Seminar on Governance and Policies for Prosperity in Europe
Ministry of Finance
Lisbon, 10 April 2015
Agenda of the seminar
Opening address by Carlos da Silva Costa, Governor, Banco de Portugal
Panel I – Which Governance Architecture?
Moderator: José Cruz Vilaça
Speakers: Agnès Bénassy-Quéré, Philip Lane, Frank Smets
Panel II – Which institutions are needed?
Moderator: Jorge Braga de Macedo
Speakers: Carlos Moedas, Guillermo de la Dehesa, Klaus Regling
Panel III – What future for Politics in Europe?
Moderator: João Marques de Almeida
Speakers: António Vitorino, Edmond Alphandery, Enrico Letta
Closing Remarks by Maria Luís Albuquerque, Minister of Finance
Summary of proceedings
The Ministry of Finance, together with Banco de Portugal, organised last 10th April 2015 a seminar devoted to discuss “Governance and Policies for Prosperity in Europe”. The seminar was attended by people coming from academia, banks, ministries and their services and embassies. In encouraging this debate, the Ministry of Finance intended to collect internal contributions for the position Portugal will put forward as part of the ongoing discussions on deepening the Economic and Monetary Union (EMU).
The Seminar was opened by the Governor of the Bank of Portugal and three panels followed:
- Which Governance Architecture?
- Which Institutions are needed?
- What future for politics in Europe?
In the opening intervention, the Governor of the Bank of Portugal put forward five main ideas: that the European response during the crisis has been reactive, delayed and built from national perceptions; that rules are the basis of mutual trust in the EMU; that rules and procedures should promote the resilience of convergence paths; and proposed the creation of both a European Fiscal Council for surveillance and of a European Monetary Fund for crisis management at European level. The concept of resilience should be understood as the ability of an economy to return to a sustainable path, complying with the rules, following deviations resulting from shocks. The concept of resilience is more target oriented than the notion of flexibility, reinforcing the need for a comprehensive approach to be followed in the definition of the adjustment path. The Governor recalled that national budgets are a matter of common interest and argued that responsibility for assessing compliance with fiscal rules should lie with an independent entity, capable of assessing and issuing reasoned opinions on the fiscal adjustment path followed by Member States – a European Fiscal Council. The Fiscal Council would gauge national policies’ compliance with the EMU’s self-imposed rules, but it would not interfere with political choices, provided that they were compatible with long-term sustainability. In addition, the Governor suggested that Europe must take an institutional leap to put in place a specialised entity to manage imbalances Member States may have to overcome - a European Monetary Fund. This institution must be able to ensure ownership and a single voice when discussing financial assistance with Member States, be endowed with sufficient funds, based on contractual arrangements with the Member States (an agreement among equals) and with governance structure independent from national parliamentary approvals. Eurogroup would exert effective control over the European Monetary Fund and enforcement of the European Fiscal Council’s opinions. On a medium term horizon, the Governor pointed out the need to reflect on faster responsiveness and political upgrade of the Commission, and suggested that an internal organisation model similar to that of the European Central Bank should be adopted.
The first panel, dedicated to “Which Governance Architecture?” was led by José Cruz Vilaça. Agnès Bénassy-Quéré, Philip Lane and Frank Smets were the three speakers.
José Cruz Vilaça made the point that the financial and sovereign crisis demanded responses and instruments not initially foreseen in the treaties. One example was the setting up of the ESM as well as the possibility of creating independent agencies, like the ESMA; further attention should be paid to the rules that govern the relationship between the Eurozone and the rest of the EU. He argued that if further integration is needed to avoid other financial crisis, there will be the need for accountability and transparency of the decision making process in the EU, while respecting the constitutional individuality of member states. Moreover, greater financial solidarity should be grounded in strict compliance with EU rules.
Agnès Bénassy-Quéré argued that the EMU was incomplete from start. It was set upon what she called “the Maastritch wisdom”: that monetary policy would be enough to tackle asymmetric shocks and that fiscal policies would be conducted at member states level. A significant gap remained uncovered as no attention was paid to the buildup of macroeconomic current account imbalances. The “post crisis wisdom” showed that monetary policy would not be enough anymore. Going forward, Bénassy-Quéré suggested closer attention should be given to current account imbalances, as a stronger and clearer indicator of imbalances. She was critical on the Macroeconomic Imbalances Procedure insofar it is weak, complex (with indicators in its scoreboard pertaining to a multitude of dimensions - not necessarily the most effective ones detecting the buildup of dangerous imbalances – and Country Specific Recommendations mixing euro specific and more general recommendations) and missing a flash indicator of imbalances (that could be, for example, the current account balance). Following this rationale, Bénassy-Quéré argued that the Macroeconomic Imbalances Procedure (MIP) should cover three pillars: fiscal, macroprudential and prices which, together, would work as the “survival kit” of Eurozone membership.
