24 April 2018

European Commission: 'The Transatlantic Economy Ten Years After the Crisis: Macro-Financial Scenarios and Policy Responses'

Vice-President Valdis Dombrovskis discussed the post-crisis reforms that the EU and the US are still working to complete and looks at some of the common challenges they face today, one decade later.

[...]Let me recall a few reforms that have improved our ability to prevent and respond to shocks:

First, we have put in place the European Stability Mechanism – or ESM - to provide support to Member States in difficulty, against the necessary policy conditionality. With half a trillion euro of fire power, it helps to ensure financial stability for the euro area.

Second, we have put in place a single rulebook for banks, and set up the European Supervisory Authorities to ensure more convergent financial supervision. We have adopted more than 40 pieces of legislation to restore financial stability and market confidence, building on the G20 agenda for financial reform. Today, our financial system is more stable and resilient, and banks are stronger and much better capitalised.

Third, the single currency calls for more integration, so in the euro area we have set up a unified framework for bank supervision and crisis management – this is the Banking Union. Along with a deeper single market in capital – the Capital Markets Union – it should help to fuse together European financial markets, and increase their shock-absorption capacity.

Fourth, we have strengthened EU-level frameworks for economic and fiscal governance and surveillance. This allows us to better tackle cross-border spill -overs and to coordinate economic policies among the Member States.

And finally - as in the US - all of our efforts were supported by the monetary policy of the European Central Bank. These actions were combined with substantial national reform programs across Member States. [...]

The euro came out stronger from the crisis. But we should keep up our efforts to ensure we are better equipped in the future. The crisis started as a financial crisis, so completing the Banking Union is at the top of our agenda.

We now have a single supervisor overseeing systemic banks. And we have a single resolution mechanism to resolve banks in an orderly manner, so that taxpayers are no longer first in line to pay for the banking sector's mistakes. These two institutions should help prevent a repetition of the massive bail-outs, capital injections, and other ad hoc emergency measures that we saw during the crisis.

But to manage a banking crisis with the least possible impact on financial stability and taxpayers, we need more. First, we need a common backstop to the Single Resolution Fund, to act as lender of last resort in the case of a serious bank crisis. There is a broad agreement that this could be done on the basis of the European Stability Mechanism.

We also need a European Deposit Insurance Scheme. This would ensure that depositors enjoy the same level of protection, regardless of where their account is in the euro area. It would reduce the risks of bank runs, and also give more time to conduct an orderly resolution of banks when needed.

Our second immediate priority is to develop a deeper and more integrated single market for capital in the EU, the Capital Markets Union. We launched this programme as a response to what we saw during the crisis: bank financing became scarce, and alternative sources of financing were hardly available. It is about giving businesses more diverse sources of funding and deepening our economy's shock-absorption capacity. And with London, Europe's largest financial centre leaving the single market, this has become more urgent.

On this the EU has already adopted significant legislation. This includes EU labels for Venture Capital, a simplified prospectus for raising capital on public markets, and new rules on securitisation. But there are many more proposals currently waiting to be adopted. Our goal remains ambitious but realistic: to have the building blocks of the Capital Markets Union in place by 2019.

Finally, markets cannot be expected to smooth all shocks alone. To be well-prepared, the right stabilisation tools to manage large economic shocks should be put in place. We also want to build on the success of the existing ESM and turn it into a European Monetary Fund. This should help it to tackle future crises even more effectively, and with greater democratic oversight. We also need to strengthen the resilience of the euro area countries, by providing additional support for structural reforms.

Our position is clear: The current economic tailwinds provide us with a window of opportunity to deepen the Economic and Monetary Union of the euro area countries. [...]

For instance, international cooperation is crucial for maintaining a level playing field for banks. So we welcome last December's agreement on reforms to the Basel III framework, which represents the last major piece of the global post-crisis regulatory reform. It is essential that all major jurisdictions implement all the key elements of the agreement, and we in Europe are committed to doing so.

But finance is changing rapidly, and new areas call for new efforts to cooperate and set policies together. Cryptocurrencies and cybersecurity are two good examples which the G20 has agreed to look into.

In addition, there is the hot topic of Brexit, which has a potentially global impact, not least when it comes to finance. The negotiations are proceeding. Important issues remain to be resolved. We cannot yet be sure of the final outcome. As Vice President in charge of financial stability, I cannot stress enough the importance of all parties – both firms and supervisors – being prepared for all different scenarios. I am confident that we will manage risks in a responsible way. And I am confident that the EU and the UK will find a new way of working together.

Fight against climate change is another global task that we need to undertake together. The situation is urgent, and the potential risks for the global economy and financial stability are high. 17 of the last 18 hottest years in recorded history have occurred since the year 2000. Last year, insurance companies paid out an all-time high amount – 135 billion USD – in premiums to the victims of natural catastrophes. This is just one example. The financial industry also needs to factor in this reality before it is too late. [We should also seize the opportunities that the transition to the low carbon economy brings.]

To tackle climate change, public money will not be enough. We want to facilitate private investment in green and sustainable projects. We need to put finance at the service of our planet. This is why the European Union has presented a strategy for green and sustainable finance.

In May, we will table a draft EU law to develop a unified EU classification of sustainable economic activities. We will define what is green and what is not. Based on this, we will be able to define EU-wide standards and labels for green bonds and other green financial products.

Next month we will also propose a law which will task asset managers, insurance companies and pension funds to incorporate environmental, social and governance factors into their investment decisions. This should help increase the awareness of sustainability risks, and steer more funding towards green and sustainable projects. [...]

Full speech

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