Here comes the next euro crisis
An Italian meltdown is just one of many things that could
blindside the European economy.
By POLITICO 11/21/18, 4:30 PM CET Updated
11/26/18, 5:37 AM CET
Rome’s battle with Brussels over the populist government’s
spending plans has many wondering if Italy will be the spark that sets off the
next euro crisis.
That’s certainly possible, but experts say that the
debt-laden country is just one risk among many.
Ten years after the 2008 global financial meltdown
devastated the European economy, POLITICO asked six experts what could be the
“black swan” event that could precipitate the next crisis.
* * *
Italy is the elephant in the room
Wolfango Piccoli is the co-president and director of
research at Teneo Intelligence.
Where we have made practically zero progress is crisis
prevention. In some areas, we are even rowing back. Deposit insurance is
virtually dead, and a fiscal capacity of around €20 billion is a cover-up, if
that.
The dying embers of a burned EU flag. Where is the Continent’s
next monetary crisis coming from? | Dan Kitwood/Getty Images
The reason is that the politics have gotten worse. The price
to pay for those bailouts, reform packages, rescue funds, and European Central
Bank bond-buying schemes has been political fragmentation, at first. But by
now, this is morphing into outright polarization. And this is happening in both
“core” and “periphery countries” as we saw in elections in France, Germany,
Austria and Italy.
The most worrying thing is that Europe itself is becoming an
ever-more salient issue cutting through parties, parliaments and populations.
Pro- and anti-EU camps are competing in elections across Europe today.
The next crisis will not be sparked by some unpredictable
“black swan.” Rather it will be brought about by a self-fulfilling prophecy:
Banking systems showing weaknesses, countries losing access to debt markets —
the next crisis movie is one we will likely have seen before.
At present, Italy is obviously the No. 1 candidate despite
its decent economic fundamentals. However, investors are mainly concerned about
the general policies and trajectory of the Italian government. Looking ahead,
the risk is that Rome’s anti-EU stance will harden — possibly as a scapegoating
strategy given the likely adverse impact of the budget on economic growth or
simply as an electoral strategy for the 2019 European Parliament vote — leading
to a sharp increase in market spreads and pushing some banks into a very
difficult spot.
* * *
Watch out for the banks
Isabel Schnabel is a professor of financial economics at
Bonn University, and a member of the German Council of Economic Experts.
The European banking sector is in bad shape.
Many banks are still burdened with non-performing loans;
their profitability is hampered by low interest rates and persisting
over-capacities; and they have exposed themselves to higher risks by expanding
maturity transformation or loosening credit standards. The expected rise in
interest rates is likely to put further strain on interest margins in the short
run and carries the danger of sharply declining asset prices.
Regulation has become much more complex, but it is unclear
whether it has become more effective. Europe has left important risks
unaddressed, in particular the regulation of banks’ sovereign exposures.
Instead of giving in to calls for deregulation, policymakers
worried about the weakness of European banks should aim to increase banks’
resilience. This can be done through a sufficient capitalization of banks and
the proactive use of new macroprudential tools that limit risks to the
financial system as a whole. But it will also require a more resilient
institutional architecture.
To be sure, the establishment of a European banking union
with centralized supervision and a bank resolution mechanism is a major
achievement. But there are still important gaps and financial markets remain
fragmented, underlining the need for a deeper banking and capital markets
union.
Progress is painfully slow and national interests
increasingly dominate the debate. To prepare for the next crisis, Europe needs
to take much bolder steps. Given limited fiscal and monetary space, the focus
should be on the resilience of banks and the European architecture.
* * *
Technology means vulnerability
George Papaconstantinou is a former Greek finance minister
and part-time professor at the European University Institute’s School of
Transnational Governance.
The European financial crisis hit long before Greece made
headlines in 2010 by asking for a bailout. And contrary to popular belief, it
was a banking crisis, not a fiscal crisis. Back in 2008, after the Lehman
Brothers collapse, international inter-bank markets froze and the U.S. crisis
migrated to Europe.
The crisis exposed the systemic risks associated with the
flawed architecture of the euro, which we set out to fix. We created financial
backstops, reinforced the fiscal framework and stretched the ECB’s mandate to
assist banks and sovereigns. We reinforced capital adequacy in banks, and
created a common supervisory framework.
