Transatlantic Macroeconomic and Financial Cooperation during and beyond the Crisis

1. Transatlantic Macroeconomic and Financial Cooperation during and beyond the Crisis by Mr. Moreno Bertoldi European Commission DG Economic and Financial Affairs The views expressed are those of the author and do not necessarily reflect the positions of the European Commission. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

2. Summary of the presentation • Recession and recovery • Do the US and the EU agree on the root-causes of the crisis? • Do the US and the EU agree on the policy responses needed? • The Transatlantic dimension of the international policy response • Did the Transatlantic response matter? • Will the Transatlantic relation continue to matter in the management of the global economy? _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

3. We fell off the cliff together … Source: European Commission Autumn Forecast _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

4. … and we are climbing our way back together Source: European Commission Autumn Forecast _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

5. … but on both sides of the Atlantic we are paying a very high cost for this crisis. Source: European Commission Autumn Forecast _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

6. The Great Recession: Did the Transatlantic • Response matter? • Do the US and the EU agree on the root-causes of the crisis? • Do the US and the EU agree on the policy responses needed? • Did the Transatlantic response matter? _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

7. Do the US and the EU agree on the root-causes • of the crisis? • Development of risk-taking chains with systemic implications (excesses of securitization, over-extension of the shadow or alternative banking system, development of ‘structured’ financial products, perverse incentive structure, etc.) • Insufficient and inadequate regulation and supervision of these risk-taking chains • Global imbalances • The illusion of a global economy regulated by (as much as possible) hands-off national authorities _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

8. Do the EU and the US agree on the policy • responses needed? • The De Larosière Report and the creation of the European Systemic Risk Board and the three European Supervisory Authorities, and the US Treasury: “Financial Regulatory Reform: A New Foundation”. • Very expansionary monetary policy, including through unconventional measures • The “European Economic Recovery Plan” (EERP – 200 billion euros) and the “American Recovery and Reinvestment Act” (787 billion US dollars) • Avoid protectionism as much as possible • Involve emerging market economies in the crisis resolution _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

9. The EU and the US financial responses to the • crisis • Rescue measures • Avoid the collapse of the financial system through the rescue and recapitalization of banks and other financial institutions which are systemically important. • Disposal of impaired assets • Assess the real situation of the financial sector so as to put in place the right rescue policies (e.g., bank stress tests) _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

10. The EU and the US financial responses to the • crisis • Financial regulatory reform • Creation of institutions aimed at identifying systemic risks and tackle them • - EU: The European Systemic Risk Board (ESRB) • - US: Financial Services Oversight Council (FSOC) • - EU: The European Supervisory Authorities (banking, securities, and insurance) • - US: Reviewing the Fed’s governance structure and supervision of banks _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

11. (con’t) • Comprehensive regulation of financial markets • - Raise capital standards • - Enhance regulation of securitization markets; • - Introduce comprehensive regulation for over-the- counter derivatives; • - Strengthen prudential requirements; • - Implement strong international compensation standards. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

12. Expansionary monetary policy, including through unconventional measures Source: European Commission Autumn Forecast _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

13. The fiscal response: The “European Economic Recovery Plan” and the “American Recovery and Reinvestment Act” _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

14. Avoid protectionism • Unintended side effect of the financial rescue packages: financial protectionism. • Efforts to mitigate it as much as possible • Trade protectionism • Exchange rate “manipulation” _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

15. The Transatlantic dimension of the international • policy response • Bilateral cooperation (EU-US Summits, intensification of contacts at all levels since the beginning of the crisis, the Camp David decision to provide the main policy response through the G20) • The G7/G8: It provided the initial response (immediately after the collapse of Lehman) and steered the G20 process until the London Summit • The G20: Transatlantic convergence or divergence? _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

16. The G20 response to the crisis. Transatlantic • convergence or divergence? • Issues where there is convergence • - Need for a strong and decisive political message by the leaders of the major economies in the world • - creation or strengthening of the global infrastructure: large increase of IMF resources and strengthening of its mandate and of the instruments to fight the crisis, creation of the Financial Stability Board, increase of the resources of the multilateral development banks; • - agreement that unconventional monetary measures and an extraordinary fiscal stimulus were needed to avoid the Great Recession mutating in the Great Depression 2; _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

17. (con’t) • agreement on cooperating at global level to address some of the financial root-causes of the crisis: • - raise capital standards • - extend the coverage of the regulation to the alternative banking sector • - more effective oversight of global financial markets • - avoid regulatory arbitrage • - implementation of strong international compensation standards • - tackle non-cooperative jurisdictions • and avoid the regulation in place acting in a pro-cyclical way. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

18. The G20 response to the crisis. Transatlantic • convergence or divergence? • Some divergences have also appeared: • Timing of exit strategies; • Degree of regulation of financial markets; • Possible taxation of financial transactions. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

19. Did the Transatlantic response made a • difference in the current crisis? • The mistakes of the ‘30s were avoided • The Great Recession did not become the Great Depression • It opened the way to the reform of the global financial architecture • It was key to put in place the measures that are leading the global economy towards recovery. • Could the two sides have done more? _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

20. Will the Transatlantic relation continue to matter in the management of the global economy? • Why it could matter less: • The EU and its Member States matter less in the G20 than in the G7/G8 • The US is turning its attention from the Atlantic to the Pacific • The perspective of a US-China G2 • IFIs will not be run any longer by the old G2 • US and EU policies will take divergent paths with regard to exit strategies, financial regulation and supervision, and the new international financial architecture. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

21. Will the Transatlantic relation continue to matter in the management of the global economy? • Why it could matter more: • Moving towards a more ‘normal’ situation, it will become difficult for the G20 to deliver concrete results. Need for a strong EU-US cooperation to ensure that the G20 will continue to deliver. • Both the US and the EU are looking East, but on some issues they share the same concerns and ask for the same solutions (rebalancing of growth, exchange rate issues, etc.). The rise of EMEs can provide new fields of Transatlantic cooperation; _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

22. (con’t) • Even if IFIs will not be run any longer by the old G2, they will still require a strong cooperation between the EU and the US to ensure their sound and effective management; • The US and the EU cannot afford to take divergent policy path without causing permanent damages to their economies. Furthermore, they are instrumental to the recovery of the world economy and the rebalancing of global growth. _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

23. The challenge of restoring sustainable fiscal positions and normalize monetary policy. Source: European Commission Autumn Forecast _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

24. The challenge of disposing impaired assets Source: IMF _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

25. Rebalancing is needed to ensure a sustainable post-crisis growth regime. Source: IMF _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009

26. Conclusions • The crisis has changed the nature of the EU-US relationship in the field of macroeconomic and financial relations. • Looking forward, this does not imply that the relationship will necessarily weaken, but it will be inevitably different from that in place in the pre-crisis period. • Strong Transatlantic macroeconomic and financial cooperation is still needed in the post-Great Recession world, in particular to ensure stability and good governance. Source: IMF _______________________________________________________________________________ SIEPS and EUROPEUM Seminar on Transatlantic Relations 1 December 2009