Abstract
Although the initial economic crisis has passed, its effects are still being felt in Europe. The European Parliament must take a more active role in constructing, negotiating and implementing strategies to lift the European Union (EU) out of the crisis, especially in the decisions made by the Basel Committee. This article also makes further suggestions on what can be done to aid this process, including the introduction of a bank levy, the creation of EU credit market agencies, the strengthening of Eurostat and reformation in the International Monetary Fund and the World Bank. Finally, the author seeks to explain the magnitude and scope of the economic crisis and what measures can be implemented to prevent a similar situation from happening in the future.
The economic crisis is far from over. Sustainable solutions are needed, and joint European action is necessary. As Vice-Chair of the Group of the European People's Party (EPP) in the European Parliament and the EPP Group coordinator on the Special Committee on the Financial, Economic and Social Crisis (CRIS) in the European Parliament, I am confronted daily with the consequences of this crisis, the most severe since the 1930s. The special committee was established to find solutions to overcome the crisis and to implement effective measures to support our European economy.
Much has been said about the reasons for the present economic crisis; however, a truly effective counter-strategy is unfortunately still lacking. The basis for all discussions must be a thorough financial audit undertaken by the European Commission. The Commission has to determine how much scope for action is left within the EU budget for measures to repair the economy and to decide which investments are to be given priority. In addition, EU Member States have to undertake an equally thorough financial audit of their own national budgets, based on a set of strict criteria established by the Commission.
I am convinced that any useful and sustainable decisions for tackling the crisis can only be taken on the basis of reliable and correct information on the Members States’ budgets. Based on the audits mentioned above, a Steering Committee set up by the European Central Bank (ECB), the Commission and the Member States should now decide on a realistic exit strategy, so that it can be used when needed.
Basel III
At the moment banks, particularly with Capital Requirements Directive (CRD) III (and soon IV), are taking centre stage. As the European Parliament's chief negotiator for the upcoming CRD IV, I take a strong interest in the whole process. With my own initial report on Basel III, I have tried to bring the European Parliament into the negotiation process as early as possible. In order to find a constructive approach that does not destroy the industry, a proper impact assessment is crucial. We have to ensure a proper impact assessment for all planned measures that will have an impact on the real economy, growth and employment and to assess the cumulative effects. Currently the European Parliament is implementing CRD II and CRD III and expecting the CRD IV proposal by the end of the first quarter of 2011. It would be desirable to have the European Parliament, the Commission and the Basel Committee working in parallel to one another, so as to enable the EU to speak with a stronger voice through the Basel Committee. Indeed it is unsatisfactory that the European Parliament was forced, in the case of CRD III, to implement decisions which were taken elsewhere. While it is important that existing regulations are being continuously reviewed and modified, all necessary information must be made available to the European Parliament in order for us to make an informed decision. All these concerns are the reason for my initiative in the European Parliament to adopt an initial report to bring the open questions to the table.
The European Parliament must play an active role and strongly influence the revision of the rules now being negotiated in the Basel Committee. Since the European Parliament is the only democratically elected European institution, which will later co-legislate on the Commission's proposal for CRD IV, it should be involved in the negotiations at an early stage and be able to ask the Basel Committee and the Commission to take necessary steps in this respect.
Although there is a strong international commitment to revise the Basel framework, it is important that such revision strike the right balance between various business models, investment and traditional retail banking, different legal forms and the predominant form of financing of the corporate sector. While the American economy is financed mainly through the capital market, the European corporate sector relies heavily on the lending capacity of the banking sector. In Europe, 80% of investment and lending is based on bank credit. The revised rules should take into account such differences without penalising certain markets or business models. Otherwise there is the danger that the European economy and industry will be harmed.
I am convinced that the crisis has made it clear that an in-depth revision of the current regulatory framework is needed. Therefore I very much welcome the efforts of the Basel Committee to upgrade the framework in general. I am, however, highly critical of the non-implementation of the Basel II agreement, especially in the US, and urge all stakeholders to clearly commit to a common implementation of the CRD III and CRD IV directives (Basel III) as well as the Basel II framework. A level playing field is an act of fairness when dealing with each other, otherwise sanctioning mechanisms are necessary. As well as considering the non-implementation of the Basel II framework, the Commission has to clarify the consequences of the Dodd-Frank bill in the US for the whole Basel II and Basel III framework before decisions are taken in the EU about CRD IV. By reducing the importance of external ratings with this new bill, the US is undermining the whole framework. With Basel III the liquidity ratio will be based on external ratings as well, so what to do with jurisdictions that do not rely on external ratings? Therefore I call for the European Parliament, as the only directly elected EU institution, to be fully involved in the Basel Committee and the G-20 process and to ensure that decisions are taken only when all outstanding questions have been answered.
The establishment of the so-called Group of Experts in Banking Issues, a group that brings together 40 experts, will further help and facilitate direct communication between banks, consumers and the Commission. I have the great pleasure and honour to be the only democratically elected representative in this group. Together we will continue to discuss the vast range of problems and try to identify possible solutions.
