Prof. Charles Calomiris Prof. Jordi Gual James D. Wolfensohn Introduction & M.C.: Prof. Pedro Videla

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2 Prof. Charles Calomiris Columbia Business School Prof. Jordi Gual IESE and Chief Economist, La Caixa James D. Wolfensohn Former President, World Bank Introduction & M.C.: Prof. Pedro Videla IESE Business School

3 Economic Recovery After The G20: What Role For Europe? Jordi Gual Professor of Economics, IESE Business School Chief Economist, la Caixa Reframing the Economic and Financial Landscape, IESE Global Alumni Reunion New York, October /10/

4 AGENDA EUROPE HAS NOT DONE WELL OUT OF THIS CRISIS HOW DO WE EXPLAIN THIS POOR PERFORMANCE? THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? IS EUROPE READY FOR THE RECOVERY?

5 AGENDA EUROPE HAS NOT DONE WELL OUT OF THIS CRISIS HOW DO WE EXPLAIN THIS POOR PERFORMANCE? THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? IS EUROPE READY FOR THE RECOVERY?

6 EUROPE HAS NOT DONE WELL GDP growth projections (%) United States Euro Area United Kingdom European Union Japan China India Russia Brazil Mexico Source: IMF WEO October 2009

7 AGENDA EUROPE HAS NOT DONE WELL OUT OF THIS CRISIS HOW DO WE EXPLAIN THIS POOR PERFORMANCE? THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? IS EUROPE READY FOR THE RECOVERY?

8 HOW DO WE EXPLAIN THIS POOR PERFORMANCE? OPENNESS POLICY-INDUCED FINANCIAL IMBALANCES INSUFFICIENT FISCAL RESPONSE MODERATE MONETARY POLICY RESPONSE Interest rates Unconventional instruments THE ROLE OF BANKS IN FINANCIAL INTERMEDIATION

9 HOW DO WE EXPLAIN THIS POOR PERFORMANCE? OPENNESS POLICY-INDUCED FINANCIAL IMBALANCES INSUFFICIENT FISCAL RESPONSE MODERATE MONETARY POLICY RESPONSE Interest rates Unconventional instruments THE ROLE OF BANKS IN FINANCIAL INTERMEDIATION

10 POLICY-INDUCED FINANCIAL IMBALANCES 0 External current account balance (% GDP, 2008) Ireland Poland Slovak Rep. Hungary Estonia Spain Lithuania Portugal Romania Latvia Greece Bulgaria Source: IMF

11 HOW DO WE EXPLAIN THIS POOR PERFORMANCE? OPENNESS POLICY-INDUCED FINANCIAL IMBALANCES INSUFFICIENT FISCAL RESPONSE MODERATE MONETARY POLICY RESPONSE Interest rates Unconventional instruments THE ROLE OF BANKS IN FINANCIAL INTERMEDIATION

12 INSUFFICIENT FISCAL RESPONSE 9 8 Increase in the overall fiscal deficit (% of GDP, 2009) Spain United States United Kingdom Japan Germany France Italy Source: IMF, projections

13 HOW DO WE EXPLAIN THIS POOR PERFORMANCE? OPENNESS POLICY-INDUCED FINANCIAL IMBALANCES INSUFFICIENT FISCAL RESPONSE MODERATE MONETARY POLICY RESPONSE Interest rates Unconventional instruments THE ROLE OF BANKS IN FINANCIAL INTERMEDIATION

14 MODERATE MONETARY POLICY RESPONSE (1) 4,5 Policy interest rates (%) 4 3,5 3 2,5 ECB Fed 2 1,5 1 0,5 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Source: Datastream

15 MODERATE MONETARY POLICY RESPONSE (2) 220 Monetary base (Jan 08 equals 100) Fed 160 ECB Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Source: Datastream

16 HOW DO WE EXPLAIN THIS POOR PERFORMANCE? OPENNESS POLICY-INDUCED FINANCIAL IMBALANCES INSUFFICIENT FISCAL RESPONSE MODERATE MONETARY POLICY RESPONSE Interest rates Unconventional instruments THE ROLE OF BANKS IN FINANCIAL INTERMEDIATION

17 THE ROLE OF BANKS in billions of U.S. dollars Holdings (Securities and Loans) Loss rate Up to Q2-09 Estimated total writedowns Writedowns Recapitalization TIER I* US 12, % % UK 8, % % Euro Zone 22, % % * TIER I is defined as paid in capital, retained earnings, reserves and preference shares as a percentage of risk weighted assets (RWA)

18 AGENDA EUROPE HAS NOT DONE WELL OUT OF THIS CRISIS HOW DO WE EXPLAIN THIS POOR PERFORMANCE? THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? IS EUROPE READY FOR THE RECOVERY?

19 THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? Common Policies Extent of coordination Effectiveness Trade Policy (including intra-eu trade) Very high A - Monetary Policy High A - Fiscal Policy Moderate B - Financial Markets Policy Moderate C +

20 AGENDA EUROPE HAS NOT DONE WELL OUT OF THIS CRISIS HOW DO WE EXPLAIN THIS POOR PERFORMANCE? THE EU POLICY REACTION: HAS IT BEEN EFFECTIVE? IS EUROPE READY FOR THE RECOVERY?

21 IS EUROPE READY FOR THE RECOVERY? THE KEY DRIVERS OF THE RECOVERY Timing Magnitude Differences across the EU EUROPE WILL HAVE TO STRIKE A VERY DIFFICULT BALANCE

22 A VERY DIFFICULT BALANCE Heterogeneity Too little Too much Too much Too little Too early Too late Timing Magnitude

23 IS EUROPE READY FOR THE RECOVERY? THE KEY DRIVERS OF THE RECOVERY Timing Magnitude Differences across the EU EUROPE WILL HAVE TO STRIKE A VERY DIFFICULT BALANCE STRENGHTENED POLICY COORDINATION IS A MUST Limits free riding Bolsters public confidence Facilitates dialogue with the US and the emerging economies LEADERSHIP

24 THANK YOU! 26/10/