A New Deal for Europe2009-02-17

Europa behöver en mer samordnad, djärvare och mer långsiktigt inriktad krispolitik - och Allan Larsson har några intressanta idéer.

Ja, de flesta verkar för närvarande vara överens om att EU:s krispolitik är för svag och illa samordnad.

Men vad ska EU göra?

Allan Larsson, Sveriges tidigare finansminister m m , talade häromdagen i Europaparlamentet - och talet borde läsas av fler.

Här är det:

" EP Joint Parliamentary Meeting
on A New Deal for European Economic Recovery?
16-17 February 2009

by Allan Larsson

Thank you for inviting me to this high level conference as guest speaker. I would prefer to be seen as a concerned European citizen, rather than as an expert. The reason is that the storms we experience today are much stronger than any financial storm of the past - no one can be an expert on the crisis of today.

Let me give you one example. One of the best placed persons in the world to understand the financial markets wrote last summer that he, in 2007, had been ”appalled and shaken when the financial system failed to protect itself more effectively against a euphoric boom”.

However, in summer 2008 he was convinced that the worst was over: ”The markets, meanwhile, are already repairing themselves… it is investors, not regulators, who are changing the dynamic of finance”.

In summer 2008 he saw inflation as the big threat - not the melt down of big institutions on Wall Street, not the global financial crisis, not a world wide slump.

The man who wrote this was Alan Greenspan in the second edition of his book “The Age of Turbulence”2. Thus, it does not help to be well placed and having a global network. Analysts, policy makers, central bankers, politicians – all are fumbling in the dark when seeking strategies and policies to turn the slump into recovery.

The crisis: Need, greed and feed

What have we learned, so far, about the present crisis?

I think we can summarise the origin in three words: need, greed and feed - poor people's need for housing, rich people's greed for money in the Wall Street and elsewhere and the feeding of the US economy with cheap money - mainly from China and the rest of Asia.

We can also identify the huge challenges facing Governments and Parliaments.

First, rescuing the financial system and reforming regulation

Second, restarting the economy.

Thirdly, rebalancing the global economy, tackling the huge imbalances between Asia and the US in saving and consumption

Finally, on top of all that, restructuring the global energy systems for long term sustainability.

Each one of them is a huge challenge. To tackle all four at the same time – no decision maker has ever faced such a challenge. The choices you - and other politicians - will do this year, will determine the fate of the world economy, maybe for generations.
My modest contribution to your debate will be to offer some questions and reflections based on the expertise of others, some of the leading economists in US and Europe.

Rescuing the financial system and re-regulate financial markets

The most urgent task is to rescue the financial system. The markets did not repair themselves, as Alan Greenspan predicted. “Development in the banking and in the near bank system … have in fact caused serious harm to the real economy. The changes, which we need to make …..will be profound”.

If you think that this is a criticism from the left, you should know that these sentences are quotations from Lord Turner, Chairman of UK Financial Services Authority – “serious harm, profound changes” – these are his words3!

Central Banks, Governments and Parliaments have worked hard for several months to rescue the financial system – they might have prevented a total melt down, but they have not yet succeeded in stabilising the system.

The fact is that “the financial system is working against recovery and at the same time the recession is putting greater pressure on banks”, to use the words of Tim Geithner, the US Treasury Secretary4.

Cleaning up Wall Street is key to get the banking system start working world wide. But the new US plan launched last week, a 2.000 billion clean-up, did not impress on experts or the markets.

The plan addresses one severe problem, lack of liquidity in the system, but it does not seem to address the other severe problem, the fact that a “sizeable proportion of financial institutions are insolvent”, as Martin Wolf in the Financial Times reminds us5.

There is a “black hole” in the financial system, it needs injections of capital, and governments need to play a leading role in this process. However, citizens are angry with the banks and politicians have an ideological blockage against a big role for government in banking and business.

The Head of the International Monetary Fund, Dominique Strauss-Kahn said the other day that measures to clean up the banks and revive the housing market in the United States are needed urgently. But they are no longer enough. He called for a coordinated global response and urged governments to restructure banks, including full fledge intervention, providing public support in the form of capital, selling or winding up insolvent banks quickly, and establishing new public resolution agencies to manage “bad” assets6.

On regulation I think there is broad agreement that regulation must be co-ordinated globally, not just within Europe7 and that G 20 is the right place to do it. But there is also broad support for tighter EU harmonisation as a first step. Europe should follow its own example in trade policy. “Repeating this success for financial regulation will benefit both Europe and the world”, to quote FT8

The European Parliament, having adopting the Nyrup Rasmusen and the Lehne reports 9, is well prepared for this process towards “a new global order”.

Recovery: asset prices are the key

Rescuing the banks – and restarting the economy – these are the top priorities.
Governments are launching one stimulus package after the other. The US Congress last week approved an 800 billion dollars fiscal stimulus. So have most European countries.

Should we be impressed by these huge figures? Or worried about lack of fiscal discipline?

When listening to political presentations of recovery plans, you have to look beyond these headline figures. I would suggest that you make a test by asking a few questions:

First, what would be the cost of non-action by governments when consumers and businesses are cutting down - and what is the return of a proactive policy?
Second, how much of these measures are really new measures, contributing to restore general demand - and how much is simple window dressing?
A third question is whether the measures are supporting or undermining the Single Market
And finally, what measures are giving the best return in terms of a lasting recovery?
On this point, on the best return of measures, I would like to introduce for discussion some ideas presented by Michael Spence, professor at Stanford and Nobel Prize Winner in 2001. His message is that the crisis started in the housing sector and that the housing sector is of fundamental importance, when seeking solutions both for rescuing the banks and for restarting the economy.

