André Sapir, a member of the Atlantic Council’s Business and Economics Advisors Group, is an Economics Professor at Université Libre de Bruxelles and a Senior Fellow at Bruegel, a Brussels-based think tank. I had the opportunity to gather his thoughts on some key issues of interest to the Atlantic Council community.
We discussed new regulations emerging from the global financial crisis, particularly those developing in Europe.
Overall, does the new regulation plan seem to appropriately address the problem areas in European economies?
The European Council has defined a framework and asked the Commission to come up with specific proposals by early fall, which the Council will either accept or reject.
The framework laid out by the European Council closely follows the recommendations of the de Larosière report on financial regulation and supervision in the European Union presented to the Commission in March. On the whole it was an excellent report, which had received the endorsement of the Commission in April. Now the European Council has endorsed it as well, but without naming it specifically. This is definitely a step in the right direction. Frankly, one could not have realistically hoped for more at this stage given all the constraints.
Defining a broad framework based on de Larosière report was relatively uncontroversial. The real battle will only come later, after the Commission makes its legislative proposal. It’s only then that we shall see where the dividing lines are, if any, between the European countries and possibly between the United States and Europe.
What specifically would you cite in the de Larosière report that you feel positively about and that gets at some of the real fundamental issues?
There are essentially two issues they have endorsed: First, at the macro level, the creation of the European Systemic Risk Board, called the European Systemic Risk Council in the de Larosière Report. Although it’s not specified, as such, it was essentially proposed in the de Larosière that it would be chaired by the President of the European Central Bank (ECB). The principle issue is in the details: what is this board exactly, and what is the responsibility it will have? Now European leaders are only saying, ‘we support this, giving the Board a very general role.’
The second main idea of the de Larosière report regards the European System of Financial Supervisors. The Council recommended that a European System of Financial Supervisors be established to “maintain the quality and consistency of national supervision.” This would apply more at the micro level, with the creation of three authorities (the second main idea of the report). In effect the Council has endorsed both proposals.
The most contentious aspect of de Larosière is how binding those institutions should be in their recommendations, more precisely, binding to whom? The fact is that responsibility for fiscal policy lies with the Member States; that is the reality of the European Union. The aim is not creating a super, EU-wide oversight for fiscal policy. That would require changing the architecture of the Union, they are not considering that. The Council reaffirmed the reality that fiscal responsibility remains with the Member States.
Not to say that recommendations put forth by these new institutions can’t be binding in other areas, but the decision to bail out, by so much, certain institutions, should remain with the Member States, their governments and ultimately with national parliaments. In Europe, that was a demand of the British Prime Minister, who wanted this clarified, and therefore the Council underscored this in its conclusion.
Picking up on this central issue of EU authorities and whether EU regulators should have power over national spending decisions in areas such as bank bailouts: In your opinion, is this power necessary to ensure financial stability, and if so, has the right balance been struck between national and supranational authority?
In this case, I would differentiate between before, during, and after a crisis. The proposed regulations can put in place a number of bodies, like the European Systemic Risk Board and the European System of Financial Supervisors, creating a common European rule book for regulation and supervision, an important development, and hopefully will minimize the likelihood of future crises.
The question that remains however is how to deal with a new crisis if one does arise despite stringent new regulations. Increased regulatory cooperation and harmonization in Europe is important, but in the event of another crisis, how can the EU respond in the absence of this fiscal authority or without the ability to impose binding orders on countries?
Here, the Commission can be creative in its proposals. For example, it seems to me that there is still room between not impinging in any way on the fiscal responsibilities of Member States and doing nothing at all. One possibility might be to have some ex-ante burden sharing arrangement. This has been discussed in Europe, in fact before the crisis. One can look to, inter alia, the memorandum of understanding presented by the Council concerning burden sharing. Clearly, the existing memorandum was insufficient to deal with the crisis.
The EU would benefit greatly from a more precise, ex-ante burden sharing consensus delineating how resources can be pooled, how national treasuries ought to finance a clearly defined portion of a bailout (if necessary). The Commission and Council should tailor rules and guidelines to specific scenarios, with defined formulas for the allocation of burden sharing. This will probably be difficult for some to agree to, but in effect, it would not violate what they have defined as the proper course of action and it would bring us a step forward. Many have talked of a “Window of Opportunity” which currently exists, in Europe as well as the United States, to push for new regulation. This is, of course politics and it is hard to predict what the mood will be in three months, six months, etc. for ambitious regulatory reform. The Commission will need to closely monitor and consider this in putting forth proposals on what, realistically can be done.
Are there some issues that haven’t yet emerged as much that, when it comes time to get specific, are going to be contentious between Member States and which will potentially put up some road blocks to moving forward?
Thus far, the focus has been principally on crisis resolution – the ex-post piece of the puzzle, as opposed to defining the rules for preventative regulation and supervision. It is important, even during the crisis, to consider the link always between ex-post resolution and ex-ante planning. It is much easier to agree on the ex-ante by saying ‘these are the rules that we have and these are the rules we agree with,’ agreement on crisis management and its resolution has been more contentious.