She pointed out a real EMU would require completing the Banking Union, with a common deposit guarantee scheme, reinforcing the ESM to support sovereigns, design a sovereigns’ debt restructuring regime and at least a “mini” redemption fund (or “mini” Eurobonds). The sovereigns’ debt restructuring mechanism would allow a middle ground between the pure “no bail out clause” and the mere market monitoring. While recognising the downsides of eurobonds, Bénassy-Quéré argued that mini eurobonds would further separate banks from sovereigns and at the same time provide the latter with an adequate liquidity instrument. She contended coordination was difficult because it required foregoing purely national interests to pursue a (well perceived) common good. She argued a budgetary capacity for the euro area would imply a separate parliament to adopt it, with significant political constraints. By contrast, she argued taxation, and labor markets would benefit from stronger and effective coordination (namely, the creation of a common unemployment scheme and portability of social benefits).
Philip Lane centered its intervention on the dichotomy “new start” vs legacy and long vs short term perspectives in what concerns the buildup of the Banking Union, the Fiscal Union and the coordination of economic policies.
His main conclusion was that the Banking Union and the EMU do not require a full fiscal union, just a limited one, built on an appropriate level of coordination of economic policies where the common policy is part of the national policies and mutually beneficial spillovers are duly taken into account. He argued that this limited fiscal union could require as little as 2% of mutualisation, which could be simply callable and not necessarily immediately available. He also argued in favor of further separating banks and sovereigns by creating the “European Safe Bonds”, with a preferential prudential status, and, at the same time, removing the sovereigns zero risk weight capital charge on banks. Once banks and sovereigns are effectively delinked, a mechanism of sovereign debt restructuring could be considered, as well as reinforcing the ESM.
Frank Smets explained that although improvements in economic situation and sentiment, due namely to external factors as well as the comprehensive assessment, the ECB monetary policy and budgetary constraints implemented, no complacency was allowed as much remained to be done and reverting to former policies and conditions would be detrimental. He argued that insofar no fiscal union was politically possible, other instruments were necessary to reinforce the EMU. He suggested reinforcing crisis management tools, such as the ESM (both in what concerns its mandate as well as financing), implementation of a common deposit guarantee scheme (which would be hardly used insofar the preventive mechanism had been already strongly reinforced), effectively handling sovereign exposures in banks’ balance sheets, implement structural reforms and reinforce risk sharing. On this particular point, he mentioned that the safety net instruments available are of limited risk sharing and more of a self insurance type (both Banking Union and Capital Markets Union) and that the EMU lacks stronger risk sharing instruments. He also mentioned banks still rely too much on debt and too little on equity (reinforcing short term commitments) and that rules reinforced trust, and should be forcefully abide to.
Jorge Braga de Macedo moderated the panel “Which Institutions are needed?” arguing that institutions produce policies and, therefore, strict coordination of both institutions and policies is of paramount importance. Coordination has not been in the forefront and that led to negative effects and a loss of credibility to the euro area. He reminded that no one had predicted the crisis because the signals were ignored by “politicians who believed bankers were engineers”. He focused on complementarity between reforms, arguing that it reinforces the link between reforms and growth thereby raising potential output growth.
Klaus Regling reflected on what can be achieved on deepening the EMU without amending the Treaties. Whilst noting the importance of reinforcing cooperation among member states, he reminded the audience about what has been done in the past to overcome the crisis. He mentioned MIP, banking union and the unconventional monetary interventions by the ECB.
As to what can be done within the current treaties, he referred to existing instruments of risk sharing and still nascent fiscal capacities such as the EIB, EFSF and ESM, the Single Resolution Fund, the Target System and some areas of monetary policy (quantitative easing). He reminded the Union budget risk sharing instruments such as the transfers to lower income countries. He noted the BRRD as an instrument of risk sharing within the private sector. Bearing in mind such instruments, he argued in favor of reinforcing the risk sharing namely possibly through ‘enhanced cooperation’ among a number of member states in what concerns establishing a limited fiscal union through ‘rainy day funds’, a limited common unemployment scheme, a targeted fiscal capacity as an incentive for implementing structural reforms and a capital markets union (common deposit guarantee schemes and harmonization of insolvency proceedings). If a treaty change is envisioned, he pointed to reinforcing the current institutions, the Commission, separating the SSM from the ECB through establishing a solid legal basis in the treaty, the ESM – which could be transformed into an EU institution – and an independent fiscal council.
Guillermo de la Dehesa argued that the imperfection of the EMU as a monetary area without a fiscal union (the euerozone “original sin”) lead to asymmetric chocks the Union was unable to properly address, rendering necessary a strong budgetary policy and control. To differentiate the euro area from other well-functioning monetary areas, he exemplified with California, resolved in two months but representing 16% of the EUA whilst Greece, representing only 2% of the EU was still lingering. He then reminded that the US had 20% of budget power to solve California whilst the EU had only 1% of member states GDP. Various studies demonstrate a nominal convergence without real convergence. He suggested to create a redemption fund (although noting that in accordance with the 2014 study on Debt Redemption Fund and Eurobills led by Tumpel Gugerel, a treaty change was required to issue other than on a pro rata basis) subject to voluntary participation of interested member states. That would allow them to issue at lower costs. He also mentioned setting up a Sovereign Debt Restructuring Mechanism that would allow Member States to orderly default on their debts. He reminded the EU still had low levels of growth that needed booting through private consumption and a fiscal union. The high levels of debt, in any event, required continued austerity measures and the persistence of generalised austerity across the euro area would end in disaster.
