Jackson Hole calling US and eurozone politicians

Yesterday, I presented the speeches by the Federal Reserve chairman Ben S. Bernanke and the ECB chief Jean-Claude Trichet in the blog post (in Swedish) USA och Europa: Bernanke och Trichet i Jackson Hole, as well as the message addressed to the eurozone by the IMF chief Christine Lagarde: Jackson Hole: IMF Lagarde talking to Europe.


Jackson Hole calling politicians

The central bankers and the leaders of the international financial institutions want the politicians in the USA and Europe to get their act together, Reuters reports: Analysis: Economic leaders fear policy paralysis (28 August 2011).

The Wall Street Journal chips in with: Central Bankers Worry Economy Still in Peril (29 August 2011).

A Financial Times editorial praised Lagarde for starting a debate on how to get rid of excessive debt in the USA and in Europe, but criticised her willingness to send the tab to the taxpayers: Lagarde spells out ugly truth on debt (28 August 2011).

The message from Jackson Hole to politicians is that monetary policy alone can't keep the global expansion going, according to Bloomberg: Central Bankers Urge Governments on Expansion (29 August 2011).

I am still hoping to find comments on Lagarde's message to the eurozone leaders:

So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work.

European Parliament

The European Parliament committee on economic and monetary affairs (ECON) meets today to discuss the sovereign debt markets with the Jean-Claud Trichet and about restoring market confidence with Jean-Claude Juncker, Jacek Rostowski and Olli Rehn (Draft agenda).

A few days ago, ECON chairwoman Sharon Bowles (ALDE) published an article about the challenges on Public Service Europe. The costs of a failure of the euro are simply too huge: Bowles: 'Saving the euro is paramount' (26 August 2011).

According to the Swedish ECON committee member Gunnar Hökmark (EPP), the continuing accumulation of debt did not solve the debt crisis. Too little has been done to enhance competitiveness and to create durable growth: En höst som måste vända utvecklingen (28 August 2011).


Bloggingportal

For continuing discussion about the eurozone challenges and other European issues, follow the new articles from 841 euroblogs on multilingual Bloggingportal.eu, an important part of the European public space. Look for the tags 'eurozone' and competitiveness'.

In addition to my four blogs (links in margin), I am active on Twitter and Facebook.



Ralf Grahn

Trichet writes to Van Rompuy on economic governance

When the president of the European Central Bank, Jean-Claude Trichet, spoke at the hearing of the Economic and Monetary Affairs Committee of the European Parliament 21 June 2010, he was not prattling on as a free thinker.



On the eve of the European Council 17 June 2010, Trichet had sent a letter to its president Herman Van Rompuy, who chairs the task force on economic governance. Enclosed were the proposals by the ECB to strengthen decisively the governance and enforcement structures in the economic policy framework of the euro area:

I trust that the proposals will be useful for the deliberations of the Task Force.

On 14 pages the Governing Council of the ECB details its proposals for

(1) strengthening surveillance over budgetary policies and more effective prevention/correction of excessive deficits and debts;

(2) an improved framework for competitiveness surveillance and the correction of economic imbalances and

(3) the design of an appropriate euro area framework for crisis management.


The Governing Council of the European Central Bank is the main decision-making body of the ECB. It consists of the six members of the Executive Board and the governors of the national central banks of the 16 euro area countries.

A heavyweight contribution, I would say.





Ralf Grahn

ECB’s Trichet on economic governance in EMU

The EU heads of state or government have stowed away the discussions about improving European Union and eurozone economic governance into the finance minister task force chaired by Herman Van Rompuy. The task force is expected to report in October.

For the sake of transparency and informed public debate, it is therefore important that these crucial matters are debated elsewhere as well. One welcome intervention was made by the president of the European Central Bank, Jean-Claude Trichet, at the hearing of the Economic and Monetary Affairs Committee of the European Parliament 21 June 2010.



EMU responsibility


According to Trichet, policy makers have to understand the requirements of the Economic and Monetary Union (EMU):

A single market of 500 million citizens and an Economic and Monetary Union of 330 million citizens – which are among the largest and most advanced economies in the world and which are built on solid foundations in terms of human and social capital – cannot and should not be measured according to the strengths or weaknesses of their individual components alone. Particularly as regards Economic and Monetary Union, policy-makers need to internalise what it means to be part of a monetary union, in words and in deeds.

Quantum leap for economic governance needed


Economic governance must be radically improved. Benefits and responsibilities of EMU go together. Solidarity runs both ways:

The ECB believes that a true quantum leap is needed in the framework for surveillance and adjustment of fiscal policies, as well as broader macroeconomic policies concerned with Europe’s competitiveness.

“ La solidarité de fait” that Robert Schuman called for 60 years ago is reflected in the degree of economic integration and interdependence already achieved in Monetary Union. But solidarity is a two-way street. The benefits and protection that are derived from membership of Monetary Union bring with them responsibilities and obligations. This is the fundamental contract which forms the basis for our currency. We now have to turn it into a more effective structure for fiscal and macroeconomic surveillance and adjustment.

Budget surveillance

Trichet outlined the strengthening of budgetary surveillance, including prevention, correction, a wider range of quasi-automatic sanctions and formal Commission proposals:

First, it is of the essence that the surveillance of budgetary policies be strengthened. I am pleased to note that the European Council confirmed this assessment at its meeting last Thursday.

