The Atlantic Council of the United States
Europe Under Stress: Ways Ahead
President and CEO,
The Atlantic Council
Co-Chair, Business and Economics Advisors Group,
The Atlantic Council
Bank of Finland
Monday, September 26, 2011
Federal News Service
FREDERICK KEMPE: Welcome, I’m Fred Kempe, president and CEO of the Atlantic Council. Thanks for joining us. This is an on-the-record session, and it’s coming at a time of, I would say, historic importance for the European monetary union, for the eurozone and for the European Union.
I want to especially thank Governor Liikanen for joining us today, especially while the European Union is struggling through, I think, the greatest challenge in the existence of its common currency. We are – we’re really excited to hear your perspectives.
We’ve known each other for some time. When I was in Brussels at The Wall Street Journal Europe, at that time, we were comparing notes on the information society and you were leading DG Enterprise at the time that I think one of your counterparts was Bill Daley at the Department of Commerce, if I’m not mistaken. So you’ve watched a lot of the developments of Europe. You were one of the most thoughtful people I knew talking about the information society; you remain one of the most thoughtful people talking about this new fascinating period we’re passing through of global financial stress.
I do also want to thank Deutsche Bank. We have a terrific partnership with Deutsche Bank. You know, the CEO/Chief Executive Josef Ackermann has been on our International Advisory Board. Frank Kelly here in Washington is on our board, and we work very closely in co-hosting our speakers’ series mapping the economic and financial future, and inside, our global business and economics program run ably by Alexei Monsarrat, who’s here.
We’ve had the honor of hosting several of the world’s more important financial and economic leaders during the series, including Christine Lagarde; Bob Zoellick; Senator Christopher Dodd, shortly after the release of Dodd-Frank – the approval of Dodd-Frank; and just a few days ago, the former FDIC Chairwoman, Sheila Bair. So Governor Liikanen, you just add to this very impressive roster.
I also want to extend a warm welcome to Atlantic Council board directors. Those that I do see in attendance – and forgive me if I didn’t – don’t have your names – are Tim Adams, Roger Kirk, John Macomber, and of course Ambassador Stu Eizenstat, who will preside over the session today. He serves on the board of our directors, chairs our business and economics advisory group at the Atlantic Council, and he’s graciously offered today to moderate the session. He also has known Governor Liikanen a long time, so, as you’ll hear in a few minutes.
During a decade and a half of public service in three U.S. administrations, Ambassador Eizenstat has held many key senior positions: chief White House domestic policy advisor to President Jimmy Carter; U.S. ambassador to the European Union; undersecretary of Commerce for international trade; undersecretary of State for economic business, agricultural affairs; deputy secretary of Treasury in the Clinton administration.
What’s important to me about all this isn’t necessarily those titles, but in those titles and also in his government afterlife and between lives, he makes things happen. He makes things happen whether it’s in the – in government, outside of government; whether the negotiations for the trans-Atlantic agenda with the European Union, establishing the framework for our relationship; development of the trans-Atlantic business dialogue among European-U.S. CEOs; negotiation of Kyoto Protocol on global warming; just to name a few things.
So, with that, I want to thank you not only for your advice and counsel to many others, but also to the Atlantic Council and to me personally.
Stu – Ambassador Eizenstat. (Applause.)
STUART EIZENSTAT: Thank you, Fred, and thank you all for coming for what, I know, will be a very special session with a very special person.
We’ve brought Governor Liikanen in here today because he really has a – an enormous perspective on what is unfolding before our eyes in Europe and what has great implications for growth in Europe, in the United States and around the world. The Atlantic Council is committed to reinvigorating the Atlantic community, to effectively react to these extraordinary challenges, and we have a person here who is incredibly well-situated to discuss those.
While we are struggling to get a handle on our own long-term debt issues, the problems in Europe are, in many ways, more acute and potentially more damaging to the global economic recovery. In light of plummeting consumer-investor confidence in Europe, our European friends may already be experiencing the first signs of a dreaded double-dip recession, although I think it’s not yet there.
While Angela Merkel of Germany and President Sarkozy of France struggle to stay out in front of the developments and frankly always seem to be a step behind, the need for unity and resolve is critical, and in many ways Brussels has been disconcertingly silent. In light of the ineffectiveness of the Franco-German proposals to date, the European Central Bank has played a critical and central role. The moves by ECB to massively intervene in the Greek, Irish, Portuguese, and now Spanish and Italian bond markets have been essential to keep borrowing rates at reasonable levels, but they’ve come at a cost. Just a few days ago, as we know, Jűrgen Stark, a leading member of the ECB’s executive board, resigned in protest, presumably over their interventionist policies.
We have in Erkki Liikanen a person with remarkable experience and background and someone that I got to know when I was ambassador to the EU and he was Finland’s ambassador to the EU at the same time. He had been already Finnish finance minister when he came to Brussels; he served four years in Brussels. He then served in two commissions as Commissioner for Enterprise and Information Society and then Commissioner for Budget, Personnel and Administration before that. He has been on the Central Bank of Finland and on their governing council. He’s Finland’s governor at the IMF and president of the Finnish Red Cross. He is genuinely a man for all seasons. We have some other personal relationships that go back to his remarkable period as a high school exchange student, in all places, at Yeshiva Flatbush High School in Brooklyn. (Laughter.)