Asset prices are key – it is mainly about house prices. As long as asset prices are falling, which they do, the economy will continue to go down. Central Banks can do a lot, but Michael Spence also suggests targeted fiscal measures:
“To address the …deflationary effects, we need not just a significant stimulus package ….but a larger and much more systematic programme of buying assets.  Housing and mortgages would be a good place to start”, Spence argues.  “With-out such a systematic programme, asset deflation will very likely …. undo some of the beneficial effects of a stimulus package and vice versa”, he warns10. 
Thus, governments could play the same role in housing markets as Central Banks can play in currency markets by intervening to stabilise markets and avoid speculation in falling prices.

This is highly relevant in the US and it seems that both Democrats and Republicans are eager to find a way to manage the housing markets. There might be some lessons on asset prices for Europe, too.

Recovery: Social policy as a productive factor

Let me add one argument on social policy as an integrated part of a strategy for recovery.

Social policies should be seen as a productive factor, not as a luxury we can afford only during the good years. However in some countries they are now “too small and paid for too short a time to be effective as automatic stabilisers: they will not do enough to offset falling demand”. In many cases, “a more generous benefit regime would deliver a better bang for the buck”11.

This is a recommendation from the leading business newspaper, the Financial Times. I agree with Financial Times. Social policy, well designed, will deliver a better bang for the buck!

If you need an illustration to this message, you should think about US and the fact that some 40 million people are lacking health insurance and that unemployment benefits are low and short. Therefore, illness and unemployment will hit not only millions of workers economically, but also the banks, as people cannot pay mortgage on their housing, and businesses, as consumers cannot afford to buy.

Thus, a good social safety net provides safety, not only for workers and citizens, but also for businesses and banks and for the recovery of the economy. However, this safety net will work much better when it is combined with an active labour market policy to make people fit for the jobs that will be available in the future, when the economy is recovering. If we fail to do that in the coming years, we will be left to match new jobs with old skills12.

Rebalancing the global economy – Europe as an entity

Rescuing the financial system and restarting the economy are two huge challenges. And, at the same time, the global economy must be rebalanced.

The US current account deficit is 700 billion dollars, and the surplus of saving in China, Japan and south east Asia is of the same magnitude. Thus, under the last eight-ten years, the US has been acting as the consumer of last resort, China/Asia as the saver and lender of last resort. China has delivered cheap products and cheap money to US - and UK – consumers.

This is not sustainable. We cannot build a lasting recovery on macro-economic instability. USA and China/Asia have to find ways and means to bring about a better balance. And it seems now that the Chinese stimulus package “stands out by far the largest”, according to an estimate by the Brussels think tank Breugel13.

But Europe cannot sit on the fence, waiting for others to do the job. There are strong arguments for Europe to act in a coordinate way. First of all, it is our own interest to bring our economies back, as soon as possible, to a recovery.

Second, a well coordinate recovery policy in Europe can build on the fact that European trade mainly is intra trade between Member States. There is a limited share of our economy in external trade, not more than 12-15 per cent.

As the spill over effect is small, Europe has a great strength when it acts as an economic entity. That strength must be used to the most to bring about a recovery – and to avoid that protectionist forces are undermining the Single Market – and the European union.

Restructuring energy systems

Finally, on top of all these challenges, there is a fourth one, restructuring the
global energy systems, a challenge in its own, but also a central element in any recovery plan. Here we are on safe ground when we take Sir Nicolas Stern’s analysis in the Economics of Climate Change as our starting point14.

He emphasises that “if we do not act the overall costs and risks of climate change will be equivalent to losing at least 5 per cent of global GDP each year, now and forever”, while the cost of action can be limited to one per cent a year – if we start acting now.

He draws the conclusion that “tackling climate change is the pro-growth strategy for the longer term”.

He particularly highlights that “markets for clean energy technologies are set for a prolonged period of rapid growth and will be worth hundreds of billions of dollars a year in a few decades’ time”.

There is a good recovery effect of such investment – as a signal to the industry and to consumers. There is also a high long term return on investment to fight climate change now, compared to investment in the distant future.

Europe has taken the lead in the climate negotiations – and Europe must take the global lead in the restructuring of our energy systems making it a central element in a strategy for recovery.

Coordinating, instead of policy competition

Let me add one recommendation on European policy processes.

We have over the last ten years established two European mega-strategies, the Lisbon strategy for growth and jobs, and the strategy for sustainable development, another growth strategy. Now, we will have a third one, a strategy for recovery to get back to economic growth.

They are overlapping and they will compete for political attention and policy making capacity. All of them are suffering from competition, all will benefit from coordination.

The crisis: how deep and how long?

Finally, I would like to offer you an idea of how long and deep this crisis will be. One of the few, who predicted the crisis, was professor Nouriel Roubini, New York University15. He is now seen - almost - as the one and only expert on the future of the global economy.

What does he think about the future?

In an interview the other day professor Roubini said that the present crises will be tree times as deep and three times as long as the last one - provided that we do everything right when trying to rescuing the banks and bringing about a recovery.

Note his words: “provided that we do everything right” in terms of public policies!

Good luck to do everything right in these difficult times– and thanks for your attention!"