poor risk management and governance,
inadequate regulation and supervision.
2. Events in economic and financial
markets after October 2008
Table 1: Real GDP growth forecasts, EU-27 and euro area
2008
EU
February 2008 interim
Spring 2008
September 2008 interim
Autumn 2008
January 2009 interim
2,0
2,0
1,4
1,4
1,0
Spring 2008
July 2008 update
October 2008
November 2008 update
January 2009 update
March 2009 update
1,8
1,7
1,5
1,3
June 2008
September 2008 update
November 2008 update
March 2009 interim
-
(annual average % change)
2009
2010
Commission
Euro area EU
Euro area EU
Euro area
1,8
1,7
1,8
1,5
1,3
1,2
0,2
0,1
1,1
0,9
0,9
-1,8
-1,9
0,5
0,4
IMF
1,4
1,7
1,2
1,7
1,2
1,3
0,6
0,2
1,2
-0,2
-0,5
1,0
-1,8
-2,0
0,5
0,2
0,9
-3,2
0,1
OECD - euro area
1,7
1,4
1,7
1,3
1,0
-0,6
1,2
0,7
-4,1
-0,3
Source: Commission, IMF and OECD forecasts, various issues as indicated
2. Events in economic and financial
markets after October 2008

Financial systemic-risk pressures have abated
since September-October 2008 as the result of
unprecedented and continuing government
financial support.
 Nevertheless, markets have not yet returned to
normalcy and risk-perceptions—as reflected in
interest-rate spreads—are still well above earlycrisis and especially pre-crisis levels.
 The crisis is in a stage where the contraction in
economic activity is now affecting banks’ loan
book.
2. Events in economic and financial
markets after October 2008
Figure 1. Average Libor interest rate in Euro Area, UK, US - as of April 1, 2009
6
5
4
3
2
1
Average 3-Month LIBOR
Average policy rate
0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
2. Events in economic and financial
markets after October 2008
However,
pressures are still strongly present in the credit markets that directly
finance the real economy.
Figure 2. Spreads in consumer finance sectors as of Jan 12, 2009
2. Events in economic and financial
markets after October 2008
Figure 3. CDS spreads for US and European corporates as of March 31, 2009
1.200
1.000
800
Europe investment grade
Europe crossover
US investment grade
US crossover
600
400
200
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
2. Events in economic and financial
markets after October 2008: Russia
42
600
40
550
38
500
36
34
450
32
400
30
28
350
9
00
.2
Reserves (billion USD, right scale)
3
.0
06
9
00
.2
1
.0
16
8
00
.2
1
.1
28
8
00
.2
0
.1
10
8
00
.2
8
.0
22
8
00
.2
7
.0
04
RUR per Exchange Rate Basket (left scale)
2. Events in economic and financial
markets after October 2008: Russia
35
25
15
5
Agriculture
Construction
Retail sales
09
-25
Industry
bFe
Basic sectors
09
08
ec
8
-0
ov
-15
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D
N
8
8
-0
ct
O
0
p-
8
8
-0
ug
Se
A
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08
nJu
8
8
-0
pr
-0
ay
M
A
8
-0
ar
M
08
bFe
08
07
ec
nJa
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-5
3. Policy responses to the global
crisis
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In today’s conditions of financial turmoil the
transmission mechanism cannot be relied to
operate as in normal circumstances; hence
fiscal policy is needed to complement
monetary policy.
The spillovers across nations are very
significant in the present circumstances –
hence steps to strengthen international policy
coordination and cooperation.
Inter-linkages and interdependence are
particularly strong in the EU (the EU as
example).
3. Policy responses to the global
crisis
EU Member States are faced with a common
disturbance, experience strong spillovers in their
policy actions and share central common interests:
•
•
•
•
The EU’s Single Market and the Single Currency.
Structural Adjustment and Sustainable Growth.
Financial Stability and overall Macroeconomic
Stability.
Multilateral governance for the global economy.
3. Policy responses to the global
crisis
•Central
bank’s
liquidity
provision
and
aggressive lowering of interest rates;
•Extension of guarantees on banks’ liabilities.
•Capital injections and (in some cases) statecontrol
•Treatment of impaired assets.
•Discretionary fiscal stimulus and automatic
stabilizers.
•A review of the regulatory and supervisory
framework in the EU
3. Policy responses to the global
crisis: Russia
An extensive set of policy measures has also been taken by
Russia, which is rather similar to what the EU adopted:
1. Provision of domestic liquidity to the banking sector;
2. Provision of external liquidity (to banks and companies);
3. More flexible exchange rate policy;
4. Package of fiscal support measures;
4. Other measures (tax cuts, bank deposit insurance extended,
increase in unemployment benefits, caps set for currency
swaps and foreign assets of banks, takeover and recapitalisation of banks).
4. G 20: EU
Main messages for the G-20 summit from the EU are:
1) Coordinated macroeconomic policies.
2) Preserve international trade.
3) Enhance sound regulation & strengthen transparency.
4) Reinforce international cooperation and promote integrity in
financial markets.
5) Increase IMF’s lending capacity.
6) Reform the WB and the MDBs.
4. G 20: Russia
Russia has been an important contributor to international
consensus:
1. A larger representation of emerging countries in the IFIs.
2. The improvement of the IMF's early warning capabilities and
the expansion of the FSF membership.
3. On the financial regulatory and supervisory areas, Russia is
very close the EU approach.
Beyond the G20 meetings themselves, the existing
framework for discussions on macro policies between the
Commission (notably DGs ECFIN and MARKT and also the
ECB) and Russian authorities, the Annual Plenary of the
"EU-Russia Macroeconomic and Financial Issues Dialogue"
has been instrumental for the exchange of information and
views.
6. Conclusion

Existing EU State-aid rules & ex-ante guidance of the
EC have played a major role in ensuring consistency
between the measures taken by Member States,
therefore contributing to a coordinated, cooperative
outcome (Single Market).

Key characteristic of intervention: Reconciliation of
short-term and longer-term perspectives of public is
crucial (e.g. banking system).

Reconciliation between the short and long run
perspectives is also present in fiscal policy.
Discretionary expansion must be
(coordinated)
timely, targeted, and temporary (SGP).
6. Conclusion

Building the ground for sustainable recovery requires
(as a necessary, albeit not sufficient condition) the
restoration of financial stability.

But to prevent and manage future crises, further
progress in the area of regulation, coordinated
supervision and crisis management procedures is
essential.

These policy questions and challenges are also
relevant for Russia (domestically…

…and more broadly they apply globally. They affect
Russia as an important stakeholder.
The Global Crisis:
a EU Perspective
Vitor Gaspar, Director General of BEPA
(Bureau of European Policy Advisers)
European Commission
Higher School of Economics X th International
Conference
Moscow, Russia, 7-9 April 2009
The views expressed are my own and do not necessarily reflect those of the European Commission.