Erkki, you really do us an honor to come. We’re all very anxious to hear you, and you’re coming really at a critical time in trans-Atlantic relations and the future of the European Union and the euro, and we welcome you with enthusiasm and warmth and look forward to your remarks, and then we’ll have plenty of time for questions. So thank you for gracing us with your presence. (Applause.)
ERKKI LIIKANEN: Thank you very much, Stu.
I really – really, my first time I traveled abroad was when I came from Mikkeli, a small Finnish town of 30,000 inhabitants to New York, and I was sent to Yeshiva of Flatbush of Brooklyn, New York. I kept kosher – (laughter) – and lived Orthodox life. And I got great friends from that period. They still do. I met one of my classmates today – was working at Washington institute and studied Middle East, as always.
But I must say that my trip ended sadly because then I – we came to Washington April 6, 1968. We spent here a week. On way back to Finland, we left on train from Washington, 4th of April, arrived into Philadelphia, and the news told that Martin Luther King was murdered. We went to television, and many areas we had been walking in were burning in Washington. I – (inaudible) – this is really a picture I see in my mind always, how huge progress and development has been America. I mean, Obama is president. That was our youth where it was very divided period in the American politics, but I don’t go back there further. It’s always my – that was my first visit to Washington, this great city.
I’ve spent the last day at the IMF meetings here in Washington, and it’s been an extremely interesting and important. The growth forecast have – has been revised down for the United States and the same has been done for Europe – to Europe mainly due to the sovereign debt crisis. When the U.S. and Lehman Brothers were in the center of crisis in 2008, it’s now about Europe and sovereign debt.
Europe must be seen in global context. The present problems in Europe are nobody’s else’s fault. But Europe is dependent on what happens in the rest of the world. That was visible in 2008, 2009, and it is visible now. The global economic situation is today a matter of clearly more serious concern than it was a few months ago. One need not even to refer to the published macroeconomic forecast to see this. It is visible in the confidence indicators of businesses and households. It is also demonstrated in financial markets, where stock market indices have plummeted and long-term interest rates have decreased since last spring.
But it’s not only the forecaster’s baselining that’s changed; also, the downside risks to economic performance have increased. This create(s) uncertainty; can be seen in many places. It shows up in the gold price which has soared, as you know, and much more importantly, it shows up as flight to quality, or should I say perceived quality, in the financial markets. The fight – flight to quality is predictable consequence of the current financial conditions.
The fragility of some countries and banks combined with the heightened uncertainty regarding the future. Investors react by trying to move funds from more indebted countries to safe havens. At the same time, banks are increasingly cautious and selective about lending to their peers to the detriment – to the operation of the interbank market. Banks prefer dealing with the central bank instead. In short, liquidity preference has again started to dominate the markets.
As I said, Europe in general and the euro area in particular has become the center of the attention of the financial markets. It is not so because of the average condition of the European economy. Indeed, judging by several objective criteria, Europe is not worse off economically than the other comparable economic areas. I give you two examples.
First, in 2011, the public deficit of the euro area should be around 4.5 percent of the GDP while in the United States and Japan, it would be about 10 percent of GDP. As we know, the accumulated government debt is much lower in the euro area than in Japan and of the same order of magnitude as in the United States.
Secondly, the currency’s solid; the euro is a credible currency which, over the last 12 years, has kept its value in terms of price stability in a remarkable way in comparison with its preceding national currencies in the previous decades. The stability of the currency itself is not disputed, and there’s no evidence of distrust in it, be it in the long-term yields on euro-denominated AAA-rated bonds or in inflation expectation surveys or in exchange rate itself, which is stronger vis-à-vis the dollar now than when the single European currency was launched in 1999.
But, of course, there are urgent problems in euro area today. They are not predominantly aggregate problems, rather they are problems of divergence within the area and structural deficits in several individual member countries. These came to the surface at the time of eruption of the global crisis in 2008, when the yield differentials on euro-area government bonds started to widen. The problems of divergence and deficits have revealed serious weaknesses in the economic and fiscal convergence of the euro area, which are now in the process of being corrected.
This summer has witnessed renewed problems as markets are worried about the effects of a possible new global economic slowdown on Europe at a time when European leaders were slow to demonstrate their determination to deal with the problems of debts, deficits and divergence. In order to restore credibility and to weather even less favorable global economic conditions, Europe must move forward on three main fronts at the same time, and these are the fronts of, first, fiscal correction; second, bank capitalization; and third, economic convergence.
The necessity of convincing action in these areas has been well recognized in principle and work is under way. But perhaps I stop my introductory remarks here so that we can go to discussions. I’m ready to reply then to questions under moderation of Stu.
MR. EIZENSTAT: Yeah.
MR. LIIKANEN: (Inaudible.) (Applause.)
MR. EIZENSTAT: Thank you, Erkki. Let me – let me get started with a more general question that harks back to the days when you and I were both ambassadors to EU, and that is as follows: Is there a fundamental flaw in the creation of the eurozone, first, in allowing countries in, like Greece, that frankly did not meet, although they indicated they did, the Maastricht criteria, but more broadly, to create a monetary union without having a fiscal union and fiscal integration? And is the long-term solution to the problem in Europe to create that fiscal integration?
MR. LIIKANEN: They are very good – very good questions. I would say so that the counterpart in monetary union, on fiscal side, was from the start the Stability and Growth Pact, which means that we have the rules which applied to all member countries, and the rules apply to deficit and public debt. That is very much a German initiative, and I think they were – they were right there. So you don’t have big federal budget in Europe, but you have these fiscal rules which have – were meant to have deep impact on the – on the fiscal performance of the member states.
