B ack L oop Public Hearing Success and F ailures in Crisis Countries Committee on Economic and Monetary Affairs European Parliament Brussels November 5 2013 Fernando Fernández fernandofernandezieedu ID: 499297
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Slide1
Breaking the Sovereign Banking Feed
B
ack
L
oop
Public Hearing
Success and
F
ailures in Crisis Countries
Committee on Economic and Monetary Affairs
European Parliament
Brussels, November 5, 2013
Fernando
Fernández
fernando.fernandez@ie.eduSlide2
What is wrong with Europe
?: an alternative narrative
Understanding the euro project
Why is Banking Union so important?A brief note on Spain
Europe: the solution to a self inflicted problem
2
© Fernando Fernández 2013Slide3
Macro imbalances around the world
3
© Fernando Fernández 2013
Source: Barclays, European Economics Quarterly, July 2013Slide4
The Euro unsustainability as seen from the outside
4
© Fernando Fernández 2013
Source: Institute of International Finance, Eurobrief, March 2013. IMF EuroArea Consultation, July 2013Slide5
Aggravated by Financial Fragmentation
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© Fernando Fernández 2013
Source: IMF, WEO, October 2013Slide6
Interest Rates in the Euro Area
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© Fernando Fernández 2013
Source: IMF, Global Financial Stability Report, October 2013Slide7
And the vicious circle of bank-sovereign-corporate deterioration
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© Fernando Fernández 2013
Source: IMF, Global Financial Stability Report, October 2013Slide8
The
Maastricht Treaty: a strange animal by
design
Independent monetary policy by the ECB
ECB response is not really that different, but the environment is
No
safe European asset for monetary policyNo lender of last resort facility until OMT was improvisedNo fiscal policy coordination
National regulation and supervision of financial
systems
No
E
uropean approach to banking regulation, supervision and
resolution until late 2013 and still in the works
National regulators, facing a textbook collective action problem, acted to aggravate the Euro crisis
N
ational fiscal policies subject to non-binding rules
The Stability and Growth Pact
unenforceable ex-post
N
o bail-out, why can California default but Greece could not?
N
o exit works both ways
© Fernando Fernández, 2013
8Slide9
The crisis showed the Euro was naked
The Greek fiscal problem and what it reveals of EMU
Open fiscal contingencies
No stabilization fund
Ireland and its banking problem
No national lender of last resort
Banking problems become sovereign problemsReflation is not possible, so default the only alternativeNo growth, loss of competitiveness in Portugal
The “Argentina syndrome”
How to ensure/impose structural reform?
Internal devaluations are painful and take time
Cyprus
:
Sequencing issues: Bail in before Resolution Authority and Common Deposit Guarantee
Capital controls cannot be part of the tool kit
© Fernando Fernández, 2013
9Slide10
The Cost of
the Banking Crisis
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© Fernando Fernández 2013
Source: IMF, Fiscal Monitor, October 2013Slide11
Monetary Union as envisaged in Maastricht is dead
For good reasons. It was never an optimum currency area
But it is taking a long and painful time to go
Normative Economics: what should happen
Banking UnionFiscal Union
Political Union: No taxation without representation
And even so, everything is possible, because growth is of essence in a democratic UnionPositive Economics: what is likely to happenMuddle through, playing at the edgeUncertainty, volatility, sudden events and prolonged subdued growth
But an accident may always happen
Despite today being highly unlikely
Understanding Europe: Likely scenarios
© Fernando Fernández, 2013
11Slide12
Banking Union
© Fernando Fernández, 2013
12
A single supervisor. Basically agreed but
Will markets wait for late 2014? Too much national discretion
AQR, Balance sheet assessment and Stress testing dangerous without a common fiscal back stop
A Common Resolution Authority
A 3 stage approach: prevention, restructuring and liquidationWill the pecking order of losses be applied uniformly?
It entails, by definition, mutualization of the debt
.
(
quasi-fiscal)
It
cannot be the Commission:
No
country allows Bank recapitalization to be decided by the Competition Authority
An European Deposit Guarantee Fund is missing
To break the vicious cycle of banking ad sovereign crisis
To allow fair competition to the benefit of the consumer
To avoid extensions of “bank holidays”
Three decisions: coverage, funding and institutionalSlide13
A Limited Fiscal Union
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© Fernando Fernández, 2013
A Fiscal Union
does not mean full tax
or expenditure harmonization
but simply avoiding externalitiesEuro TreasureCommon monetary policy requires an euro risk free asset An asset that has to meet strict requirements: (i) depth and liquidity (ii) ample references at all maturities; (iii) actively traded in liquid markets; (iv) available in the short run for existing debt and not only for future debt, the legacy problem; and (v) its emission to be the sole responsibility of the Euro Treasure
An Euro Treasure issuing an euro asset leads to decide on:(i) the source of funds: Euro
T
ax (new or old) vs. revenue sharing mechanisms
(ii) the use of funds: the European Stabilization Fund
Fiscal rules for the Euro Zone
,
Rationale: To avoid national policies impeding adequate functioning of common monetary policy
Implication: A binding restriction on national budgetary aggregates
Evolution: Complex structural rules increasing implementation riskSlide14
A
note
on Spain
The case of Spain
is an euro crisis
It could
not have happened without the euroIt will not be solved without addressing the mistakes in MaastrichtSpain adjustment is work in progress. A proven willingness to reform,
however reluctantlyA significant turn around in banks solvency and profitability, fiscal consolidation and external competitiveness.
Foreign Investment, both debt and equity flows, coming in
Institutional stability
But employment growth remain and will remain elusive.
Challenges and priorities for the future
Restore and maintain fiscal balances in a highly decentralized state
Job creation and additional labor market and education reform
And creating a more business friendly environment
© Fernando Fernández, 2013
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