the global crisis: a eu perspective vitor gaspar, director general of bepa (bureau of european...

The Global Crisis: The Global Crisis: a EU Perspectivea EU Perspective

Vitor Gaspar, Director General of BEPA Vitor Gaspar, Director General of BEPA

(Bureau of European Policy Advisers)(Bureau of European Policy Advisers)

European CommissionEuropean Commission

The views expressed are my own and do not necessarily reflect those of the European Commission.

Higher School of Economics X th International Conference

Moscow, Russia, 7-9 April 2009

BOTTOM LINEBOTTOM LINE1.1. The crisis has spread globally through strong economic The crisis has spread globally through strong economic

and financial linkages. The crisis is and financial linkages. The crisis is globalglobal in character. in character.2.2. Experience of Great Depression shows unilateral Experience of Great Depression shows unilateral

national action leads to negative spillovers and national action leads to negative spillovers and retaliation deepening and prolonging the crisis. It is retaliation deepening and prolonging the crisis. It is necessary to engage multilaterally to preserve open necessary to engage multilaterally to preserve open trade.trade.

3.3. EU is the largest economic entity in the world (and most EU is the largest economic entity in the world (and most Russia’s most important partner). It is also the most Russia’s most important partner). It is also the most integrated international economy in the world. integrated international economy in the world. Coordinated action is key to explore synergies and to Coordinated action is key to explore synergies and to avoid negative spillovers. avoid negative spillovers.

4.4. Policy responses are (and have been) based on the Policy responses are (and have been) based on the judgment according to which the current financial and judgment according to which the current financial and economic crisis is an exceptionaleconomic crisis is an exceptional event event that justifies that justifies exceptional responses. Restoring financial stability is a exceptional responses. Restoring financial stability is a necessary – albeit not sufficient- condition for necessary – albeit not sufficient- condition for sustainable recovery.sustainable recovery.

OutlineOutline

1.1. Factors contributing to the current global Factors contributing to the current global crisis.crisis.

2.2. Events in economic and financial Events in economic and financial markets after October 2008.markets after October 2008.

3.3. Policy responses to the global crisis.Policy responses to the global crisis.

4.4. G 20.G 20.

5.5. Conclusion.Conclusion.

1. Factors contributing to the 1. Factors contributing to the current global crisiscurrent global crisis

Macroeconomic factorsMacroeconomic factors - The “Great Moderation”. Low - The “Great Moderation”. Low nominal interest rates. Compressed risk premia. Real nominal interest rates. Compressed risk premia. Real estate and asset price inflation. Strong growth of money estate and asset price inflation. Strong growth of money and credit. Large global imbalances.and credit. Large global imbalances.

Microeconomic factorsMicroeconomic factors - Financial innovation: new - Financial innovation: new financial instruments of unprecedented complexity, financial instruments of unprecedented complexity, development of the “originate and distribute” of bank development of the “originate and distribute” of bank operations, poor risk management and governance, operations, poor risk management and governance, inadequate regulation and supervisioninadequate regulation and supervision..

2. Events in economic and financial 2. Events in economic and financial markets after October 2008markets after October 2008

EU Euro area EU Euro area EU Euro areaFebruary 2008 interim 2,0 1,8 - - - -Spring 2008 2,0 1,7 1,8 1,5 - -September 2008 interim 1,4 1,3 - - - -Autumn 2008 1,4 1,2 0,2 0,1 1,1 0,9January 2009 interim 1,0 0,9 -1,8 -1,9 0,5 0,4

Spring 2008 1,8 1,4 1,7 1,2 - -July 2008 update - 1,7 - 1,2 - -October 2008 1,7 1,3 0,6 0,2 - -November 2008 update 1,5 1,2 -0,2 -0,5 - -January 2009 update 1,3 1,0 -1,8 -2,0 0,5 0,2March 2009 update 0,9 -3,2 0,1

June 2008 - 1,7 - 1,4 - -September 2008 update - 1,7 - 1,3 - -November 2008 update - 1,0 - -0,6 - 1,2March 2009 interim - 0,7 - -4,1 - -0,3

Source: Commission, IMF and OECD forecasts, various issues as indicated

Commission

IMF

OECD - euro area

Table 1: Real GDP growth forecasts, EU-27 and euro area (annual average % change)

2008 2009 2010


Financial systemic-risk pressures have abated Financial systemic-risk pressures have abated since September-October 2008 as the result of since September-October 2008 as the result of unprecedented and continuing government unprecedented and continuing government financial support. financial support.

