Download DERFOR KOM FINANSKRISEN OG HVAD GØR VI VED DEN?

CAN THE EURO BECOME A MAJOR
CURRENCY DESPITE WEAK INTERNAL
GOVERNANCE?
Presentation by Niels Thygesen*
At IV ASTANA Economic Forum
3 May 2011
*Professor (emer.) of Economics, University of Copenhagen, dr. polit
Member of the Delors Committee on EMU 1988-89
MY QUICK ANSWER IS YES, BECAUSE
• THE WEAK GOVERNANCE IMPACTS PRIMARILY
THREE SMALL PERIPHERAL ECONOMIES;
• THE WEAKNESSES ARE BEING REPAIRED, THOUGH
A DIFFICULT TWO-YEAR TRANSITION PERIOD IS
AHEAD; AND
• THE INTERNATIONAL MONETARY SYSTEM IS
BECOMING MORE MULTIPOLAR WITH THE EURO IN
AN ESSENTIAL POSITION
FAILURES OF GOVERNANCE
DID THE ORIGINAL MODEL – CENTRALISATION OF
MONETARY POLICY WHILE LEAVING BUDGETARY AND
STRUCTURAL POLICIES LARGELY TO NATIONAL GOVERNMENTS
- BECOME UNWORKABLE , BECUASE IT WAS
• FLAWED FROM THE START, OR
• ALLOWED TO DEGENERATE INTO NON-OBSERVANCE?
THE EVIDENCE SUGGESTS THE LATTER,
PARTICULARLY SINCE 2003
TWO ARGUMENTS FOR ”LOPSIDED” FRAMEWORK
• POLITICAL FEASIBILITY – EUROPEAN COUNTRIES NOT
READY TO CEDE SOVEREIGNTY OVER BUDGETARY OR
STRUCTURAL POLICIES
• THE CASE FOR CENTRALISATION MUCH WEAKER FOR THESE
POLICIES DUE TO SMALL SPILL-OVER EFFECTS – THEIR
IMPACT IS LARGELY NATIONAL
BUT SOME CONSTRAINT ON DIVERGENT NATIONAL
BUDGETARY POLICIES REMAINS DESIRABLE TO FOSTER LONGRUN SUSTAINABILITY
THE NEED FOR SUCH CONSTRAINTS DOES NOT JUSTIFY
VESTING DISCRETIONARY AUTHORITY IN THE COUNCIL OF
FINANCE MINISTERS(ECOFIN)
FISCAL RULES WITH A CEILING ON PUBLIC SECTOR DEFICITS
AND A NORM FOR THE PUBLIC DEBT RATIO SHOULD SUFFICE
INDIRECT COORDINATION WAS PREFERRED TO ANY DIRECT
COORDINATION OF NATIONAL BUDGETARY POLICIES FOR
SHORTER-TERM STABILISATION
STILL THE RULES WERE CRITICISED FOR BEING TOO
CONSTRAINING – WHILE THEY WERE IN FACT TOO LAX
MAYBE THE FOUNDERS OF THE EURO WERE TOO
PREOCCUPIED WITH PROTECTING THE COMING ECB
AGAINST ALL THREATS TO ITS MONETARY PURITY –
THE ECB AS ”A MONETARY RULE, NOT A BANK”
•
•
NO AUTHORITY FOR FINANCIAL
STABILITY IN THE ECB ?
NO PLAN B FOR THE FAILURE OF THE FISCAL
RULES ?
SHOULD A RESIDUAL ROLE FOR FINANCIAL MARKET
DISCIPLINE HAVE BEEN DESIGNED ?
CREDIT RISK MUCH LESS IMPORTANT THAN
CURRENCY RISK – AND IT TURNED OUT TO BE
PERCEIVED AS SMALLER IN THE EURO AREA THAN
ANTICIPATED AND SMALLER THAN ON SUBNATIONAL
DEBT IN LARGE FEDERAL COUNTRIES UNTIL 2008
HOW CAN ONE EXPLAIN THAT?