Was that sufficient? It was not strong enough for two reasons. First was that, in the early 2000, where in France and Germany get into difficulty with these criteria, the project was launched to make them flexible. I was at the commission then, and we were against these changes, but they were unfortunately implemented.
But what do we do now? When we have learned this crisis is that, just a week ago, council – European Parliament and Commission agree now to reinforce the Stability and Growth Pact, put more emphasis not only on the – on the deficit, but also on debts; it’ll be operational; make the decision-making more effective so that if commission finds reason for action, it’s more difficult to turn it down by the council. So in that side, on the fiscal side, I think it’s a big improvement.
There was perhaps another area where we didn’t pay enough attention, and that concerns the general macroeconomic balance. And there – this comes from my background in Finland because I was worried even when I – when we met in Brussels because we had – we were – we had very strong economy in late 1980s, and our fiscal debt was only 12 percent of GDP: one-two.
But then, what happened at the same time, first recession in the West; second, banking crisis; and third, the dissolution of Soviet Union. It was – (inaudible) – major, major market, and the Finnish economy went into deep recession, even depression. So, in four years, our fiscal balance changed. So our debt went – debt rate went up over 12 percent to 60 – six-zero – in four years. And that – what are my conclusion here is that, even though your fiscal figures look fine, if your macroeconomic balance is not in order, big recession just turns it all down quickly, and we didn’t follow enough separate member countries and their macroeconomic performance.
If you looked at the aggregate figures in euro area – and now in this new package, focus will be also on macroeconomic performance of each country. Jean-Claude Trichet will in a year – in month leave his job as ECB. He has been raising this point many times. Let’s say that, like, Greece and Ireland had very fast-growing wage (spiral ?) all the time, especially public-sector wages were really fast-rising, their unit labor costs were raising faster than elsewhere, that that was (recipe ?) problem. But there was not mechanism to tackle it early enough. And now, in this package, we get this size. So strong Stability and Growth Pact is like counterpart to fiscal discipline. It’s simply it’s about rules and this kind of joint coordination of the macroeconomic policy – macro performances in the other tools. So I think that will go to better direction.
But, third, what we need also is the markets. I’m not those who attack the markets but when things go well, they normally get excessively complacent. Look at the spreads, I mean, especially – (inaudible) – to say, four countries for a long time, when they can – when situations become difficult, the reaction is – may be excessive.
I don’t say what’s right or wrong, but you – (inaudible) – from history point of view. But I think that this market discipline is there to stay. So you have stronger rules – more effective, better implemented – and I’m sure this market discipline – the pressure – will be there at the same time. And that’s something what political leaders can read because it’s always present.
MR. EIZENSTAT: One more general question and I’ll throw it open to the audience.
With the July package that was agreed upon for the creation of about a $660 billion European Financial Stability Fund, which will be considered now by the 17 separate parliaments, there are some who feel that even if that passes, Erkki, that it’s not large enough to give the markets confidence against bank instability and sovereign debt default. Therefore, is it time to consider the monetary equivalent to the G-20 2009 fiscal stimulus, where there was a global effort involving China and other countries, the U.S.? Should there be in effect a massive multitrillion dollar package, which backs up the European Financial Stability Fund, which includes contributions from the central banks of China, the Federal Reserve, and others so that it sends a very clear signal to the markets that there’s enough firepower in there so that whatever happens to Greece, there won’t be a contagion or do you think the EFSF is sufficient?
MR. LIIKANEN: I think that’s very important question. I – we have only now the – also the problem of timing in the sense that, if you want to get things done in Europe, where you have 17 euro area member countries or 27 member countries, you need to be strict in two issues: have a clear focus and have a strict timetable and don’t lose the attention.
If we now leave the – (inaudible) – off, we may have got – not get through our July 17th – July 20th package. So I think it’s very important for us now to implement what was decided, get EFSF which is more flexible, which can finance bank recapitalization, which is very important, which can after certain procedures go to the secondary market, which is more flexible than any arrangements before that we just needs (sic) to get it done now. I accept your question and the question, for instance, for then – for the European stability mechanism which will be then the permanent system after this temporary one, which will be capitalized. Could it be leveraged? I think they are fair questions. But for us, now, because we have this, you know – next couple of weeks are critical that we get the decisions implemented; I think we must keep the focus there first.
MR. EIZENSTAT: Questions, please.
Yes. Identify yourself as well, please.
Q: Hi, I’m Tapio Christiansen from Kraeb Gavin Anderson. Governor Liikanen, I wondered if you could comment a little bit. There’s been a lot of focus on how the difficulties within the eurozone are perhaps affecting the domestic political situations of eurozone member countries, and I think we’ve – certainly we’ve seen that in Finland and elsewhere. Do you think that this attention is overblown or do you think that there are going to be long-term domestic political effects?
MR. LIIKANEN: That’s a good question. I – whenever I look at the domestic political difficulties, I always start from the country where I am then. If I look at the United States, how difficult it was to negotiate about the budget. I mean, it is not normal situation; it’s extremely complicated. And I must say, we have equal difficulties in some countries and, just to make long story very brief, the – even the countries like Finland, the Netherlands, which are open economies, were benefited a lot about European Union internal market, its trade policies which have been for open trade (to the world ?) or budget/competition policies, who have very strong growth for a long time, feel that it’s unfair that when those countries who didn’t play with the rules get difficulties that we need to pay and why we who were above the budget – with no budget deficit, need to finance those who didn’t keep the control. And that’s a fair question, and that’s difficult.