At the level of the EU27, and in particular within the euro area, we must have effective instruments to prevent – and, where necessary, correct – excessive deficits and debt levels. A more stringent implementation of rules and procedures is essential, among other things by increasing the automaticity and speed of procedural steps. The initiation of sanctions also needs to be quasi-automatic.

Fiscal surveillance must be more direct and effective. It must also be based on more independent monitoring and assessment. We may need a differentiated approach to surveillance depending on the fiscal performance of countries. The Commission should have greater responsibility by making proposals, which can only be modified with unanimity in the Council, rather than mere recommendations under the Stability and Growth Pact.

In the event of non-compliance, sanctions need to be applied much earlier and to be broader in scope. They should not only address excessive debt ratios, but also apply when countries are not making sufficient progress towards medium-term budgetary objectives. A wider spectrum of financial sanctions needs to be considered, along with non-financial and procedural sanctions, such as more stringent reporting requirements or even a limitation or suspension of voting rights.

Competitiveness


Broader economic reforms and surveillance of macroeconomic policies are needed to enhance competitiveness and prevent imbalances:

The second area may appear more novel, both at the level of the European Union and at the level of the euro area, but the ECB has in fact been stressing it in the Eurogroup since at least 2005: the surveillance of policies to maintain Europe’s internal and external competitiveness – policies to raise productivity, to enhance people’s skills and to improve firms’ competitiveness. These policies go well beyond the tradable sector. They must also encompass the non-tradable sector, including the public sector, since it too is decisive for the competitiveness of an economy as a whole.

Conscious management of wages and costs in order to maintain a healthy position for the economy within a competitive environment – this should be the core focus of such broader macroeconomic surveillance. The reason why competitiveness should be the main focus is not that countries should pursue export-oriented policies or boost international market share. The reason is that within a monetary union, the relative competitiveness of economies captures very well the sustainability of price and cost developments.

I am pleased that last Thursday’s European Council confirmed the need for an effective surveillance framework in this area. Experience has shown that persistent divergence in this regard is detrimental both for Member States and for Monetary Union as a whole.

As with fiscal surveillance, this framework needs to allow for targeted and differentiated surveillance and follow-up measures. For countries that experience significant losses of competitiveness, surveillance should become increasingly deep and detailed. More ad hoc reporting and dedicated country missions, policy recommendations, compliance requirements, public peer pressure and gradual financial steps to encourage compliance could all be part of that process.

For this to work, we need a transparent and effective trigger mechanism to determine the intensity of vulnerabilities and surveillance. This should be based on close monitoring and reporting by both the Commission and the ECB. Experts are currently developing ways to best capture the complexity of the issue, as well as procedures by which indicators could be used in a surveillance and adjustment framework.

If we can put in place effective surveillance and adjustment frameworks for both fiscal and competitiveness policies – and if we can ensure through appropriate regulation that our financial system serves the real economy and not the other way around – our European Union and our Economic and Monetary Union will exit this crisis much stronger than before and will be very well placed in the global economy.

Wise public spending and growth oriented reforms are needed, but the Economic and Monetary Union is far from over, if our political leaders grasp the nettle.




Ralf Grahn

Tracking eurozone crisis measures: Financial supervision and better governance in motion

Even if the Greek aid package and eurozone stabilisation are the main focus of our tracking exercise, financial regulation and supervision are related areas worth mentioning.

On 12 April 2010 the European Central Bank (ECB) and the European Commission held a joint conference on financial integration and stability, the legacy of the crisis (IP/10/417).



The ECB president Jean-Claude Trichet reminded that the financial supervisory framework in the EU will be based on two pillars. The micro-prudential pillar, the European System of Financial Supervisors (ESFS), will be composed of the national supervisors and three European Supervisory Authorities (ESAs). The European Systemic Risk Board (ESRB) will form the macro-prudential pillar.

According to Trichet, the ECB stands ready to support the ESRB:

in particular taking into account the important presence of the members of the General Council of the ECB in the ESRB and the fact that the ECB will provide the secretariat and analytical, statistical, logistical and administrative support to the ESRB, as required under the legislative proposals. Preparatory work at the ECB has been organised through the setting up of an ad hoc team and is under way so that the ESRB can take up its work after its formal establishment. The ECB is in the process of enhancing its capabilities for monitoring and assessing financial stability risks. Only a number of weeks ago, we reformed our Directorate Financial Stability and Supervision into a Directorate General Financial Stability with more resources.

Internal market commissioner Michel Barnier’s speaking points (in French) stressed the need for proper regulation and supervision of integrated European financial markets.




Further reading: the Commission’s web page on financial services supervision.




On 15 April 2010, Olli Rehn spoke about reinforcing economic governance in Europe (SPEECH/10/160). The commissioner for economic and monetary policy said that the aim of the Europe 2020 strategy is to mobilise growth drivers in order to modernise our social market economies. The second pillar is the consolidation of public finances.

Rehn outlined enhancing economic policy coordination through three main building blocks: reinforcing the Stability and Growth Pact, deepening and broadening economic surveillance and setting up a permanent crisis resolution mechanism.




Ralf Grahn