The next crisis could well be due to a systemic tech failure
inside a major institution that leads to a widespread failure of payment
systems.
A decade later, and with enormous cost, the European economy
is growing again. But we haven’t truly solved the problem.
Both the fiscal and banking unions remain incomplete today.
And with high private and public debt, we remain vulnerable to future shocks.
Crucially, the disruption caused by digital transformation
and innovation in the financial sector has amplified our vulnerability.
The next crisis could well be due to a systemic tech failure
inside a major institution that leads to a widespread failure of payment
systems. And with cyberthreats posing new dangers to global financial
stability, operational risk has become the new systemic risk. It is today’s
most overlooked threat — and one over which regulators and policy makers still
have little grasp.
Life has moved on; but unfortunately, we still seem to be
fighting the previous battle.
* * *
Private debt is weighing down the economy
Steve Keen is a professor of economics at Kingston
University, London.
The EU’s policymakers like to obsess about government debt,
but the 2008 crisis was caused by something they ignore: private debt.
Credit of as much as 40 percent of GDP per year fueled
Spain’s housing bubble, for example, and drove private debt to 260 percent of
GDP, more than four times the Maastricht Treaty limit on government debt.
Spain’s private debt is still 200 percent of GDP, and is a millstone around any
recovery.
France and Italy carry similar burdens. EU attempts to
reduce government debt could trigger a return to private sector de-leveraging
and cause another slump: not as bad as 2008, but still debilitating.
Europe has “turned Japanese” and doesn’t know it.
* * *
The north is too rich; the south, badly governed
Guntram Wolff is the director of Brussels-based think tank
Bruegel.
Europe took significant steps, in the aftermath of the
Lehman Brothers collapse, to make itself more resilient to future shocks. Banks
were closed and many were rescued (in some cases probably unnecessarily). The
EU toughened its banking regulation, and drafted legislation that will make the
use of taxpayers’ money more difficult in the future. It created a European
bank supervisor, stepped up its fiscal and macroeconomic surveillance, and
equipped itself with the European Stability Mechanism.
But let’s face it: We remain pretty vulnerable to crises.
The European Central Bank headquarters in Frankfurt | Daniel
Roland/AFP via Getty Images
For a start, the eurozone still relies on the European
Central Bank to hold everything together. And instead of a treasury, we have a
politically unstable consensus on the need for the ECB to act as a lender of
last resort for governments.
To be sure, policymakers need to support the ECB. But the
eurozone will not be able to dodge a discussion on better fiscal alternatives
forever.
The eurozone is still seriously imbalanced. The size of the
northern countries’ account surplus is a clear symptom of the underlying
divergences. We will need to rebalance to address these.
Another cause for concern is the weak governance of some
parts of Southern Europe, where there is still too little convergence. This
will be very difficult to sustain politically and policy officials should focus
the bulk of their efforts there.
* * *
The underlying pathology: inequality
Miguel Otero-Iglesias is a senior analyst at Elcano Royal
Institute and professor at the IE School of International Relations.
A lot has been done to fix the system since the start of the
recession. Most countries have regained their 2007 level of GDP. Stock markets
are at even higher levels. The banking system is better regulated and has
higher capital ratios to confront new crises.
But this paints too rosy a picture. The system is still
quite fragile, and many wounds have not yet been closed. In fact, the
underlying pathology has only gotten worse.
The liberal order based on free trade, free competition and
relatively free migration creates many winners, but also a number of losers.
Inequality has increased over the past 10 years. As the OECD
has warned, this is undermining social mobility, perhaps the most important
pillar of the liberal order.
Although growth is back, the gains are not evenly
distributed. There is excessive inequality in income, wealth and power. The
financial sector is still too dominant and attracts excessive capital and
talent. This is because economic growth continues to be dependent on credit,
and the other side of credit is debt, which has not stopped growing. As
McKinsey calculated, in 2007 global debt was $97 trillion. In 2017, it was $169
trillion.
All this has created social discontent and economic anxiety.
The liberal order based on free trade, free competition and relatively free
migration creates many winners (although some win more than others), but also a
number of losers. If we don’t reduce the number of losers, the pathology will
only get worse.
* * *
Don’t forget Italy
Pier Carlo Padoan is a former Italian finance minister.