But – give you an example. These open economies like Finland: We had no banking problem at all; in fact, we were – banks were well-capitalized; the economy was competitive. But the crisis which was triggered by Lehman crisis – at Lehman Brothers pushed our GDP down with 8 percentage points – 8 – highest fall since 1980, because we are an open economy, we’re dependent on the world.
So it’s hard job to explain to people that if international economy will go through a severe shock, that the expectations will fall – if the world economy goes through a downfall, it hits us hard, but we just need (to do ?) the explanation. It is difficult, but it needs to be done, and I’m sure that still in these countries the – this voice of reason will win, but it will be hard, and it’s more work what will need to be done.
But as I say, I look around in the world nowadays, I see that in every single country, the politics become often more divisive. Look at Greece, a (perfect ?) example, government and opposition, no agreement on a single issue, even though the present opposition was in government eight years before this all started and is not, let’s say, innocent bystander. No, no agreement.
Some examples were better like Portugal they tried to do it, but in most – many countries, it’s extremely divisive even though the issues are shared for the whole country. So it is – it is more difficult, but I still believe that we will see now, in October, that still this voice of reason will win and those decisions will be implemented and we are – we are a functioning system, even though we have 17 member states.
MR. EIZENSTAT: Yes, please.
MR. EIZENSTAT: Again, identify yourself, please.
Q: Nicolas Veron at the Peterson Institute for International Economics here and at Bruegel in Brussels. My question is about the banking system, which is addressed in your written speech and very briefly in your oral remarks. Clearly, it’s a prominent piece of the puzzle right now, and there’s this new mantra that Europe needs to recapitalize its banks. But this is too simple a way to look at it because, as you say in your written speech, the important thing is not to recapitalize the banks in general but to identify the weakest links and to address them.
My question is, what’s the technology to do that in Europe? There are financial resources with the EFSF supposing all the legislation is passed that allow the EFSF to lend to member states, but member states haven’t done a very good job so far at identifying the weak links. If we look at the dynamics of the stress tests, they have very much been about member states refusing to identify their weaklings. So how is this going to work in practice? How can we ensure that the recapitalization of banks, if it happens, is not directed at banks which don’t need that money, but it’s directed at banks which need that money and especially those who need – which need heavy-duty restructuring? Thank you.
MR. LIIKANEN: I think these are very good question(s), and I’m the first to say that we must understand there’s a big difference here between America and Europe, that in Europe banks are critical for financing. They are – they are financing the business activities. In America, there’s not a lot of financing which is outside banking system because we’re all – (inaudible) – banking, but two-thirds in Europe is done by banks, and here it’s the opposite. So banks are critical. And so that if banks have a very – are not properly capitalized in difficult situations, risk is their capacity to lend will be diminished and that will be contribute to weakening of the economy. What has been done?
We had stress test in summer where we tested all the banks against a recession scenario for next year’s – its worst economic scenario what happened. One element was there that fall of (7.15 percent ?) of stock market, if this happens, but we are not in recession. And then we found that, you know, there are a lot of banks who are below 5 percent/tier 1, this is genuine (own ?) capital and then a number about – that they failed, big number were between 5 and 6 percentage – percent. And now IMF actually Friday – Saturday updated this data and they saw that in Finland – in Europe, all these banks who were below 6 percent have now recapitalized themselves, and we now know that they are there. So they are identified one by one. So I must say that this stress test has been a good incentive to do this work properly.
Second, of course, which has changed now, is the market pressure, that they clear even though we say that six is good. There’s pressure in markets that you need to have more. And many – we have seen many banks acting at the moment – taking actions at the moment to have medium-, long-term plans to take into account Basel III agreements which are coming to have strong capital base. I think this market pressure goes to the same direction.
You come to the weak ones, I think that’s very important, that we need to have proper bank resolution systems. May I (will say ?) when I’ve been following what happens to America that American deposit insurance corporation and the legislations there, I mean, they are very advanced. And European system we have national systems, but not – we have not European solutions. They are – they are on the table. There is some development, but I think that is the area where somewhere we have – where (problems ?) in the system is to have resolution systems which can properly tackle then this kind of cross-border solutions.
We need to do more there because if some – this crisis left a lesson to us, it is that, for the banking crisis, there are two issues which are not solutions. One is bankruptcy; the other one is that taxpayers pay, because you can’t have private profits and social losses, as has been often the case, and a bankruptcy without proper resolution is also systematically very difficult. So you need to have a good resolution – solutions by which the weak banks can be reorganized, restructures, taken back to market. And I think we – on the European level, we have work there to do. On national level, in some cases, it has worked, but there in America, your system, FDIC – FDIC – (changes pronunciation) – is quite strong, not always popular, but it’s well advanced.
MR. EIZENSTAT: Yes – (inaudible).
Q: I’m John Macomber, a member of the council and a former and still director of Lehman Brothers. (Audience murmurs.) Let me follow on from the first question – first question, which has to do with the specific differences among the different groups of European countries about how aggressive or how not aggressive they want to be towards refinancing the struggling countries.
