Vincenzo La Via
Ministry of Economy and Finance, Italy, Chairman, Financial Services Committee and Director General of the Treasury
European Central Bank, Member of the Executive Board
Ministry of Economy and Finance, France, Director General of Treasury
Crédit Agricole S.A., Deputy Chief Executive Officer
Trust among Members of the European Union (EU) has been severely damaged since the crisis. The panel discussion would focus on the ways of restoring confidence across, and within, EU Member States. Regaining the trust of EU citizens in the EU project i.e. fostering economic convergence, making the Banking Union a reality and implementing the CMU, were the main priorities on which the members of the panel would elaborate.
1. Fostering economic convergence and deepening the EMU
1.1. Structural reforms have to be implemented
A public authority representative stated that growth is improving, but is still modest. Recovery is uneven. There are wide imbalances in Europe and a need to find effective ways to foster convergence, which would help to make the euro area more resilient, restore confidence between the Member States and accelerate private risk sharing within the EU. The convergence engine worked well to begin with, but then began to sputter. The question is now about what can be done.
First, the reality is that Europe is viewed by most people in it as a source of problems, not solutions. At the root of that is Europe’s need to rebuild trust in their citizens. If they do not rebuild trust, nothing else they discuss makes sense. The question that then arises is how that can be done.
Second, Europe needs to improve the policy framework: Improving the policy mix, relaunching investment, continuing to pursue structural reforms and promoting fiscal responsibility. All of this being mutually reinforcing, should lead to common fiscal capacity and a eurozone finance minister.
1.2. EU fiscal rules must be respected
A representative of another public authority declared that currently, in 2017, Europe is struggling with problems that look relatively small as a percentage of GDP, but are difficult to address. Europe has to push through and accelerate. Trust means respecting the rules. Structural reforms have to be implemented much more decisively to achieve stronger and persistent long term growth. Likewise, full and consistent implementation of the Stability and Growth Pact remains crucial to ensure confidence in the EU’s fiscal framework and to safeguard public debt sustainability. Monetary policy has done much to support the economy, with some side effects. However, at a certain point it will be unable to continue. The rest needs to follow.
There is a fundamental lack of trust in structural and banking reforms. Europe needs to know where the issue comes from and needs to consider what principles of banking they want to follow. In order to regain trust, it has to be shown and then earned.
Time is running out. There can be a view that the economy is picking up and in the short term the sentiment indicators in general, and in the public, show that consumer confidence is high. The representative indicated that their organisation may have welcome surprises in the next one or two quarters.
1.3. Europe needs a high level symbolic initiative.
A public authority representative stressed that the Juncker plan currently works better than initially expected, but Europe should want to be more ambitious. They should start from areas where they can get a win win from everybody. Five areas were suggested: common security; addressing migration and the ‘neighbourhood policies’; more efforts in terms of developing free trade agreements with other countries; investment and completion of the internal market; and a large initiative on youth unemployment A youth unemployment initiative would obviously need better use of structural funds. Much has been done, but Europe has not delivered. This could be a turning point.
An industry representative stated that, assuming good outcomes from the German elections, the European leaders, along with the Parliament and Commission, could decide on a package of initiatives. Some of the ideas suggested by the panel are in the economic and financial space; for example, some are on CMU. That could be driven forward on the basis of fixing dates for delivery.
1.4. A more complete EMU is the foundation for a stable and resilient euro area economy
A public authority representative explained that new projects are needed. Developing fiscal capacity for the euro area would be an important step forward, because it is a way of completing what has been done in terms of monetary banking and fiscal union. A more complete EMU is the foundation for a stable and resilient euro area economy. That type of longer term project is needed in order to keep the dynamic and to ensure the resilience of the euro area economy.
2. Delivering what has been promised
An industry representative stated that the question of how to regain trust is challenging, but the answer is to succeed and deliver. If Europe lost the trust of its citizens, it is because they made promises and did not deliver.
Regarding progress towards eurozone integration, the industry representative wondered how people can be convinced that there is strong unity in the eurozone if the eurozone are still unable to deal with the issue that nowadays does not represent a serious threat to financial stability in Europe.
Second, the problem of NPLs needs to be solved. If Europe cannot deal with that then they are not credible. The problem relates to the whole system. The Bail-in rules put in place make it more difficult to solve the issue of NPLs, but that is where politicians should step in, say that it is a real priority and that a compromise needs to be made between the Commission, the ECB, the resolution authority, and the governments of each country, to solve the problem and say that they have delivered.
The implementation of the Banking Union is not a major issue, but contradictory messages are currently being delivered. On the one hand, European leaders say that they want cross border mergers, pan European banks and such. On the other hand, there is a great deal of regulation saying that prudential requirements related to cross-border banks of the euro area are defined on a solo basis and not on a consolidated one. It is understandable that the LCR is calibrated on a solo basis, but not understandable for the NSFR; and these examples could be multiplied. Ultimately, trust is a consequence of consistency.
The eurozone should not tell citizens that they will progress, but should instead communicate that they are able to resolve the problems and legacy issues. They will demonstrate credibility if they solve legacy issues and show willingness to compromise at the eurozone level on the remaining problems.