Nevertheless, markets have not yet returned to Nevertheless, markets have not yet returned to normalcy and risk-perceptions—as reflected in normalcy and risk-perceptions—as reflected in interest-rate spreads—are still well above early-interest-rate spreads—are still well above early-crisis and especially pre-crisis levels.crisis and especially pre-crisis levels.

The crisis is in a stage where the contraction in The crisis is in a stage where the contraction in economic activity is now affecting banks’ loan economic activity is now affecting banks’ loan book.book.


Figure 1. Average Libor interest rate in Euro Area, UK, US - as of April 1, 2009 Figure 1. Average Libor interest rate in Euro Area, UK, US - as of April 1, 2009

0

1

2

3

4

5

6

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Average 3-Month LIBOR

Average policy rate


Figure 2. Spreads in consumer finance sectors as of Jan 12, 2009

However, pressures are still strongly present in the credit markets that directly However, pressures are still strongly present in the credit markets that directly finance the real economy. finance the real economy.


Figure 3. CDS spreads for US and European corporates as of March 31, 2009

0

200

400

600

800

1.000

1.200

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Europe investment grade

Europe crossover

US investment grade

US crossover

2. Events in economic and financial 2. Events in economic and financial markets after October 2008: Russiamarkets after October 2008: Russia

28

30

32

34

36

38

40

42

350

400

450

500

550

600

RUR per Exchange Rate Basket (left scale) Reserves (billion USD, right scale)

2. Events in economic and financial 2. Events in economic and financial markets after October 2008: Russiamarkets after October 2008: Russia

-25

-15

-5

5

15

25

35

Basic sectors Industry Agriculture Construction Retail sales

3. 3. Policy responses to the global Policy responses to the global crisiscrisis

In today’s conditions of financial turmoil the In today’s conditions of financial turmoil the transmission mechanism cannot be relied to transmission mechanism cannot be relied to operate as in normal circumstances; hence operate as in normal circumstances; hence fiscal policy is needed to complement fiscal policy is needed to complement monetary policy.monetary policy.

The spillovers across nations are very The spillovers across nations are very significant in the present circumstances – significant in the present circumstances – hence steps to strengthen international policy hence steps to strengthen international policy coordination and cooperation.coordination and cooperation.

Inter-linkages and interdependence are Inter-linkages and interdependence are particularly strong in the EU (the EU as particularly strong in the EU (the EU as example).example).


EU Member States are faced with a common EU Member States are faced with a common disturbance, experience strong spillovers in their disturbance, experience strong spillovers in their policy actions and share central common interests:policy actions and share central common interests:

• The EU’s Single Market and the Single Currency.The EU’s Single Market and the Single Currency.• Structural Adjustment and Sustainable Growth.Structural Adjustment and Sustainable Growth.• Financial Stability and overall Macroeconomic Financial Stability and overall Macroeconomic

Stability.Stability.• Multilateral governance for the global economy.Multilateral governance for the global economy.


•Central bank’s liquidity provision and Central bank’s liquidity provision and aggressive lowering of interest rates;aggressive lowering of interest rates;•Extension of guarantees on banks’ liabilities.Extension of guarantees on banks’ liabilities.•Capital injections and (in some cases) state-Capital injections and (in some cases) state-controlcontrol•Treatment of impaired assets.Treatment of impaired assets.•Discretionary fiscal stimulus and automatic Discretionary fiscal stimulus and automatic stabilizers.stabilizers.•A review of the regulatory and supervisory A review of the regulatory and supervisory framework in the EUframework in the EU

3. 3. Policy responses to the global Policy responses to the global crisis: Russiacrisis: Russia

An extensive set of policy measures has also been taken by An extensive set of policy measures has also been taken by Russia, which is rather similar to what the EU adopted:Russia, which is rather similar to what the EU adopted:

1.1. Provision of domestic liquidity to the banking sector;Provision of domestic liquidity to the banking sector;2.2. Provision of external liquidity (to banks and companies);Provision of external liquidity (to banks and companies);3.3. More flexible exchange rate policy;More flexible exchange rate policy;4.4. Package of fiscal support measures;Package of fiscal support measures;4.4. Other measures (tOther measures (tax cuts, bank deposit insurance extended, ax cuts, bank deposit insurance extended,

increase in unemployment benefits, caps set for currency increase in unemployment benefits, caps set for currency swaps and foreign assets of banks, takeover and re-swaps and foreign assets of banks, takeover and re-capitalisation of banks). capitalisation of banks).