Carlos Moedas reported on the necessary conditions for growth, mentioning structural reforms, appropriate institutions, innovation and digital models. He mentioned quality and productive investment was necessary but, for that, some underlying conditions would be required, namely, proper institutions and the adequate reforms. He argued that the Juncker plan, by providing a guarantee, created the necessary incentives for structural reforms to take place and referred to initiatives aiming at integrating in valuation models the positive impacts of R&D to growth. In his view, the Commission is creating a policy facility that will help countries to create themselves the right policies in investment and science. All more important as the digital revolutions is not so much about producing data but much more on how to synchronize data so that machines can do intelligent things. The idea of building on and reinforcing the single market was central.
During the first block of questions and answers, Carlos Moedas argued that the persistent market fragmentation and lack of structural conditions prevented (good) ideas from turning into effective products, thus reinforcing the need to implement and deepen a sustained and strong internal market. Edmond Alphandery supported the idea of creating excellence centers in Europe, to make good use of the intellectual developments through science.
Responding to the Governor, Klaus Regling recognised that European financial assistance programmes lacked a centralized/single accountability line and could not, therefore, act as efficiently as the IMF. He also argued in favor of a permanent eurogroup chair. Responding to other questions, Regling assumed that if one had to wait harmonisation of the labor market rules to have a common unemployment scheme, that would never happen. He supported instead some level of harmonisation allowing a minimal scheme to be put in place with topping up by member states. Guillermo de la Dehesa argued ESM and the redemption fund could be seen as bridge instruments to a fiscal union. Others argued that the lack of budgetary space was hindering political union in the EU.
The third panel, on “What Future for Politics in Europe”, was moderated by João Marques de Almeida and António Vitorino, Edmond Alphandery and Enrico Letta were speakers.
António Vitorino’s intervention was centered on the decision making process in Europe, arguing for the need to integrate the two decision making processes: the one taking place at national level and the other one at Europe’s level.
Edmond Alphandery noted that the recent results of elections around Europe show little appetite for further integration. The mood is still negative in a number of areas and Grexit looms, as well as limited progress in policies such as energy, defense and fight against terrorism. Nevertheless, monetary policies have made a substantial progress with OMT and QE and allowing the ECB to buy project bonds could incentivise the energy union, a concept that remains vague, given that the subject is highly complex and sensitive. He saw the need for a common policy such areas as energy, defense, fight against terrorism, immigration from Northern Africa and Middle East.
Enrico Letta argued that the future of politics in Europe was highly dependent upon its economic performance and the attitude of each institution’s leaders. He noted the economic crises led to a different equilibrium among the European institutions, with the Council (member states) taking the lead over the Commission/institutions. At the same time, he argued the crisis rendered the Commission much more intrusive and its election procedure creates a special link between the Commission and the European Parliament, which should further reinforce the Commission. He also recalled that, due to a lack of political leadership, the ECB has come to the front light and has been ensuring the unity of the euro area, being the only able to defy Germany at the same time. All around, the political landscape in several member states is changing, with the rise of anti-European movements and political parties. Enrico Letta reasoned Europe’s future is dependent upon economic performance and the ability of its institutions to reconstruct themselves. During the crisis, the economic performance was very much dependent upon the ECB actions, and the ECB had to act because the institutions were unable to do so. He pointed out, that however, Europe cannot be led by the national leaders nor by the ECB: Europe needs leaders of its own that are able to support European and common interests.
The last block of questions and answers dealt with the role of independent authorities and of the European Parliament in shaping policies in Europe, as well as the issue of whether the banking union was introduced on time, the role. Antonio Vitorino argued in favor of maintaining statistics and competition within the Commission, as the executive arm of the European institutions.
A speech by the Finance Minister closed the event. She mentioned the root causes of the crisis and explained the Portuguese Government starting point for the discussion, with an aim to strengthen the euro area governance and adjustment capability. Among those, the Minister mentioned reinforcing the internal market and decisively pursuing structural reforms across all member states; coordinating budgetary policies and understanding its positive spillovers better. She emphasised strict compliance with commonly agreed rules; reforming the European Semester to render it more simple (with flagship indicators) and focused on a limited number of policy priorities; rendering the macroeconomic imbalances procedure capable of effectively detecting the buildup of imbalances and allowing a proper balance between stocks and flows. She also spoke of the need to complete the banking union through the setting up of a common backstop and a common guarantee deposit insurance; assess how to effectively handle internal imbalances through a limited fiscal capacity at European level, able to leverage and support structural reforms and based on own resources gathered from the sectors benefiting the most from the internal market. The Minister also supported rendering the ESM a more “European based” structure, delinked from purely national interests and aiming at supporting the single currency. The Minister hinted to a possible treaty revision to ground some of the proposals put forward on a solid basis. Finally she thanked all the participants for their insights.