An effective counter-crisis strategy
In my opinion, the current crisis was triggered by a combination of factors, ranging from new financial products and loopholes within existing regulations to the widespread desire within financial markets to generate as much money as possible through buying high-risk products. It is therefore essential that the European Union (in cooperation with the G-20) address the twin issues of inadequate regulation and international cooperation, as well as strengthening the role of the Bretton Woods institutions.
In terms of tighter regulation, the EU has been at the forefront of the global response. It is implementing a number of regulations dealing with credit rating agencies, capital requirements and new structures for financial supervision. This is in line with its ambitious goal of dealing with systemic risk as well as improving supervision of the three main financial sectors—banks, insurance companies and securities. The Directive for Alternative Investment Funds, for example, will be an important step forward for the securities industry.
With regard to international cooperation, it is now abundantly clear that no country can solve the problems on its own. Only by acting together can we transform our common political will into legal reality and implement agreed-upon standards such as Basel II in a coherent and effective manner. Governments therefore have to take their responsibilities more seriously and implement the changes already agreed to within the G-20. In the long run, the problem of the ‘soft power’ of international financial regulation can be addressed only through the creation of a new global supervisory agency along the lines of the World Trade Organization. This is an ambitious goal, one that will demand cooperation among all countries in the world.
The establishment of European Supervisory Authorities is the first step towards ensuring the proper functioning of the markets. These authorities will help identify risks at the outset and be able to diminish the possible consequences of a crisis. It is, however, important that financial supervision be operational as soon as possible. The European Parliament managed to set 1 January 2011 as the initial day.
The issue of a financial transaction tax has become increasingly urgent. We must harmonise budget and tax policies across the EU. Unfortunately, Parliament is still awaiting answers to questions that address the nature and extent of this tax: First, what will be the exact amount? Second, what is the basis for assessment? Third, who will levy it? Fourth, who will receive the money? And fifth, what is its main purpose?
I believe that a tax on financial transactions is of vital importance and would be an effective instrument. I myself and the majority of the Parliament are clearly demanding a resolution on this issue and immediate implementation, ideally at the global level.
The introduction of a bank levy across the EU would, moreover, provide more funds in times of crisis but should by no means be a substitute for a possible financial transaction tax. Many countries have already decided to introduce such a levy on a national basis. Individual undertakings, however, are not the right approach. A European approach is required. The proceeds of such a bank levy should not be included in national budgets to reduce public debt, but should go directly either into a European Monetary Fund or into a foundation administered by a European rating agency. It should, however, be ensured that banks remain fully operational and can continue to finance the economy.
The complex issue of credit rating agencies is well known among experts. The market is currently dominated by US credit agencies. Therefore Europe has to set up its own credit market agencies which should be under the direct supervision of the European Securities and Markets Authority (ESMA). Some argue that the ECB should act as a provisional credit rating agency. I believe, however, that full independence has to be guaranteed. Therefore, the ECB is by no means an appropriate or feasible alternative to an independent credit rating agency.
The strengthening of Eurostat has become increasingly important. So far Eurostat has not been able to thoroughly examine data. Unrestricted and unannounced access should be guaranteed so that it may identify abnormalities at the very beginning. The current proposal by the Commission is the very minimum that should be achieved. As the rapporteur on the strengthening of the Eurostat, I have taken a strong interest in giving more competencies to this key actor in preventing future crisis. Through my report I have tried to strengthen the power of Eurostat, which should have happened already in 2004 with the Almunia proposal.
As for the International Monetary Fund (IMF) and the World Bank, I am convinced that both need to be strengthened as part of the global response to the worldwide financial crisis. I personally do not believe the IMF could have prevented the current crisis even if it had been stronger. The IMF is especially important for emerging countries which are in need of money, but the primary causes of our present troubles lie elsewhere. I believe that we have to concentrate on these root causes if we want to avoid further financial crises in future.
Savings and trade imbalances are serious problems, and reforms of the IMF and the World Bank are desirable and necessary. I believe that an under-regulated and highly innovative financial services sector presents a greater danger to the world economic system. Without additional regulation and coherent supervision, especially of products and markets with a high degree of systemic risk, the global system will not be strong enough to avoid the build-up of dangerous bubbles in the future.
Overcoming the crisis
Although progress has been made in overcoming the financial and economic crisis, the situation is still dire. At present, the most interesting question has to do with the development of Europe after the crisis. Many voices emphasise that the structure of the financial system itself was one of the main causes of the crisis. Since the system was too complex to understand the risks it created, massive complexity combined with enormous leverage went unnoticed by regulators. Other potential causes for the crisis included bad monetary policy. Thus it was not possible to react to a sharp increase in asset values or to a so-called culture of greed, which dominated some international financial centres. A deeply flawed financial incentives system, focusing attention on short-term profits, also contributed to the crisis.