4. G 20: EU4. G 20: EUMain messages for the G-20 summit from the EU are:

1) Coordinated macroeconomic policies.

2) Preserve international trade.

3) Enhance sound regulation & strengthen transparency.

4) Reinforce international cooperation and promote integrity in financial markets.

5) Increase IMF’s lending capacity.

6) Reform the WB and the MDBs.

4. G 20: Russia4. G 20: Russia Russia has been an important contributor to international Russia has been an important contributor to international

consensus:consensus:

1.1. A larger representation of emerging countries in the IFIs. A larger representation of emerging countries in the IFIs. 2.2. The improvement of the IMF's early warning capabilities and The improvement of the IMF's early warning capabilities and

the expansion of the FSF membership.the expansion of the FSF membership.3.3. On the financial regulatory and supervisory areas, Russia is On the financial regulatory and supervisory areas, Russia is

very close the EU approach.very close the EU approach.

Beyond the G20 meetings themselves, the existing Beyond the G20 meetings themselves, the existing framework for discussions on macro policies between the framework for discussions on macro policies between the Commission (notably DGs ECFIN and MARKT and also the Commission (notably DGs ECFIN and MARKT and also the ECB) and Russian authorities, the Annual Plenary of the ECB) and Russian authorities, the Annual Plenary of the "EU-Russia Macroeconomic and Financial Issues Dialogue" "EU-Russia Macroeconomic and Financial Issues Dialogue" has been has been instrumentalinstrumental for the exchange of information and for the exchange of information and views.views.

6. Conclusion6. Conclusion Existing EU State-aid rules & ex-ante guidance of the Existing EU State-aid rules & ex-ante guidance of the

EC have played a major role in ensuring consistency EC have played a major role in ensuring consistency between the measures taken by Member States, between the measures taken by Member States, therefore contributing to a coordinated, cooperative therefore contributing to a coordinated, cooperative outcome (Single Market). outcome (Single Market).

Key characteristic of intervention: Reconciliation of Key characteristic of intervention: Reconciliation of short-term and longer-term perspectives of public is short-term and longer-term perspectives of public is crucial (e.g. banking system). crucial (e.g. banking system).

Reconciliation between the short and long run Reconciliation between the short and long run

perspectives is also present in fiscal policy. perspectives is also present in fiscal policy. Discretionary expansion must be (coordinated) Discretionary expansion must be (coordinated) timely, targeted, and temporary (SGP).timely, targeted, and temporary (SGP).

6. Conclusion6. Conclusion Building the ground for sustainable recovery requires Building the ground for sustainable recovery requires

(as a necessary, albeit not sufficient condition) the (as a necessary, albeit not sufficient condition) the restoration of financial stability.restoration of financial stability.

But to prevent and manage future crises, further But to prevent and manage future crises, further progress in the area of regulation, coordinated progress in the area of regulation, coordinated supervision and crisis management procedures is supervision and crisis management procedures is essential.essential.

These policy questions and challenges are also These policy questions and challenges are also relevant for Russia (domestically…relevant for Russia (domestically…

……and more broadly they apply globally. They affect and more broadly they apply globally. They affect Russia as an important stakeholder.Russia as an important stakeholder.

The Global Crisis: The Global Crisis: a EU Perspectivea EU Perspective

Vitor Gaspar, Director General of BEPA Vitor Gaspar, Director General of BEPA

(Bureau of European Policy Advisers)(Bureau of European Policy Advisers)

European CommissionEuropean Commission

The views expressed are my own and do not necessarily reflect those of the European Commission.

Higher School of Economics X th International Conference

Moscow, Russia, 7-9 April 2009

the global crisis: a eu perspective vitor gaspar, director general of bepa (bureau of european...

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