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BackA panel discussion organised by the Austrian National Bank in the Permanent Representation of Austria to the EU in Brussels stood under the motto of overcoming the recession. Whilst the Commission, as usual, talked again about increasing competitiveness, two of the speakers presented solution approaches to lead Europe as quickly as possible out of the recession.
To start the discussion, Jürgen Kröger of the Commission outlined the current state of the economic crisis and pointed out that the EU even had Member States such as Ireland that had to record a double-digit drop in GDP (Gross Domestic Product). Most of the other EU States were hardly in a better position.
Kröger sees the necessity for countries with a current account surplus to revalue their currency whilst states with a current account deficit should devalue. Furthermore, countries that devalue should provide for a tight monetary policy. Corporate and budgetary adjustments should be carried out.
He sees a particular challenge in the soon required reduction of the budget deficits, because this would also mean a reduction in available income in the private sector. A strengthening of competitiveness of the EU economy could lead to income restrictions in some countries.
Hans-Helmut Kotz of the German Central Bank does not see a typical economic cycle in the current recession; the problems would be of a structural nature. Whilst he, for example, almost sees a similar level as before the crisis with regard to the overnight deposits at the European Central Bank, Kotz draws attention to the rapid increase of national debt: this year, the USA would most likely reach a deficit of about 14 %; the level of debt would rise from 60% of GDP to over 100 %. Germany expects a rise in debt of 80 % of GDP.
Jacques Delpla, Member of the Council for Economic Analysis in France suggests the creation of a common pan-European market government bond market. Currently the market for government bonds in the euro area was fragmented – there would be 16 different bond markets. This would result in liquidity bottlenecks for smaller countries such as Austria or Finland. This would mean that these countries had to pay add-on interests for their bonds in spite of having a good credit rating.
Delpla therefore suggests the following reform: government bonds with a Eurozone guarantee for up to 40 % of the Eurozone GDP should be issued (so-called Blue Debts). Due to their lower interest, these bonds would be significantly more favourable for smaller Member States than the current bonds. Additional national government bonds should be issued for bonds, which are also necessary to finance national debt (Red Debts). One could expect that higher interest payments would continue for these bonds.
Franz Nauschnigg, representative of the Austrian National Bank, holds the view that the financial markets had come under particular great pressure because of the collapse of Lehman Brothers and the financial crisis of Iceland and Hungary in the 3rd quarter of 2008. Apart from that, the currencies of some Central and South European Countries were also under pressure. Only recently, Latvia had do cope with such problems.
Nauschnigg sees some positive steps at EU level to tackle the financial crisis. The Premiers at the European Council, for example, agreed to increase the emergency fund by Euro 50 billion; another Euro 75 billion will be contributed by the EU to strengthen the International Monetary Fund. The regulation and supervision of the financial market will be improved. Nevertheless, he still sees the continuation of existing problems: the fiscal policy of some East European states was oriented pro-cyclically, which resulted in the further aggravation of the recession. Many of these states hardly have any scope for an anti-cyclical monetary policy; the exchange rate volatility would also be problematic.
The suggestions of the representative of the Austrian National Bank include among others the increase of tax on foreign currency loans and the introduction of a credit growth stabilisation tax: the receipts should flow into a stabilisation fund, of which anti-cyclical measures could be financed in times of crises. 200 billion Euro for boosting the economy should be made available at Euroregion level; another 50 billion Euro for EU members outside the Euroregion. Further 50 billion Euro will be set aside for non-EU countries in the European Economic Zone. As Delpla, he also supports the creation of an EU-wide bond market.
The implementation of these proposals, which are by all means worth considering, lies in the hand of the EU institutions. However, the odds at Commission level are long: statements of various Commissioners already point towards a revival of liberal economic concepts. Only a few months after the beginning of the financial crisis, the Commission once again sees the salvation in the self regulation of the markets.
Kröger sees the necessity for countries with a current account surplus to revalue their currency whilst states with a current account deficit should devalue. Furthermore, countries that devalue should provide for a tight monetary policy. Corporate and budgetary adjustments should be carried out.
He sees a particular challenge in the soon required reduction of the budget deficits, because this would also mean a reduction in available income in the private sector. A strengthening of competitiveness of the EU economy could lead to income restrictions in some countries.
Hans-Helmut Kotz of the German Central Bank does not see a typical economic cycle in the current recession; the problems would be of a structural nature. Whilst he, for example, almost sees a similar level as before the crisis with regard to the overnight deposits at the European Central Bank, Kotz draws attention to the rapid increase of national debt: this year, the USA would most likely reach a deficit of about 14 %; the level of debt would rise from 60% of GDP to over 100 %. Germany expects a rise in debt of 80 % of GDP.
Jacques Delpla, Member of the Council for Economic Analysis in France suggests the creation of a common pan-European market government bond market. Currently the market for government bonds in the euro area was fragmented – there would be 16 different bond markets. This would result in liquidity bottlenecks for smaller countries such as Austria or Finland. This would mean that these countries had to pay add-on interests for their bonds in spite of having a good credit rating.
Delpla therefore suggests the following reform: government bonds with a Eurozone guarantee for up to 40 % of the Eurozone GDP should be issued (so-called Blue Debts). Due to their lower interest, these bonds would be significantly more favourable for smaller Member States than the current bonds. Additional national government bonds should be issued for bonds, which are also necessary to finance national debt (Red Debts). One could expect that higher interest payments would continue for these bonds.
Franz Nauschnigg, representative of the Austrian National Bank, holds the view that the financial markets had come under particular great pressure because of the collapse of Lehman Brothers and the financial crisis of Iceland and Hungary in the 3rd quarter of 2008. Apart from that, the currencies of some Central and South European Countries were also under pressure. Only recently, Latvia had do cope with such problems.
Nauschnigg sees some positive steps at EU level to tackle the financial crisis. The Premiers at the European Council, for example, agreed to increase the emergency fund by Euro 50 billion; another Euro 75 billion will be contributed by the EU to strengthen the International Monetary Fund. The regulation and supervision of the financial market will be improved. Nevertheless, he still sees the continuation of existing problems: the fiscal policy of some East European states was oriented pro-cyclically, which resulted in the further aggravation of the recession. Many of these states hardly have any scope for an anti-cyclical monetary policy; the exchange rate volatility would also be problematic.
The suggestions of the representative of the Austrian National Bank include among others the increase of tax on foreign currency loans and the introduction of a credit growth stabilisation tax: the receipts should flow into a stabilisation fund, of which anti-cyclical measures could be financed in times of crises. 200 billion Euro for boosting the economy should be made available at Euroregion level; another 50 billion Euro for EU members outside the Euroregion. Further 50 billion Euro will be set aside for non-EU countries in the European Economic Zone. As Delpla, he also supports the creation of an EU-wide bond market.
The implementation of these proposals, which are by all means worth considering, lies in the hand of the EU institutions. However, the odds at Commission level are long: statements of various Commissioners already point towards a revival of liberal economic concepts. Only a few months after the beginning of the financial crisis, the Commission once again sees the salvation in the self regulation of the markets.