Sunday, October 13, 2013

The Future of Europe – How the European banking union and structural reforms will get us back on track.

On June 26, 2013,

  • Jörg Asmussen (Member of the Executive Board, European Central Bank),
  • Dr. Enrico Tommaso Cucchiani ([Ex] Managing Director and Chief Executive Officer of Intesa Sanpaolo),
  • Jens Henriksson (President, NASDAQ OMX Stockholm),
  • Dr. Gerard Lyons (Chief Economic Advisor to the Mayor of London), and
  • Xavier Musca (Deputy Chief Executive Officer, Crédit Agricole)
discussed the future of Europe at the IIF spring meeting in Paris.

Recovery from the financial crisis

Jens Henriksson
Jens Henriksson traces back the European crisis after the asset bubble burst in the 2008 financial crisis:

  • 1st phase: European authorities had to deal with failing banks through guarantees, equity injections, and nationalizations.
  • 2nd phase: To combat recession following the banking crisis, European member states used fiscal and monetary policies to stimulate demand, weaken the Euro, and lower interest rates.
  • 3rd phase: As phase 2 triggered budget deficits, member states now deal with budget consolidation, as consistent and coherent as possible.

In this situation, the panel wonders how Europe can regain competitiveness. Two key concepts come back again and again – the European banking union and the need for structural reforms.

European banking union

Jörg Asmussen
The European banking union is of vital importance to increase the confidence in the European banking sector, reintegrate financial markets, and improve the transmission of ECB's monetary policy. This is the opinion of Jörg Asmussen who says that “this project [the European Banking Union] is of key importance to us [the ECB]”.


The European banking union project comprises two key elements, i.e. the single supervisory mechanism (SSM) and the single resolution mechanism (SRM). In the future, it might also include a common deposit guarantee insurance scheme.

The SSM provides for a joint supervisory model in Europe. The idea is to introduce a common supervisory scheme which reviews the quality of banks’ assets, assesses their balance sheets, and carries out stress tests. The SSM will rely primarily on the ECB. National regulators, external advisors, and the European Banking Authority will also intervene.

The SRM will create a European resolution authority, backed by a single resolution fund. This is necessary to deal with future crisis situations affecting large cross-border banks, in particular to avoid political imponderables between governments. The primary SRM tool will be the bail-in which will allow a recapitalization of banks in times of crisis.

A common deposit guarantee scheme is currently not discussed in Europe and Jörg Asmussen doesn’t expect this discussion to become relevant in the medium term. As a matter of fact, a common resolution scheme will lessen the need for a common deposit guarantee scheme: Because banks will have to maintain a minimum amount of liabilities eligible for their resolution, there is not need for a common deposit insurance.

Jörg Asmussen

Our objective at the ECB is to start supervision with a clean slate and to restore credibility in the European banking sector.”

It is clear that the results of the asset quality review and stress tests may require capitalization or other means of support for weak banks.”

The credibility of the SSM requires more transparency on the banks' balance sheet. Markets also need to be confident that, in the future, the supervisor can pull the plug on banks that are failing or likely to fail.”

The resources for this fund [the single resolution fund] should not come from the taxpayer. It should be financed by ex ante risk-based levies on the banking sector.”

The financial sector itself should pay for the cost of financial crisis.”

Global investors need certainty about the rules of the game in Europe.”

Only in extreme cases, deposit guarantee schemes will have to pay out.”

We said a number of times in Europe that we need a banking union to break the links between banks and sovereigns.”


Xavier Musca
The whole story of this crisis [in Europe] is about the delicate balance between solidarity and responsibility and the research for a new equilibrium of powers.”

People have realized that structural reforms are key.”

Structural reforms

Dr. Enrico Tommaso Cucchiani reports that Europe is loosing economic ground vs. the rest of the world. He criticizes today’s debate about [economic] integration in Europe and says that the continent should focus on regaining competitive advantage instead. Focusing on external (as opposed to internal) benchmarks, Europe should improve

  • competitiveness,
  • economic freedom,
  • containment of the role of the state,
  • investment in education and R&D,
  • quality of infrastructures, and
  • early and mandatory adoption of English as a second language which is a fundamental prerequisite for labor mobility.

Jens Henriksson underlines the human aspect when putting structural reforms into practice: Any fundamental change process requires the following subsequent steps:

  • Show empathy with people
  • Analyze the problem
  • Make a value judgment (“This is unfair and needs to be changed.”)
  • Plan for the measures to implement change

As people must be convinced of the necessity of structural reforms and be helped to adapt to new circumstances, it is actually not possible to skip the first three steps, as is nevertheless often the case in politics.

Dr. Enrico Tommaso Cucchiani

Until 2010, the Euro has been a very good thing for Euroland.”

Europe's growth differential of 4 % vs. the world average and 3 % vs. the US is not sustainable.”

It is clear that we have to get Europe back – back on the competitive track.”

The notion of integration is losing momentum: The Nordics are afraid to pay the bill for the lazy members of the MED club and the Euro periphery feels suffocated by the rigor imposed by the North. In this environment, centrifugal forces are clearly gaining ground.”

To sum it up: Less emphasis on integration, more emphasis on alignment! Less focus on internal benchmarking, more focus on competing with the rest of the world! Less emphasis on who gains or looses sovereignty, more on how to win back growth and full employment!”

If we don't align to the global reality, the EU can implode. If the EU implodes, individual countries are too small to succeed.”

If we align, we can both get back into the race and turn the dream of true integration into reality.”

Jens Henriksson

[In ten years], we will make funny jokes about how we used to call Europe “the sick man of the world”.”

When everybody complains [about higher taxes and government spending cuts], it is ok. The point is to have full burden sharing.”

The key lesson to be successful with budget consolidation is to be consistent and coherent.”

Politics is not about being loved, it's about being respected. If you are looking for love – well – go into show business.”

Protect people, not jobs!”


Gerard Lyons

When we look globally, I think it's important to stress that the world economy is continuing to grow and Europe is loosing out.”

Europe is very good at talking a good story, very good at talking a regional story. But then, everyone goes off and acts in a national perspective.”

Demand side and supply side problems need demand side and supply side solutions.”

We need basically Germany to align almost fully, I would argue, with what Britain wants, which is to make the single market work.”

I don't think the Euro and the EU debate are the same.”

I still see London remain the financial center of Europe, whether Britain is in the EU or outside the EU.”

Xavier Musca

We need a clear and convincing commitment from the European Union that the same will be ready to intervene in order to fix the situation when the need arises.” [Talking about the importance of the European banking union]

What is my takeaway from this discussion? Europe will be better off if it implements the European banking union and structural reforms. We seem to make progress on the first point but much less so on the second point.