Mr Jean-Claude Trichet (Chairman, Group of Thirty; Board of Directors, Bruegel Institute)
22 April 2015 (Wednesday)
Event Report [Print/PDF version]
The EU Centre in Singapore and the Lee Kuan Yew School of Public Policy co-organised a talk on improving the Euro Area Economic Governance by former European Central Bank (ECB) President Jean-Claude Trichet at the Lee Kuan Yew School of Public Policy on 22nd April 2015 (Wednesday).
Mr Trichet began his talk by reminding the audience that the recent crisis was that of advanced mature economies. The first stage of the crisis affected the financial system. It started outside of Europe – its epicentre was in the United States from 2006 – 2009 and this was triggered by a large decline in home prices, leading to mortgage delinquencies, foreclosures, the devaluation of housing-related securities and the collapse of financial institutions such as Freddie Mac, Fannie Mae and Lehman Brothers. From a crisis in the financial sector, this led to a general economic recession. This second stage of the crisis did not deteriorated into a depression fortunately because of bold actions taken by the US and European governments in 2009 to intervene in the financial market.
However, the third stage – the crisis of the sovereigns in the Eurozone since late 2009– is characterised by overly high government structural deficits and accelerating debt levels. This remains the concern of policymakers in Europe today. The epicentre of the crisis was in the Eurozone, in particular, in countries such as Ireland and Spain that had similar sub-prime problems as the US, as well as the fiscal difficulties in Greece. The crisis is certainly a paradox, Mr Trichet felt, as the Eurozone area as a whole was more solid in terms of better current account balance and its consolidated deficit was also considered to be better that Japan’s or the US. .
My Trichet then went into the reasons as to why and how the third crisis unfolded. The first reason was the failure of member states to respect the framework of the growth and stability pact and the financial compact. For example, Germany and France did not think these rules applied to them and did not take them seriously. The second reason was that there were issues with the deviation of current account deficits and wage increases. This was identified by the ECB since 2005, but there was no governance ex-ante as the dominant belief was that the market economy would correct itself.
The third reason, Mr Trichet argued, was the lack of a banking union in the EU. Sovereigns and financial institutions are highly connected in today’s financial markets, and sovereigns depend on financial institutions for financing of expenditure. However, the lack of backstops for sovereigns meant that member states were left with a credit worthiness problem that not only affected themselves but those of banks as well. The fourth reason was a more political one – the EU lacked ex-ante tools to cope with the crisis. He gave the example of the US where it was easier for the executive branch to convince the legislature to create corrective mechanisms, and contrasted that to the step-intensive European policymaking process in the Council and the Commission.
Last but not least, Trichet shared what he thought was the fifth reason for the crisis – that is, the failure of EU member states to fully implement the single market and undertake structural reforms. This political problem is exacerbated by the cautiousness of Eurozone member states.
Mr Trichet ended his talk by elaborating on what has already been done and what can be contemplated to prevent further crises. The crisis has certainly spurred the EU to take tough decisions – to date, the Union has already strengthened the the stability and growth pact, created the European Stability Mechanism, and agreed on a fiscal compact treaty. It has also, introduced the European Semester, launched the Macroeconomic Balance Procedure and finalised the European Banking Union which gives the ECB more power to conduct surveillance on banks.
To go further, Trichet felt, the EU would have to consider more innovative political measures. One would be to push for a more federal Europe, with a significant federal budget for areas such as security and defence. He noted that the EU already has a quasi-federal structure in many areas such as trade negotiations and competition policy, and has institutions such as the European Court of Justice and the common currency which are already hallmarks of a federation.
The other solution that the EU can consider with regards to fiscal and economic governance would be to give more powers to the European Parliament to decide on the appropriate measures to deal with errant member states. Currently, fines by the European institutions are the measures used to ensure member states keep in line but are increasingly seen as an ineffective deterrent. The bold move suggested by Trichet would effectively allow MEPs as the elected representatives of the people to decide on the best ways to apply the Eurozone’s economic and financial rules.