One of the issues that we have not discussed is insolvency, and laws for insolvency in general, for all corporations. In Europe, insolvency is handled at the Member State level by national laws which differ between countries; there is no European regime to handle insolvency. In a single market, with many firms operating cross-border, this can create significant problems if one of these firms becomes insolvent; this requires dealing with the pieces of each country’s regulations on insolvency. This applies as much to banks as to corporations in general. Linkages between national regimes are essential to deal with cross-border companies in a single market. Without an EU-wide treasury, countries must decide where public money will come from in times of crisis management. Other matters for consideration include how to deal with shareholders, how to allow for greater cooperation between different regulatory regimes across countries, in general, and in particular for banks.
Many have noted the lack of cooperation between the US and EU in developing their regulation plans. Should international coordination be a priority for regulation at this point, and in which areas is this coordination most important?
There are two levels of international cooperation to consider, on the one hand we have the G20 framework, and on the other hand, we have bilateral coordination between the United States and EU. It’s clear that financial services and financial regulation is mostly, though not exclusively, a matter involving the EU and the United States. The G20 process is very, very important, but it’s also very important that within this G20 process there is a special attention to EU-US cooperation as the two current centers of global finance. If there is no progress between the EU and the US, then it is very difficult to make progress internationally and meaningful consensus will need US and EU agreement to be successful.
One thing we are seeing more clearly is that the processes in the US are always much more political than in Europe. In Europe the process is political in that it involves multiple Commissioners on the one hand, and the Member States on the other. But in the US, the process involves Congress, and Congress is a more formidable political body than the European Council in the sense that the constituencies represented in the US Congress are much more narrowly-focused than the member states represented in the European Council.
The European Council is also complicated (with 27 countries). But in the end, at the Council, for certain matters like this, there are really only a few countries that exert decisive power. For example, in financial markets, it is generally accepted within the Council that not every country has a leading role in financial affairs and even among leading countries different approaches can be hard to manage. However, I would say that, on the whole, because of the nature of the process of European integration, we are more naturally inclined toward cooperation than the US. Structurally, it’s somewhat easier for us to do. The key result for the US is difficulty for the administration to make binding agreements in the international process. Although President Obama, in principle, believes in multilateral cooperation in the G20 framework and bilateral cooperation in the EU-US framework, the political process in which he and his administration are engaged with Congress and the Senate limits room for maneuvering and true cooperation more, I believe, than it is the case in Europe, where the Commission is also engaged in a similar process with the Council.
Some regulatory decisions are being made in the US that may not really take into account what is happening elsewhere; the political structure makes it difficult even for the President and Congress to negotiate with each other and even more so if they are then simultaneously involving third parties. This is a risk for new and effective regulatory design.
Within the EU, do you see in the discussions any trend or emerging pressure toward less national sovereignty? Will one of the long-lasting effects of this crisis on Europe be to move the system closer to a supranational system, where the EU does take on more responsibilities?
There’s lately been much discussion on this issue in Europe, though it is not specific to the financial sector. This is especially relevant as people make predictions about the next Commission and what’s going to be the agenda. Many are promoting the bicycle theory: either you move forward or you fall off. That very same analogy is used in integration now: either you move forward or you will fall backward, that the status quo is not an option there is not a consensus on this, but the crisis has brought this message back. I used to work for Prodi when he was the President of the Commission, and he often repeated, that Europe only makes progress through crisis. That doesn’t mean that everyone is endorsing deeper integration – some people are disputing it. If you ask, ’What lessons do we draw from the crisis, and does it indeed mean that we need to move forward in order not to fall backward, because the status quo is not an option?’ This debate will likely continue and intensify.
What remains to be seen is whether deeper integration would be a broad brush over many areas, or if it will be limited to some very specific issues, like financial markets. Financial markets in particular are seen as the prime candidate for the idea that you need to move forward otherwise the risks are very, very big. You remember what Adair Turner, UK Financial Services Authority (FSA) Chairman, said about financial regulation and supervision in Europe: “sound arrangements require either increased national powers, implying a less open single-market, or a greater degree of European integration.” The point being that it’s one or the other.
So it’s either going back to national powers sacrificing part of the single-market or accepting a higher degree of European integration. The fact that this comes from the UK parliament is symptomatic of the attitude in that country. Mr. Barroso often says “if not now, when”?
Overall, I would expect deeper integration will indeed happen. Mario Monti, for example, has been making the point about deepening links between taxation regimes. Others have talked about social areas.
I would be very surprised if we have the status quo five years from now, at the end of the coming Commission. We would not have taken advantage of that window of opportunity, if we had not moved into greater integration, which means greater EU responsibility compared to national responsibility.
Alexei Monsarrat is director of the Global Business and Economics Program at the Atlantic Council. .