BlogSpot – July 12th, 2013
The IMF and the Outlook
The IMF updated its projections for the global economy in its WEO update, with a slight downward revision, and still a three-speed recovery. Analysts noted that this is the fifth consecutive negative revision—this time driven by weaker domestic demand and slower growth in several key emerging market economies, as well as a more protracted recession in the euro area. Citi Research commented that growth in the U.S. economy could be an important turning point for the global recovery.
The IMF euro area article IV mission officially concluded during the Eurogroup meeting. In the concluding statement, the Fund highlighted four important policy areas to revive growth and employment: i) repairing bank balance sheets to revive credit; ii) moving to full banking union to reverse fragmentation, including through strong resolution mechanism; iii) providing sufficient near-term support, including through more monetary easing; and iv) implementing structural reforms to lift growth and foster rebalancing. Progress is noted on two areas. First, the European Commission issued later in the week a proposal on single resolution mechanism, a key element of the above mentioned policy mix. Second, the ECB introduced explicit forward guidance (see our July 5 2013 BlogSpot).
Towards a Single Resolution Mechanism...
The European Commission proposed a Single Resolution Mechanism (SRM) for the EU, to become effective in 2015 (more background information) and complement the Single Supervisory Mechanism (SSM, IP/12/953). The SRM proposes a framework to deal with and restructure troubled banks of member countries to ensure that if a bank subject to the SSM faced serious difficulties, its resolution could be managed efficiently with minimal costs to taxpayers. For Marcel Fratzscher, the proposal implies that bank resolution will now be decived centrally at the EU level. This is in contrast with some proposals, including from Germany and France, to grant this power to a network of national authorities.
Commentaries (e.g., Süddeutsche) stress the importance of a fast resolution mechanism. The SRM would work in the following sequence: (i) the supervisor (e.g., the ECB) indicates that a bank is in severe financial difficulties and needs to be resolved; (ii) a Single Resolution Board (SRB) prepares the resolution with broad powers over which tools to use, and how the European Resolution Fund should be involved, with close involvement from the national resolution authorities; (iii) the Commission decides whether and when to place a bank into resolution; (iv) executed by national resolution authorities under the supervision of the SRB; (v) a Single Bank Resolution Fund would ensure the availability of medium-term funding support.
The Fund will be consisted through a bank levy equal to 1 percent of deposits but the actual amount should be determined by the banks’ risk profile. Estimates, using 2011 data, suggest a Fund size of 55 Billion Euros, according to Süddeutsche. Open Europe warns that the mechanisms fund wouldn't be large enough and will at the earliest be in place 2015.
In the transition, any bank crisis will be managed on the basis of national regimes, converging towards allocating bank losses to shareholders and creditors instead of taxpayers, with appropriate burden-sharing as a condition for possible direct recapitalization by the ESM.
Resistance to the EC proposal emerged quickly. Bildzeitung and Spiegel report that German Finance Minister Schäuble strongly attacks the EU plan for bank resolution in a letter to EU Commissioner Barnier, calling for a credible and legally sound and sustainable solution. Reuters, Reuters, Spiegel and FAZ also noted Germany’s opposition to using German money to wind down banks located elsewhere in the EU. Alex Barker in FT Alphaville also reports German resistance citing Angela Merkel's warning that the proposal doesn't rest on stable grounds as it requires a new EU treaty. Germany prefers a gradual two-stage approach, which compromises the goal of setting up the SRM before the next European Parliament elections. Representatives from the UK also voiced concern, with Mats Persson fearing that the line between the European Union and the Eurozone will blur. In a CEPS commentary, Stefano Micossi criticizes the proposed system for not only appearing highly intrusive but also placing a considerable burden of aid to the failing institution on the member state, raising doubts about its ability to “break the vicious circle between banks and sovereigns”.
Tensions are also building on the coming inspection of large euro zone financial institutions by the ECB. Süddeutsche Zeitung has an interview with Eurogroup chief Jeroen Djisselbloem, who said he was confident the ECB will look “deep into the balance sheets” of the European banks, and if necessary draw on external auditors. Daniel Gros, in a Project Syndicate commentary, reminds us that the the overabundance of banks with no sustainable way to turn a profit constitutes the most serious and most difficult problem for the banking sector in Europe. The policy solution is the recapitalization of much of the sector and the restructuring of those without a viable business model. But, given that it is unlikely to happen soon, the recovery in Europe will remain ellusive.
EU-US Transatlantic trade and investment partnership (TTIP)
Last week, the first round of negotiations over the EU-US free trade agreement (TTIP) took place in Washington, D.C. (see FT) The aim of the TTIP is to reduce national regulations that currently still serve as non-tariff barriers to EU-US trade, according to a Commissions publication. In a Project Syndicate entry, Zaki Laïdi warns that this might be a promising move for the US, but lesser so for Europe. The EU should pay attention to avoid a too narrow bilateral focus in their trade policy towards the US, as this potentially threatens its multilateral trade position and weakens its room for maneuver in future negotiations with Asia. According to Maya Rostowska the two most problematic points from the European side will be the sticking to its privacy standards and the protection of agriculture markets. From the US side, she expects the public procurement procedure "buy American" to be a hurdle in the negotiations.
The Short View…
Guiseppe Bertola, in a VoxEu entry, argues that incomplete and inconsistent redistribution policies at the eurozone level explain much of the lack of productivity convergence and the Eurozone’s inability to deal with asymmetric shocks. On this trending topic among commentators, he proposes to implement behavioural constraints and redistribution schemes that operate, not without difficulties, within established national socioeconomic systems.
By Julia Knapp