MR. LIIKANEN: Yes, I think the key issue is that this European Financial Stability Facility is functioning by guarantees. The permanent mechanism will – which will enter into force in 2011, it functions by paid-in capital, so there’s a difference. But as long as you work with the guarantees, then rating has more importance than does paid-in capital. So that if you have AAA rating, it has a lot more weight. So the share of those countries who have AAA ratings is relatively bigger than future systems. So it seems to be so that, is it by accident or is it the consequence that in those countries the discussion is the most difficult, which are Germany, Netherlands and Finland.
Those – but I trust – Germany has a long history in European construction and they’re the – they’re the – of course, government opposition have battlefields in many territories, but it’s not mainly on European policies. So SPD and Greens are, let’s say, pro-European (pride ?) tradition.
The Netherlands has a political situation – it’s a very special one – because they don’t have majority government at the moment though they have minority government, and they need to win always the support of Parliament on the major issues and that has consequences.
In Finland, we have today a majority government where government parties are strongly committed to be a constructive member of the European Union. But this particular issue, Finnish issue was related to the, let’s say, post-election period. When we had to sign the agreement to support Portugal, Finland didn’t have political government at all because it was just after elections; new government was not formed. So they had to negotiate that in Parliament, solution where conditions were put there which now are binding the government. They feel it’s binding despite a government program, and now we just need to settle that issue in the next few weeks and I’m more optimistic today than I was a few months ago.
Q: Let me just add a, you know, just to pursue a little bit further. This kind of an environment usually or one could think would lead to the minimum amount of push and acceptance, a minimum amount of funds from the European Community towards the countries that really need a backup. It’s not going to lead to what we find and what we found in this country is not just what you need, but demonstrating when you do the initial thing that you have plenty of other firepower ready to go. And it sounds to me from what you’re saying that what’s going to – might happen here is Europe is going to come to a consensus and do what they can, but that will be the minimum that they can negotiate with the – with each other; it’s not going to be the maximum to send a message that nobody is going to tinker with us anymore. Nobody’s going to have to tinker with us anymore.
MR. LIIKANEN: Yeah, yeah.
Q: Can you comment on that –
MR. LIIKANEN: Yes, I –
Q: – because that is the message that’s coming across to the American financial community, that Europe is going to do as little as possible in order to solve the problem as opposed to saying we’re going to solve the problem and, by the way, here’s what else we can do.
MR. LIIKANEN: I mean, I – on this point, I think it’s very important that your facilities big enough and flexible enough to have sufficient firepower. But I, at the same time, want to say that when we are just now in the post-ratification of the – of the agreements, if you open that debate that perhaps that’s not the solution, then you easily have a situation to get nothing done. So we just need to keep our minds focused, fix this issue now and then look forward.
At the same time, of course, those countries concerned, which have been under stress, they much implement their political programs, which are difficult, and I understand – if I may, excuse me, but just two comments on that. One is the deficit. You must have healthy primary surplus so that you have more revenue than in expenditure into – taking into account the interest rates in these costs. If you know that’s it got a healthy surplus, you can never settle your debt in the long term, and that’s first issue.
Second is you need growth, and many of these countries were in difficult – they have a problem, and their countries are – their economies are too regulated, they are too many closed professions, you need too many licenses in many areas. You need to open the economies, do the structural reforms in productive labor markets, and be there very, very strict.
People have criticized lot in – I mean, Greek performance, but they started at least this. It leads always to massive problems because those people have vested interests will fight back. But they should – they should not hesitate. They must open the economy because this openness keeps possibly the new entrepreneurs, new initiatives, and by that way they can easily (devise ?) the growth. And especially, I must say, this is the case in Greece, it is case in Portugal in their program. Ireland is perhaps different a little bit there. But also very important for Italy in areas that this kind of growth side of their programs – political program must be equally important than this – (inaudible) – consultation side.
MR. EIZENSTAT: I’m going to call on this young lady, but I want to just underscore what Mr. Macomber said because I was trying to suggest this as well in my – in my opening series of questions. I think that the fear on this side of the Atlantic is – and I understand your point and it’s a good point – not getting distracted, getting this July package passed, and not gumming it with a lot of other things. I think the fear that once that’s done and that may be the middle of October, that the market will then discount that by saying it’s not big enough and if there’s not something that is ready to undergird that fund then we may be back in the same cycle as well and that there is a need in some way to throw absolutely massive firepower at this problem, not to distract –
MR. LIIKANEN: No, no.
MR. EIZENSTAT: – what you’re doing, but in fact to encourage –
MR. LIIKANEN: Yes.
MR. EIZENSTAT: – the governments by saying, look, if we do this, we’re going to get more help from the international community. So –
MR. LIIKANEN: OK, I take your – point is well taken, yeah.
MR. EIZENSTAT: Please.
Q: Good afternoon, Sujeen Chou (ph), Langham Partners (ph). Could I follow up your remark on Portugal and Greece? The Finnish government position on ESF – a temporary loan guarantee program is quite different between Poland – Portugal and vis-à-vis in Greece, and my understanding is Finnish government has requested Greek government to provide collateral issues and a, what would it be sufficient to meet Finnish government? Would a symbolic gesture of the Greek government will be sufficient?
And B, would you see as – this as a bilateral issue – Finnish and vis-à-vis Greek as a bilateral issues? And what is the legal perspective of how to deal with these issues? Perhaps you can ask Ambassador Eizenstat, who is a well-known lawyer on these issues. (Laughter.)