If we compare Europe’s position today to where it stood at
the beginning of the Greek crisis in 2010, it is clear that its financial
resilience has increased and its resistance to shocks has improved.
Public debt is on a downward trend in most eurozone
countries, the fiscal stance is broadly neutral, and banks’ balance sheets are
being cleaned up from excessive non-performing loan accumulation. Although
growth is weakening, its trend remains positive. Southern countries that have
been under a program are growing and their public finances are improving.
When quantitative easing — the ECB’s expansionary policy —
expires, monetary conditions, in theory at least, will be more “normal.” This
will allow for more sustained nominal — and real — growth as well as more
sustainable banks balance sheets.
Black swans are impossible to predict by definition. But I
suspect a political black swan could originate in Italy if the current
coalition government continues in its strategy of picking fights with Europe in
the expectation that next year’s European election will shift the balance of
power toward Euroskeptic parties, giving Italy more freedom to maneuver when it
comes to fiscal policy.
In the medium term, one could foresee two scenarios for
Italy. In the positive scenario, a successful structural reforms program boosts
growth and allows for a significant decline in public debt. In a negative scenario,
the economy “gets out of control” and requires some form of “emergency action.”
What happens over the coming weeks and months will set the
path ahead.
Not sad but defiant: Theresa May makes case for Brexit deal
Prime minister issues direct appeal for backing as EU
leaders endorse Brexit deal
Heather Stewart Political editor
Sun 25 Nov 2018 13.38 GMT Last modified on Sun 25 Nov 2018
16.21 GMT
'This is the best possible deal, it is the only possible
deal' reiterates Theresa May - video
Theresa May has insisted she is not sad that Britain is
leaving the EU, as she made a direct appeal to the public to back her deal,
saying: “The British people don’t want to spend any time arguing about Brexit.”
The prime minister was speaking after EU leaders met for a
special summit in Brussels and formally endorsed her Brexit deal, following a
discussion lasting less than an hour.
Jean-Claude Juncker, the president of the European
commission, said Sunday was a “sad day”.
But asked if she shared the sentiment, May said, “No: but I
recognise that others do; I recognise that some European leaders are sad at
this moment.”
Despite the increasingly bleak prospects for her deal
passing the House of Commons next month, in what she called “one of the most
significant votes for many years”, May struck a defiant note.
Show
She said she had always rejected the “counsel of despair”
from those who believed a beneficial Brexit agreement could not be struck.
Despite the fact it is MPs, not voters, who hold her fate in
their hands in the coming weeks, she said she wanted to “speak directly to the
British people”, and would be embarking on a campaign in the next few days, to
sell the deal to the public.
The outlines of that campaign were clear as she described
the merits of the deal on Sunday, highlighting an end to free movement “once
and for all”, halting “vast annual payments” to the EU, and ending the
jurisdiction of the European court of justice as the advantages of her deal.
She also stressed the government’s keenness to move on to
domestic priorities – a view she believes is shared by many voters. “The
British people don’t want to spend any more time arguing about Brexit,” she
said.
May pointedly highlighted the £394m a week her government
has promised to pour into the NHS. That pledge, which the prime minister has
previously claimed is the result of a “Brexit dividend”, echoes the £350m a
week the Vote Leave campaign claimed could be diverted to the the health
service if Britain left the EU.
In an open letter on Sunday, May promised to put her “heart
and soul” into winning over MPs and voters to the merits of her deal, which she
previously said she believed “with every fibre of my being” was the right one.
At Sunday’s press conference, she again refused to rule out
resigning if the deal was rejected by parliament next month, saying: “It’s not
about me.”
The foreign secretary, Jeremy Hunt, conceded on Sunday that
the odds of the deal passing were “looking challenging” and refused to rule out
the risk that the government could collapse if parliament rejected it.
He told BBC One’s The Andrew Marr Show: “It’s not possible
to rule out anything, and that’s why all of us have to do is say, what do your
constituents actually want in this situation, and we have to work out what’s in
the national interest, and it’s all about the balance of risks. This isn’t a
perfect deal for everyone, but does have a lot of what everyone wants.”
May echoed the insistence by several EU leaders on Sunday
that there was no possibility of reopening negotiations if parliament said no.
Sem comentários:
Enviar um comentário