A public authority representative agrees with the points made. Delivery is very important; however, the question is about what is delivered. Second, high level initiatives may be scary, but are sometimes needed. Europe may have a completely different union in six months’ time, with different parties in power and a new crisis to handle, simply through not having addressed the issues people are concerned about.
2.1. Building trust between citizens and EU Institutions
An industry representative explained that his experience as a banker has taught him that when one has a relationship with a client and is trying to explain that he will deliver the best service, the banker has to look cautiously at the counterproofs. The banker explains that he will help the client, give him good advice and such, but if the client then realises that the banker is incentivising him to do something contrary to his interests, because it is in the interests of the banker, then the client immediately loses confidence. To a certain extent, Europe faces the same problem.
There has to be a political agreement. It could lead to the initiatives alluded to, but the EU have often said in the past that the political initiatives on the grand mission they have are a way to mask the fact that they are unable to resolve some of the remaining difficulties. That is the counterproof for the general public, because they see why they are being told that.
Second, people are clever. They understand that there are things that politicians and parliaments are not able to resolve. If there are things they are unable to deliver, it ruins the confidence citizens have in them.
The third point is more positive. The economy is currently picking up in the eurozone. Perhaps employment and the fiscal situation will improve. Europe can either take the opportunity to resolve some of the remaining problems they have at the same time and do things that could be modest, but seriously delivered. They will then be prepared for the grand initiatives which are being pled for, which the industry representative would support.
3. Making the Banking Union a reality
A public authority representative detailed how they had begun in their notes with the question of how Europe can regain trust, and had then not known how to fill in the rest. Although the representative has been vocal about completing the Banking Union, they were not specialists of the other initiatives. Migration security is fine; it is a priority. However, there are still a number of legal, institutional and political problems to overcome before a European bank can operate in the Banking Union as it operates in a domestic market. Europe has, for instance, to complete the fungibility of liquidity capital and in a reasonable period of time.
The panel were aware of the challenges faced by the SSM, but despite it having been in place for two and a half years there are still headlines about NPLs and some troubled, and relatively small, banks. Nothing else needs to be said.
Completing the Banking Union in four to five years is not realistic so long as capital and liquidity are not fungible. The representative would only recommend that message if he saw progress.
3.1. An effort from all sides and countries is required
A representative of a national authority stated that the questions on the table are difficult to solve. At the core of the issue is the euro area, and there is a distinction between what is going on in the euro area and the EU. Much progress is being made on the proposal of a win win in security, migration and such. In the new environment, progress is being made. In the functioning of the euro area, trust is at the core of the affair.
The EU has come a long way in providing solidarity, putting together common instruments, providing financial support for countries and such. They have gone far in terms of sharing risks and bringing together difficult and unwilling national parliaments to create financial tools to provide financial support in the euro area, and so on. The commonalities are now broader than they used to be.
Rebuilding trust implies an effort from all sides and countries, and each country can contribute. If the EU does not manage issues through a common view of what the policy mix should be, they will be stuck for a long time. NPLs are a key issue which the representative’s institution will soon discuss, where they will hopefully decide a roadmap on how to address it.
3.2. The urgency of agreeing an ambitious timetable for implementing and completing the Banking Union
A public authority representative stated that the Banking Union is both an objective and a process of fundamental structural changes in the euro area’s financial architecture.
Banks are key in the transmission mechanism of monetary policy. Europe currently has a collection of national banking systems exposed to their own country, with limited cross border private risk sharing. It is a simple issue, currently more than ever before. There are ideas that discuss cutting banks’ exposures to national sovereign debt. Even if a bank has no more sovereign exposure in its balance sheet, it remains exposed to sovereign debt: if the government of the country has a problem of public debt sustainability, so does its banking sector, because national banks are exposed to the national economy.
Cross border banks operating in the Banking Union area as if they were operating in a domestic market are needed for an efficient functioning of the Union, i.e. developing cross border investment; and wider choice of financial products for clients.
There are a few possible incentives. One is to give waivers for liquidity, subject to over collateralisation and other conditions. In the revision of the CRD, the Commission suggested waivers for capital because there is excess capital in some places, but the Members of the Council did not support that legislative initiative. In such a context, trust is eroding rapidly, so it is not a stable situation. One cannot live long with an asymmetry between supervision where the responsibility and resolution are mutualised and where the consequences of potential bank failures are still predominantly national. The situation is unstable. Concrete examples include a lack of fungibility of liquidity or capital. The fact that the euro area is not considered as a single jurisdiction may result in applying higher capital buffers to euro area GSIBs. This prevents banks in particular from becoming more European. Progress is therefore needed. A public authority representative agreed that, in a way, Europe has the apparatus of a Banking Union, but without enjoying the benefits.
The industry representative added that If Europe wants to make progress on capital allocation in the Banking Union area, they need the waiver. Liquidity can currently be trapped in the different countries, banks or subsidiaries of the euro area, but it is doubtful that is legitimate. The Eurozone must be looked at as a single constituency. Members of the euro area share the same currency, and benefit from a single supervisory authority and a single resolution authority. The presumption should be that the waiver has to be granted automatically for all subsidiaries of eurozone banks, rather than the contrary. The industry representative questions why that fragmentation of the market is accepted.