• GREAT CONFIDENCE IN THE PERFORMANCE
AND PROSPECTS OF PERIPHERAL ECONOMIES, OR
• RELIANCE ON A BAIL OUT OF COUNTRIES, DESPITE
THE FORMAL PROHIBITION (ART.125)
ONE OTHER WORRYING TREND – INCREASING DIVERGENCE OF
NATIONAL COST AND PRICE TRENDS, ACCENTUATING INTRAEU COMPETITIVENESS PROBLEMS AND EXTERNAL
IMBALANCES
THE MEDITERRAINEAN ECONOMIES (NOT IRELAND) ARE
RELATIVELY MORE CLOSED AND HAVE TOO MUCH OF THEIR
FOREIGN TRADE ÍN COMPETITION WITH LOW-COST
PRODUCERS IN THE GLOBAL ECONOMY
IRELAND AND SPAIN HAD EXCESSIVE CONSTRUCTION
BOOMS, BOOSTING DOMESTIC INFLATION AND EXTERNAL
DEFICITS
THE WEAKNESSES IN GOVERNANCE HAD LARGELY BEEN
ADDRESSED IN 2010, MAKING FUTURE CRISIS LESS LIKELY
• ENHANCED SURVEILLANCE OF BUDGETARY POLICIES WILL
BECOME EFFECTIVE DUE TO LESSONS OF 2008-10 AND THE
RETURN OF MARKET DISCIPLINE
• SURVEILLANCE ALSO OF OTHER MACROECONOMIC
IMBALANCES
• MORE AUTHORITY VESTED IN EUROPEAN FINANCIAL
SUPERVISION, BOTH OF INDIVIDUAL INSTITUTIONS AND
MARKETS AND MARKETS OF SYSTEMIC RISKS (THROUGH A
NEW RISK BOARD, SERVED BY THE ECB)
HOW TO GET OUT OF THE CURRENT CRISIS?
THE MAIN NEW ELEMENT IS THE SET-UP OF A
SAFETY NET TO DEAL INITIALLY WITH LIMITATIONS
TO THE ACCESS OF SOME BORROWING
SOVEREIGNS TO FINANCIAL MARKETS, FROM 2013
ALSO TO DEAL WITH APPROACHING INSOLVENCIES
FROM 2013 ALL BOND ISSUES WILL HAVE
COLLECTIVE ACTION CLAUSES FACILITATING
SUBSEQUENT RESTRUCTURING, WITH THE LATTER
CONTINGENT ON STRICT CONDITIONALITY PROGRAM
WITH THE IMF, THE COMMISSION AND THE ECB
WHILE THIS MAY CREATE A ROBUST FRAMEWORK
FROM 2013, PROBLEMS WILL NOT WAIT FOR 2 YEARS
GREEK PUBLIC DEBT WILL PEAK AROUND 160% OF
GDP IN 2012-13, IRISH DEBT AROUND 120%, WHILE
PORTUGAL – NOW NEGOTIATING A PROGRAM – HAS
LOWER DEBT, BUT STRUCTURAL PROBLEMS AS
SEVERE AS GREECE.
SOME ”VOLUNTARY” DEBT RESTRUCTURING MAY
BE ORGANISED OVER THE NEXT TWO YEARS, BUT
THAT MAY NOT BE ADEQUATE
IF NO EXIT – CAN BALL-OUT OR DEBT
RESTRUCTURING HELP?
AS EXIT FROM THE EURO AREA IS INCONCEIVABLE FOR A
DEBTOR ECONOMY, SOME ACCESS TO ONE OR THE OTHER OF
THE REMAINING TWO DIMENSIONS OF PLAN B – BAIL-OUT
AND/OR DEBT RESTRUCTURING HAS TO COME ONTO THE
AGENDA BEFORE 2013
BOTH ARE CURRENTLY RESISTED BY THE CREDITORS AND THE
POST-2013 SAFETY NET(ESM) IS STILL SUBJECT TO ADOPTION
BY PARLIAMENTS IN CRITICAL GUARANTOR COUNTRIES
(GERMANY, THE NETHERLANDS, FINLAND) WHICH COULD MAKE
ITS USE CUMBERSOME
THE ECB ALSO REJECTS WIDER DEBT RESTRUCTURING FOR
FEAR OF DESTABILISING MARKETS AND BECAUSE IT WOULD
REQUIRE RECAPITALISATION OF THE ECB ITSELF
HOWEVER, REMEMBER THAT
• GREECE, IRELAND AND PORTURAL COMBINED
CONSTITUTE LESS THAN 8% OF EURO AREA GDP, MAKING A
SOLUTION ECONOMICALLY MANAGEABLE
• FOR THE INVESTOR THERE REMAINS AN AMPLE SUPPLY OF
HIGH-GRADE SOVEREIGN BONDS ISSUED BY THE OTHER 14
COUNTRIES IN THE EURO AREA AND BY THE SAFETY NETS
• DESPITE THE REMAINING ISSUES OF GOVERNANCE, THE
QUALITY OF EURO-DENOMINATED BONDS WILL LOOK
RELATIVELY REASSURING - COMPARED WITH OTHER
INDUSTRIAL COUNTRY DEBT, ALSO DUE TO SLOW-TRENDWISE APPRECIATION OF THE EURO AGAINST THE USD