MR. EIZENSTAT: And C, if Finland – and C, if Finland asked for it, why shouldn’t the other 16 – (laughter)?
MR. LIIKANEN: That’s to say, in theory, (in our ?) constitution, there’s a big difference between government and central banks. We are fully independent. The central bank’s fully independent; I can’t take any advice from government. I may give some, but I can’t take any. (Laughter.)
That’s (right ?) on that issue that the solution must be such that all euro area member states accept it. And that is critical. And that’s why it’s not easy to find, but I know they are working hard, and I hope this issue will be settled in time in the sense that Finland will be back in this middle field in European construction. You know, that’s been kind of a middle-field player. I mean, in football, that’s important, you know, to kind of put ball (in both ?) direction, but the key – (inaudible) – is always moving up front. But it must be a solution that all member states accept, and that’s important. So it’s not only – it’s not bilateral only. It must be accepted by all.
I understand all your questions, but when it’s not in the hands of government, that negotiating, I don’t want to distract the discussion at all.
MR. EIZENSTAT: Yes, sir? Yes, please.
Q: Thank you. My name is – (off mic, inaudible) – from the Institute of International Finance. You made three statements, which I fully agree: One, bank lending is important for the euro area growth.
Two bank needs to recapitalize, but basically they do it to improve the capital ratio basically. And they do it by shedding assets, basically by deleveraging and therefore by not lending to support growth.
And number three, growth is very important. So I agree with all three.
Question: What do you think the European governments, European Commission should do to stimulate growth? For example, should the ECB in the next meeting take back the hikes that they have done in previous months, which with the benefit of hindsight seem to be – to have been a bit premature?
MR. LIIKANEN: Let’s first stay on the general conditions for growth. I’d say it’s very important here that you keep this internal market well-functioning, you open the closed sectors into competition, you increase competition – productive labor markets. And these are fundamental issues where we need to go forward. And those countries who have moved the most have been most resilient in this phase.
And I must say that to many – I mean, when we were in Brussels, Germany did big reforms, led by – (inaudible) – and Schroeder (ph). They had a deep impact on the performance of Germany because they major – (inaudible) – in the labor market, that – the youth unemployment fell down dramatically due to these reforms. And that’s why they had this supply-side input, which was very strong, this crisis. Their unemployment fell just very briefly but came back very strongly. So you need these reforms.
On monetary policy, just to say that we never pre-commit – I don’t make statements about monetary policy, but you – I made – perhaps one remark there is that when you saw our position in the last meeting of the governing council and compare that with the previous one, in August we said that risks for growth are balanced, and risks to price stability are on the upside in September. In our assessment, which was based on the – on the forecasts, which were rather recent, we saw that risks to inflation are in balance, and risks to growth are on the downside.
And my personal opinion – and we’ll be working on these issues very much – also, the Bank of Finland – is that the risks to growth are substantially on the downside. But we will discuss the monetary policy next time actually in Berlin, because in the European Central Bank we have a tradition that twice a year we have a meeting in one of the member countries, and we will be in Berlin in October. It happens to be, by the way, the last monetary policy meeting chaired by Jean-Claude Trichet. It is in Berlin.
MR. EIZENSTAT: Yes.
Q: And Mr. Liikanen, my name is Patrick Welter with the German newspaper Frankfurter Allgemeine Zeitung. Can you tell me – the discussion about leveraging the EFSF is already on and even if you want to put it beside (sic). But nonetheless the discussion is going on in Germany, and the German government had made clear over the weekend that they are in favor of that.
So could you tell me, are you in favor for the ECB taking part in that exercise? So should the ECB help leverage the EFSF?
MR. LIIKANEN: Thank you very much. I know this discussion is quite, quite active in Germany now, but I just don’t go to any discussion for the future. I mean, I’m committed that we need to implement decisions of July now. And even though I’m independent our government, we have a particular challenge at home also, that issue. And we need to fix it, agree on everything, put it in place. And if any discussions on future issues, we can get back to that after. I don’t want to – it’s a good question, but I don’t want to distract the focus now on that – (inaudible).
MR. EIZENSTAT: (Off mic.)
Q: Thank you. Kris Bledowski from Manufacturers Alliance – Mr. Governor, as a member of the ECB Governors Council, could you comment on the remit of the European Central Bank?
We know that the ECB provides a short-term liquidity at discount window against collateral, and that’s beyond dispute. What is a little bit more shaky is, the role of the ECB is the lender of last resort vis-à-vis the sovereigns. But I would not like to go into that issue.
Rather I’d like you to comment on the role of the ECB as the lender of last resort vis-à-vis the banking system, vis-à-vis the financial system. For example, in the United States when the 2008 and ’09 crisis hit, the Treasury hit – with the – with the TARP, versus the Fed provided a TALF facility so that both the Treasury and the central bank were in a way intervening.
How would that happen? Should there be a crisis – I’m not saying there will be one, but should there be an impairment to the balance sheet of the financial system in Europe, what would be the division of the national treasuries vis-à-vis the European Central Bank both acting as the lenders of last resort?
MR. EIZENSTAT: And Erkki, if I may just crystallize that excellent question with – we talked before the session about Secretary Geithner’s visit in which he was in effect suggesting that the ECB move to a broader mandate more like the Fed in which it’s not concerned only with price stability but takes on, as the question suggests, a broader function, which it’s in a – in a sense inched into already. And maybe you can – you had some interesting thoughts on the Geithner visit as well.