To progress, a public decision maker stated that there is a need to agree on the roadmap to complete the Banking Union and, ultimately, grant a European licence. A European license granted to a qualifying institution has to be considered at some point. It has vast consequences because it is new. It has to be considered because the current process is not working too well in some constituencies, which has negative externalities for the entire project. Macro economically, the issue is not that large. It is politically difficult, but feasible. There is then a whole change in the system that is slowed down by the pockets of problems present. This also needs to be reflected on at some point. It connects as a threat which may create incentives to change or accelerate.
The representative furthermore also noted that national supervisory or resolution institutions currently overstretch their mandate. The representative wondered whether other panellists trust European institutions such as the SSM and SRB.
The representative concluded that there are serious issues with the current position. The window is relatively small, and once the political situation in the two pillar countries of the union is clarified (France and Germany), the project can then be relaunched in a credible way. It is about rebuilding trust and respecting the rules. In any case, the current situation cannot last.
An industry representative agreed with many of the points raised, emphasising that nothing is worse than unfulfilled promises. It is difficult to explain to the public that agreement cannot be found on issues that have been under discussion for years. If there is a significant political initiative, then it had better be delivered this time round.
The Chair recalled, going back to the days of Jacques Delors, and speaking from the Commission’s side, that it was brutal if one did not fulfil requirements on time. The President of the time worked brilliantly with the European Council to ensure delivery. That gave rise to confidence, and trust and appartenance européenne began to grow. It snowballs to some extent; once people see things happening and agreements are made, confidence can then be very quickly regained in the economic and financial spheres.
A public authority representative, in the hopes of introducing some optimism to an otherwise gloomy discussion, stated that progress has been made and there is room to find compromise. One difficulty in trying for the Banking Union is that, in those specific areas, Europe is also moving into inter governmental proceedings and such. The process has become difficult to manage. Decisions are negotiated and taken at the EU level, and then go through the national parliaments. All decisions on Greece, for instance, have to go to the Bundestag in a way. This has some positive effects because it is democratic and endorsed by the Parliament; however, it is very heavy and something that needs to be addressed.
On the positive side, Europe has to deliver what they have promised, and the Banking Union is crucial. Regarding the functioning of the Banking Union, there are issues with how the institutions that have been created work together and how those processes can be streamlined. It is complex and cumbersome, but work is underway.
On the banking issue there are two forthcoming issues: one related to common deposit guarantee schemes (EDIS) which is essential to break the feedback loop between banks and their sovereigns and give the same degree of protection to small deposits across the whole euro area. The other one is the common backstop to the Single Resolution Fund which is necessary to ensure the last resort credibility of the Single Resolution Fund in the case of a systemic crisis.
These issues will be difficult to address, but compromises will need to be made. When there is no willingness to compromise, the issue becomes serious. Negotiations are starting, knowing that they will go on for several years. It is a problem where a new political agreement at the highest level needs to be achieved and making compromises in both directions will be important.
4. Implementing the Capital Markets Union
A public authority representative outlined that the European economy has an endpoint and a transition period. The current situation is unique: it is one of the most difficult periods of the EU’s history, and the solutions previously outlined need to be delivered.
There has been good progress and there is good willingness to cooperate. There is obviously not enough progress in the delivery of a Banking Union, and more progress is desired in the delivery of a CMU. The benefits of the CMU are known: it contributes to diversify sources of finance for EU economies and creates a risk-sharing channel that helps smooth out incomes and consumption via cross-border holdings of financial assets.
The Italian Government recently issued a paper suggesting how to move forward. The basic idea is to look at CMU as a single undertaking, with a European approach to policymaking and a key principle for free markets to produce balanced outcomes; however, a system is also needed which can effectively address market failures. There are four key priorities. First is to effectively serve the needs of small and medium sized enterprises (SMEs). Second is to enhance the cost effective availability of risk capital funds. Third is to ensure that the rules of the game are effectively and uniformly enforced by the supervisory function, which should be an EU wide supervisory function rather than a collection of single authorities. The fiscal and legal framework for private players in capital markets will be as it currently is. Finally, more than ever, completion of both banking and the CMU is needed, alongside solutions to the legacy issues.
An industry representative questioned whether, when considering relaunching the eurozone and its priorities, the CMU was a high priority. The CMU is a positive but long term prospect. He stated that Brexit is changing the overall picture. The CMU should be a higher priority because of Brexit. That gives the EU a higher priority to develop its financial markets internally and facilitate access to the market for all kinds of companies. There is progress on securitisation and prospectuses, but it is slow. More focus and political attention should be given to the project. The representative looks forward to an ambitious mid term review process of the CMU agenda.
A member of the panel summarised that there is wide agreement that Europe will need some political power, and agreement can no doubt be reached quickly on which measures need to be taken. However, the most important issue is that it has to be delivered on time. All remaining 27 Member States have a vital interest in the success of both the Banking Union and the CMU, thus furthering financial integration.