The current financial crisis has thrown into sharp relief the close links that exist between monetary policy, the banking sector, sovereign debt, and serious imbalances within the Eurozone. The vehemence and longevity of the crisis have called into question the very political structure of the European Union as well as its institutional architecture, both in need of modification through a more rigorous application of existing rules, but also by means of the assignment of new responsibilities and the creation of new mechanisms. Yet whilst this view is now widely accepted, opinions vary as to the degree of innovation to be introduced into the EU’s economic and financial governance, and regarding when and in which sequence reforms should be adopted. One of the key issues is that authorities and the financial sector are obliged to address both immediate and pressing challenges (starting with the refinancing of public debt and the recapitalization of a number of banking institutions), together with medium- to long-term needs to ensure that the current situation does not recur. In addition, even prescriptions that have met with broad consensus require national governments to demonstrate strong political will and to take risks in order to implement often unpopular measures. Apropos of this, it was noted that the delay in taking such necessary steps has increased the cost of corrective measures that everyone is having to pay for – albeit some to a greater extent than others.
It was stressed that any sustainable institutional framework will need to be based on greater mutual trust between governments, so as to enable responsibilities and burdens to be shared more effectively. In this regard, the participants pointed to the importance of taking due account of the social impact of policies adopted, as the erosion of political consensus could ultimately paralyze any reform efforts. Another dangerous trend identified was the tendency for debate in individual countries to point the finger at other Eurozone members (more so than at authorities in Brussels) as being to blame for the sacrifices demanded by the current climate of austerity. It was felt that this could in part be remedied by limiting the punitive element that seems to be built into the terms of bailout packages extended to beleaguered economies.
Another important question considered during the discussions concerned the relationship between financial integration – which has reached unprecedented levels in the last decade – and stability. The financial sector, it was suggested, is now becoming less integrated as a result of the crisis, yet such fragmentation is certainly not conducive to recovery; on the contrary, it limits credit flows. Paradoxically, the relative closure of national economies tends to exacerbate existing imbalances further, as evidenced by bond yield spreads, which are not actually reflecting the performance of economic “fundamentals”.
Emphasis was laid on the need – which has emerged from the banking crisis in the Eurozone – for a profound rethink of the rules governing a sector that is vital to the entire economy. In recent months, the approach adopted is that of a progressive shift towards a banking union, but there are still some points regarding the timing and manner of this move that remain a subject of dispute. One such issue relates to the question of oversight, with some maintaining that the European Central Bank should carry out this task (in addition to its conduct of monetary policy), whilst others believe that it is inappropriate to combine these two roles. A second unresolved matter concerns the scope of application of new rules: although only a few financial players are of direct ‘systemic’ importance, there are many interconnections with other institutions that regardless of their smaller size – as we have seen in recent years – can still give rise to contagion effects.
It was acknowledged, in any case, that a true banking union would also require decisive steps to be taken on the budgetary and fiscal fronts, and therefore needs to be set against a dynamic backdrop of closer overall integration.
The participants were at pains to stress that the evolution of the Eurozone cannot be analyzed in isolation of major global trends, not least a consideration of the US economy as a potential factor of growth and of massive imbalances. A case in point is the role played by the Federal Reserve in stimulating a possible recovery – any limitations stemming from recent expansionary policies notwithstanding. The Fed – it was suggested – serves as an external stimulus to the ECB and European governments to try out new approaches to kick-starting growth and increasing competitiveness. Indeed, it is precisely in a competitive light that productivity trends should be read, which do not vary greatly on the whole between the two sides of the Atlantic, despite the differences in their respective labor markets and in the structure of the United States and the EU as economic blocs. In closing, it was observed that one basic fact remains: the US economy has responded to crises – both that currently being experienced and those of the past – with greater ease. Nevertheless, it was conceded that due account must be taken of the impact of the serious fiscal problem that America is having to contend with whilst trying to reduce an unusually high rate of unemployment by historical standards.