MR. LIIKANEN: Can I just start from Stu’s question? When I – when I read the media reports yesterday evening and today on the IMF meeting over the weekend, I sometimes felt that I was not in the same meeting. (Laughter.) And I don’t criticize anybody. The question is that there’s so much talk, so many interviews, it gets big, big choice – (inaudible). And – (inaudible) – I went to GVS (sic) to buy some stuff yesterday. And who was in front of me? Christine LaGarde buying her – (inaudible, chuckles) – where we had the same – I like this democracy. You know, it was at Georgetown, you know, M Street GVS (sic), so we met there and had the analysis of the situation. (Laughter.)
But – and we very much had the situation that it was actually better.
And why I say so is that I’ve been in these international meetings since I came to Yeshiva – after that, always. And what irritates you often is that if somebody thinks that they have found the truth and they want to lecture to others, you may want to lecture, but no one – nobody wants to be lectured. You know, this kind of atmosphere you – where you start to say what others should be doing – now, that’s sometimes be extremely omnipresent at international meetings. There was nothing of that sort all this weekend.
This crisis has led to situation that somehow all leaders from all parts of the world knows that if there’s a problem we can’t contain, we will all have a problem soon. So atmosphere’s extremely open, constructive. And everybody has a right to tell what he’s experienced.
I mean, we don’t – nobody takes as insult that – that’s the way we did it. Why don’t you look at it the same way?
So when we talk about European issues, Europeans talk about American – we talk about emerging economies. They come back. They key issue was that that was a shared – that was a shared problem. So the European sovereign debt problem is a problem for all. They hope we settle it. But of course they know that we need IMF and the others there, too.
So I’d just say this about the – (inaudible) – on liquidity, I come back to my previous reply that there’s one big difference between the European and American system of financing enterprises. In Europe, it’s the banks. Here, it’s banks and the markets. So if you can’t – if you only support banks, but you don’t have impact on the other parts of the securities market, you can’t – you’ll make – don’t make the difference.
But for us, you can mainly do – you can do it through the banks. And for that reason, in liquidity side, in Europe, ECB’s position is very clear in the sense that if the banks have collateral, we will give the liquidity that it wants. And how does it work? This was actually – this instrument was developed in crisis 2008. Until that, we organized auctions. Regularly, they had to give their bets. But when there was – a crisis emerged, we saw that the liquidity premiums went very high. The monetary policy transmission failed.
So we started to give the money on the policy rate as much as they needed. We call it fixed-rate full allotment. And now it means that in our operations, banks know that if they have collateral, they get as much liquid as they want. So they – it’s not liquidity risk. (Inaudible) – it’s not liquidity problem.
During crisis, we went also to normal operations, you know? A normal operation is one week, one month. And then long-term operations are three months, six months, even 12 months. So we prolong that. And that is still in our toolbox.
Then of course the limit is that, do the banks have the collateral. Do they have enough? Already now the bank lending, what we are lending to banks is about five (hundred billion) to 600 billion. But in the collateral pool for those loans, we have 1.6 (trillion), 1.7 trillion. And still the banks are beyond this (important ?) demand of assets. So when – in the markets of discussions that, do the European banks have a liquidity problem, I’ve said there is no euro liquidity problem because of the ECB system.
And we work it so that we don’t have – (inaudible) – like New York, you have – (inaudible) which last – (inaudible) – market operations. In our system, Frankfurt, we in Frankfurt decide about policy rates, but the implementation of policy is done in all cabinets of the member states. Like, in Finland, we are healthy – we have counterparts who have kept liquidity in the way they want. So that issue is quite clear.
And then added to this, we had agreement with the Fed, the Bank of England and the others on dollar liquidity, which was signed recently, so – which is also adding up to this. So I think it’s very positive. And if I say – I would say one also important remark would – what we have learned in this crisis – the – because it’s been so global and central banks have been so close to connecting day and night, 24/7 during this crisis, I mean, it’s very impressive mutual trust and respect in that community. And it’s able to work together.
(I would say ?), I’ve never seen this anywhere else. And that has been – it’s important to know for us that in this crisis the central bank community works, there’s trust, there’s respect, they know each other and they are able to move. But it was – a good example was what we have been doing.
MR. EIZENSTAT: Yes?
MR. LIIKANEN: Reuters.
Q: Marc Jones from Reuters, yes – it was on your liquidity point you made. As you said, in your toolbox, you’ve got these one-year operations and these six-month operations. But now considering the crisis and the fact that banks in Europe are so important in lending to the sovereigns – and as we know, the sovereigns, the Italys and the Spains, you know, they’re facing one, two, three years of potential rehabilitation here. Would it be perhaps an (option ?) to go even further than that, or is there technical limitations? Is there technical reasons why you wouldn’t go beyond that?
And the other question is on the dollar liquidity you said, but one of the reasons why the banks haven’t been using the dollar liquidity is because the swap rate’s actually very, very expensive and prohibitive, and that creates a stigma. So now you’re doing three-month operations again. Would it be wise to maybe reduce that difference with the Fed?
MR. LIIKANEN: You know, he’s from Reuters.
And I accept your question. If I say something wrong, it will be on screens in 15 minutes. So I will not make – (laughter) – I’d just say – I’d just say that the – what I want to tell is that what is different with this crisis compared to 2008 is, 2008, we had to develop the toolbox if this kind of difficult liquidity situation emerges.