To design proper preventive policies, we need first to understand which factors played a key role, what the dynamics of the process were and what were the key triggers.
However, more important than the chronological sequence of events is an explanation for why these processes and phenomena appeared, why they lasted so long and why they reached such a big scale. In this respect it is worth reconsidering why the so-called financial elites did not notice the problem early enough or, if they noticed, why they did not take any counteraction in advance. We need to ensure that future preventive actions are taken in a timely fashion.
A good diagnosis is a precondition to determining what actions and measures need to be taken to avoid such a worldwide financial crisis in the future. We need to know what should be changed in the supervision of the globalised financial markets, what regulatory changes are expected, what should be the role of the state and the taxpayer and who will provide the ‘invisible wallet’ in the end.
Finally, we should consider what could be the long-run implications of the current crisis-prevention policies. A few questions pop up immediately:
Is the present state intervention temporary and will it be reversed? Or is it the beginning of a new model of capitalism with a much stronger role for the state?
Will massive money printing lead to high global inflation in the future? What is the exit strategy from this ‘printing-press policy’?
Can the present crisis lead to a change of cultural models, including the rejection of the American consumerist way of life and a turning towards attitudes that take into account the various challenges that all of humanity is facing now, such as an ageing population and ecological degradation?
What should be the role of the EU in this process, and how does it affect the social market economy?
We chose the social market economy
In Austria and Germany as well as the new Member States, we have come to realise in recent months and years that the EU is not the cause of the problems, the cause of the crisis, but in fact is part of the solution. It has been 20 years since the fall of the Berlin Wall and 20 years since my own country, Austria, applied to join the EU. Without EU enlargement, Austria could never have moved from the periphery to the heart of Europe. And without enlargement, we would never have had the internal market and then the euro, which together have been an excellent path to globalisation, growth and employment. I should say here that the internal market is far from being completed, and we will never solve the crisis unless we have the four freedoms for all EU citizens and have finalised the internal market. It is not just a matter of implementing these four freedoms; we also need to establish a new way of sharing competencies between the Member States and the EU. And we have to ask ourselves today what needs to be done in the areas of social policy and education policy. These debates must be part of the efforts to strengthen the internal market as a response to globalisation.
We have now had the euro for ten years: it is our greatest form of protection from the crisis and the best way of combating the crisis in the financial markets. Sixteen of the 27 Member States now use the euro. Can we go further? We need to think about how to make the euro the only currency that is used in the EU, and even on the continent—and it is up to the Member States to do this. We need to find a new stability so that we can emerge from the crisis: uncoordinated policies leading to excessive national debt will not do us any good. Our economies demand serious effort and stability. With the Treaty of Lisbon, we have opted for a certain economic model. It is not necessarily supported by everyone but it is a clear choice.
Economic growth, sustainability and social responsibility as the main objectives
The EU's priority is the implementation of the social market economy and its development in all the Member States, and beyond if possible. It is the social market economy that must be our export model—a market that does not just exist for its own sake, a market where policy is not absent, a market where the social partners are not marginalised, a market where entrepreneurs themselves are concerned about the collective good and about the future, and a market that takes responsibility not only for itself but also for society. This is all stated very clearly in the Treaty. We have instruments for ensuring free trade and ensuring that the states remain neutral in relation to the economic actors. We are in the process of strengthening the rules on transparency. We will have a better idea of what direction to take in this respect after the committee of inquiry into the financial crisis is set up. But it is vital to remember that none of these rules should lead to any states or regional authorities being absolved of their responsibilities, particularly in times of crisis. We must not take a dogmatic, militant approach to the single-market rules. The social market economy is a pragmatic economic vision whose goal is a stable society, and in this respect all of us must be able and willing to face up to our responsibilities.
We the members of the EPP must face up to our intellectual responsibilities: we are the driving force of the EU. As a Group, as citizens, we will be increasingly asked to provide proof that we are working to defend this model, tirelessly and with realism.
Europe 2020
It is one of the main goals of the EPP in the European Parliament to make Europe more stable, successful and competitive in the face of the emerging markets in Asia. Thus it is crucially important to actively support the foundations of the European economic system, which is mainly based on the social market economy and is therefore vital for the EU.
As Chair of the Parliament's Small and Medium Entrepreneurs Union Intergroup and EPP Group Coordinator in the CRIS Committee, I have no doubt that small and medium-sized enterprises (SMEs) on our continent are playing an important and remarkable role in the European economy. I am therefore calling for more European efforts in supporting SMEs. These are the backbone and the motor of the European economy. They are the very essence of stability, innovation, wealth and economic growth within the EU and deserve our continuous support. A report prepared by former EU Commissioner Mario Monti will put special emphasis on supporting SMEs in formulating the Europe 2020 Strategy. We need a meticulously planned entry strategy for SMEs in parallel to the Member States’ exit strategy from the financial crisis.
I am convinced that with all these measures we will overcome the financial crisis, strengthen the European economic system and make Europe more successful.
Footnotes