Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank. Reshaping Europe Reforms for growth and reforms for stability

Transcription

1 Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank Reshaping Europe Reforms for growth and reforms for stability Founders Day Lecture at the Indo-German Chamber of Commerce in Mumbai Friday, 31 October 2014 Page 1 of 11

2 Table of contents 1 INTRODUCTION REFORMS FOR GROWTH AND COMPETITIVENESS REFORMS FOR STABILITY CONCLUSION Introduction Ladies and gentlemen, I thank you for the invitation and the opportunity to deliver the Founder s Day Lecture of the Indo-German Chamber of Commerce. Being here in India reminds me of the fact that the economic world has changed profoundly over the last few decades. And I am not just referring to the crises we have witnessed, but rather to the process of globalisation. Globalisation is to crises as plate tectonics is to a volcanic eruption: it is slower yet its implications might be larger. Not too long ago the saying was that when the US sneezes, the world catches a cold. This is certainly still true, and the turbulence in some emerging markets following the Federal Reserve s announcement of tapering was a case in point. Page 2 of 11

3 However, we have reached a point where the health of the world economy is no longer just determined by the state of the US economy. Over the past few years, emerging economies have become ever more important players in the global economy. During the last decade, real GDP in emerging economies grew by more than 6% per annum. Over the same period, output in advanced economies rose by less than 2% on average. According to estimates by the IMF, emerging economies now account for more than half of global output, measured by purchasing power parities. Looking to the future, it is generally assumed that emerging economies share of world output will increase further. From a European point of view the question is: how can Europe participate in and benefit from the changing structure of the world economy? As early as 1954, Jean Monnet, one of the founding fathers of the European Union, said: Our countries have become too small for today s world, when compared to the potential of modern technical means and in relation to the dimension of America and Russia today, China and India tomorrow. In that sense, European integration and also the introduction of the euro could be interpreted as a response to globalisation as an attempt to create a strong regional pole in an increasingly multi-polar world. The recent crisis, however, has exposed weaknesses in the framework of monetary union. To benefit from a globalised economy we have to address these weaknesses in order to make the euro area economy stable, competitive and prosperous. There are two sets of reforms that are necessary to achieve that objective: reforms for growth and competitiveness Page 3 of 11

4 as well as reforms for stability. Let us begin by looking at the first set of reforms. 2 Reforms for growth and competitiveness Looking at the figures, one could conclude that the euro area had a rainy summer. The already modest economic recovery faltered in the second quarter: seasonally adjusted GDP in the euro area as a whole remained unchanged. The German economy shrank by 0.2%, Italy slipped back into recession and the French economy stagnated. Only in Spain did the economy grow. Euro-area GDP is still 2.4% below its pre-crisis level, and indicators suggest only a moderate upward movement in the coming quarters. And two factors still pose a risk to this rather modest outlook: the crisis in Ukraine and the danger of reform fatigue in the euro area. While the former has been an unpredictable issue from the beginning, the latter is in the hands of policymakers. They have to take the right steps to put the euro area back on the path of recovery. But what are the right steps? The crisis has shown us that a lot of ballast is weighing on the euro area economy. Thus, in order to get the recovery off the ground, we must rid ourselves first of this ballast. The good news is that this is exactly what is happening now. Unit labour costs and current accounts in the crisis countries have already improved substantially not only because of shrinking imports, but also because of expanding exports. Competitiveness has improved. Page 4 of 11

5 At the same time, we can see clear signs of sectoral change in the crisis countries. Sectors which were oversized and unproductive are shrinking and resources are being reallocated to more productive sectors with a strong focus on exports. The construction sector in Ireland, for instance, has accounted for over half the decrease in aggregate employment. In Spain, Italy and Portugal it has accounted for around 40%. In industry, by contrast, either far fewer jobs have been cut or as in Ireland new jobs have recently been created. These sectoral adjustments are also reflected in credit reallocation. Take Spain as an example. While loans to the Spanish construction sector have fallen, the more productive export-oriented industrial sector is able to receive loans. This aspect is often forgotten when discussing credit growth in peripheral countries. Progress has also been made in other areas of the economy. The crisis countries have introduced a number of labour market reforms. These reforms are intended to foster employment and reduce adjustment costs during economic downturns. As an additional measure, the retirement age has also been raised. Product market rigidities that weaken competition, produce regulatory red tape and inhibit growth are likewise being addressed. And according to the World Bank s Doing Business Report, the efforts are starting to pay off: Portugal, Italy and Spain have climbed up the ranking ladder by 17, 13 and 10 positions respectively over the last four years. Greece has even moved up 37 positions. Page 5 of 11

6 However, we still have ground to cover. Recent estimates 1 by the European Commission suggest a medium-term growth potential for the euro area of just 1%. Thus, the potential gains from structural reforms remain especially large. A study 2 by economists from the OECD suggests that a comprehensive package of labour, product, tax and pension reforms could raise GDP per capita in the EU by about 11% after ten years. To me, there can be no doubt. To restore growth and competitiveness in the euro area, we need to follow through on structural reforms. 3 Reforms for stability However, while structural reforms at the national level are necessary they are by no means sufficient. We need to supplement them with measures designed to create a stable framework for monetary union. From an economic point of view, this could be achieved by fostering deeper integration. Let us take a look at two areas where further integration could be the way forward for European monetary union. In a few days, on 4 November, the ECB will assume direct supervision of the 120 largest banks in the euro area thereby establishing the first pillar of a European banking union. The 120 banks which will come under the supervision of the ECB account for more than 80% of the aggregated 1 European Commission (2013), The euro area s growth prospects over the coming decade, Quarterly Report on the Euro Area 12(4). 2 Bouis, R and R Duval (2011), Raising the Potential Growth after the Crisis: A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond, OECD Economics Department Working Paper No Page 6 of 11

