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
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 2009 26/10/2009 60
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?
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?
EUROPE HAS NOT DONE WELL GDP growth projections (%) 2009 2010 United States Euro Area United Kingdom European Union Japan -2.7-4.2-4.4-4.2-5.4 1.5 0.3 0.9 0.5 1.7 China 8.5 9.0 India 5.4 6.4 Russia -7.5 1.5 Brazil -0.7 3.5 Mexico -7.3 3.3 Source: IMF WEO October 2009
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?
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
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
POLICY-INDUCED FINANCIAL IMBALANCES 0 External current account balance (% GDP, 2008) -5-10 -15-20 -25-30 Ireland Poland Slovak Rep. Hungary Estonia Spain Lithuania Portugal Romania Latvia Greece Bulgaria Source: IMF
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
INSUFFICIENT FISCAL RESPONSE 9 8 Increase in the overall fiscal deficit (% of GDP, 2009) 7 6 5 4 3 2 1 0 Spain United States United Kingdom Japan Germany France Italy Source: IMF, projections
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
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
MODERATE MONETARY POLICY RESPONSE (2) 220 Monetary base (Jan 08 equals 100) 200 180 Fed 160 ECB 140 120 100 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Source: Datastream
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
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 12,561 8.2% 1.025 610 500 11.5% UK 8,369 7.2% 604 260 160 10.4% Euro Zone 22,901 3.6% 814 350 220 8.5% * TIER I is defined as paid in capital, retained earnings, reserves and preference shares as a percentage of risk weighted assets (RWA)
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?
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 +
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?
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
A VERY DIFFICULT BALANCE Heterogeneity Too little Too much Too much Too little Too early Too late Timing Magnitude
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
THANK YOU! 26/10/2009 81