It’s a lot of reflection, sometimes improvisation, a lot of innovation, but now we know – we have the toolbox. We know how they work. What are the problems? So we are – there we are in a different situation, but I don’t want to say anything (on ?) what further steps we take. I accept the question, but we have a toolbox, which we have tested. We know how it works. And our counterparties know how it works.
Can I just – so come back to a question about Tim Geithner and the difference between the European Central Bank and the Fed and so forth. One is that banks are more critical here, and the other – of course the issue on this government debt is that we have a trigger saying we cannot buy government bonds from the – from the primary market. And that’s a very important decision. We must remember that for – in American history the depression is the great thing you all know.
In German history, it’s the hyperinflation. And you need to understand and respect each other’s history. You know the dramatic consequences that happened in Germany. And for that reason, in Germany bank, the government debt issue is – (inaudible). You don’t buy from the primary market.
In our treaties, secondary markets are allowed, but of course it’s all so formal, so – but whenever you go to the area how we operate with the governments, it’s of course sensitive, but we must work in the way which is very rules-based. So we have been following the treaty so that in the secondary market, you can be – primary market – (inaudible) – market is excluded.
MR. EIZENSTAT: Yes?
Q: If I may ask again, Mr. Liikanen, concerning the liquidity question, there’s a proposal coming out from the G-20 being – (inaudible) –
MR. EIZENSTAT: Could you speak more into the microphone?
Q: Is it better like this?
MR. EIZENSTAT: Yes.
Q: OK, sorry. There was a proposal concerning the liquidity question, the proposal discussed in the G-20, which will be decided in Cannes to have some kind of short-term liquidity credits being given by the IMF to countries to solve liquidity problems all over the world and maybe even in European peripheral countries.
Do you have any statement on that or any – what is your position on that? Is this going too far concerning the – because it’s going to intervene in monetary policy by central banks? Or are you in favor of that proposal?
MR. LIIKANEN: Yeah, I’m sorry, but we are – we participate everywhere but not in G-20 meetings. There we are too small a country, so I’m not around that table. So I don’t know exactly the details how discussion was taken, but I can come back to that, if you – if you want, in email. I have not all the data on that matter.
MR. EIZENSTAT: Let me – let me close with one very big question.
MR. LIIKANEN: Do you want to go – (inaudible) – to Fred? Well, he’s hosting –
MR. EIZENSTAT: No, I’m going to ask Fred’s question – (laughter) – because Fred, you and I talked about this, and Fred of course was at The Wall Street Journal Europe. He knows Europe as well as anyone and he’s been a fantastic leader for the Atlantic Council. He’s really invigorated this institution, and it’s been exciting to work for him.
And he asked, I think, the right question to end with. And that is – Fred, if I’m not misquoting you – is Europe now in an existential moment in terms of European integration, in terms of the future of the eurozone, in terms of the future of the euro? And if it is, does it have the political will to deal with that, or are we just going to keep nibbling at the edges, hoping that we can kick the can down the road?
MR. KEMPE: And could I just say, not just the political will at the top but the public –
MR. LIIKANEN: (Yeah, yeah ?)
MR. KEMPE: – not just the political will at the top but the public support. Even if one wanted right now fiscal and political union at the top, I can’t imagine a European populace that would, through referendum, support anything that would have to be done by treaty at the moment, so I think the public sentiment also on that issue –
MR. LIIKANEN: If I take the historical – the historical perspective of this first that – of course when the EU – EEC was founded, we had great statesmen who negotiated, that made the agreement. It was well-received and it was done. We had, you know, Jean Monnet and we had Robert Schumann and the others.
Now it’s different really. I mean that – we have – (we had ?) a situation where in the European project, we will have a lively debate between political leaders and people, media. We will be faced by more pressure from the outside. We need to convince and work more in that territory. I accept that has changed. But still, still, when knowing the new generation of European political leaders, we (put them the ?) question that, has internal market in Europe served you well?
They say yes.
Do you think that it’s right that we have strong competition policy in Europe, so that we have product and labor markets which are free?
They say yes.
Do you share European values?
They say yes.
Do you say that Europe has been beneficial not only for euro-area countries but for the others?
Both those countries were inside euro. Those who are outside say that it’s been a terribly important approach. So you shared –
So I’m sure that we’ll go through this crisis, but it will be difficult, more complicated with the people, and the international context very challenging. We must remember that, you know, Europe has been tested by the crisis, which is the biggest of our generation, the biggest crisis of our generation in – which was triggered by the financial markets. We’ve been – (inaudible) – terribly difficult circumstances.
We have been able to stick to our target of price stability. We have been able to operate – take care of the liquidity. I mean, that’s – monetary policy target is price stability. We’ve been able to – (inaudible) – liquidity banks with nonstandard measures. (Countries have ?) still been able to cut their deficits down in difficult situations.
There has been progress, but we need to (do it and do it ?) more. It will be more difficult, but I am convinced that still in the – in the crisis Europe normally performs better than in good times. In good times, (you’ve ?) been complacent. In crisis, you must get the best out of yourself.
MR. EIZENSTAT: Well, I’ll close by saying we’re in one, so this will be a great test. (Laughter.)
Thank you very much, Erkki.
MR. LIIKANEN: Thank you. (Applause.)