7 balance sheet for the euro-area banking sector, making the ECB one of the world s largest supervisors. The banking union is certainly the biggest step towards financial integration in Europe since the launch of our common currency. And to me, it is the most logical step to take. A single monetary policy requires integrated financial markets including, without doubt, European-level banking supervision. European banking supervision will allow banks throughout the euro area to be supervised according to the same high standards. In addition, crossborder effects can be covered better through joint supervision than by national supervisors. And adding a European perspective to the national view will put more distance between the supervisory authority and the entities it supervises. This will minimise the danger of supervisors getting too close to their banks and thus treating them with kid gloves out of national interest. Meanwhile, a comprehensive banking union must consist of more than just effective European banking supervision. The second pillar of the banking union is a European resolution mechanism to deal with future bank failures. This mechanism will be in place from 2016 onwards. If push comes to shove and a bank is no longer viable, shareholders and creditors will be first in line to bear banks losses, and taxpayers money will only be used as a very last resort. Thus, the European resolution mechanism will also contribute to disentangling the close connection between banks and public finances, which was a central problem in the euro crisis. Page 7 of 11

8 All in all, the banking union is definitely a major step forward in designing a stable framework for European monetary union. However, we should broaden our view beyond the banking sector. A deeper integration of capital markets would also contribute to sharing opportunities and risks. To be sure, we have come a long way in integrating capital markets in Europe. According to statistics provided by the Bank for International Settlements, European banks claims within Europe stood at 36% of GDP at the end of the 1990s. By 2008 the share had grown to 77%. This share has fallen during the crisis, but still stands at around 48% of GDP. However, there are two caveats regarding this trend of capital market integration in Europe. First, the financing structure of European companies is still predominantly bank-based. A look at the balance sheets of German companies, for instance, shows that bank credit still accounts for about 15% of the liability side. This is certainly lower than the 22% observed at the end of the 1990s, but compared to the US or the UK there is still room to increase the share of capital market financing. Second, although banks cross-border exposures have increased, capital market integration remains incomplete. In the banking sector, for instance, integration has concentrated on the interbank market while credit markets for companies remain predominantly national. The integration of the markets for capital may have increased in Europe, but the ownership structures of many companies have not. They are still strongly national. Page 8 of 11

9 The relatively low level of integration in European capital markets represents a barrier for risk sharing. Equity holdings in the United States, for instance, are much more widely dispersed throughout the entire country. Thus, when a negative shock hits an industry or a specific region, the resulting losses are spread widely beyond that region. In Europe they are not, because equity holdings are much more concentrated nationally. Empirical studies for the United States show that integrated markets for capital cushion around 40% of the cyclical fluctuations between the US federal states. A share of around 25% is smoothed via the credit markets, while fiscal mechanisms cushion just 20% of shocks. Studies for Canada and Sweden come to similar conclusions. Against this backdrop, two general lines of action could be followed in Europe. First, it might be beneficial to increase the share of capital markets in the financing structure of companies. This would, of course, require a shift away from the traditional bank-based system to a certain degree. In this context, it might be worth taking a closer look at tax regimes, among other things. Currently, tax treatment still favours debt financing over equity financing. Removing this bias in taxation would encourage companies to strengthen their equity base and thus turn more towards capital markets in their search for sources of funds. The second line of action would be to deepen the integration of capital markets, which might eventually result in the formation of a capital markets union. Admittedly, the concept of a capital markets union is not as clear-cut as that of a banking union. Capital markets are complex, and non-bank Page 9 of 11

10 finance takes many forms: corporate bonds, private equity, public equity, venture capital or peer-to-peer lending, to name just a few. And integration relates not only to financial products but also to integral elements of the respective markets, such as stock exchanges and central counterparties. Thus, any attempt to form a capital markets union would require a lot of different measures in a lot of different areas. Nevertheless, the idea of a capital markets union has gained some traction lately. Among others, the President of the European Commission, Jean- Claude Juncker, and Yves Mersch, Member of the Executive Board of the ECB, have promoted the concept of a capital markets union. To me, it would be a logical step to supplement the banking union with a capital markets union. It would reduce fragmentation in European financial markets and, at the same time, enhance their efficiency and stability. Thus, it is certainly a goal worth pursuing. 4 Conclusion Ladies and gentlemen, We live in a world that is marked by constant change. Over the past few decades, the global economy has become a single space, and individual countries are no longer remote islands that are economically detached from the rest of the world. This is as true for India as it is for the euro area. Page 10 of 11

11 Every country is responsible for its own position in the world economy, of course in my speech I discussed the reforms Europe has to undertake. But at the same time, we also have a shared responsibility for a stable and prosperous world economy. Thus, to reap the gains that globalisation offers, we have to cooperate. We all share the same objective, and to achieve it, we have to work hand in hand. Institutions such as the Indo-German Chamber of Commerce certainly lead the way in that regard. Thank you for your attention. * * * Page 11 of 11