The Global Crisis: a EU Perspective

1. The Global Crisis: a EU Perspective Vitor Gaspar, Director General of BEPA (Bureau of European Policy Advisers) European Commission Higher School of Economics X th International Conference Moscow, Russia, 7-9 April 2009 The views expressed are my own and do not necessarily reflect those of the European Commission.

2. BOTTOM LINE • The crisis has spread globally through strong economic and financial linkages. The crisis is global in character. • Experience of Great Depression shows unilateral national action leads to negative spillovers and retaliation deepening and prolonging the crisis. It is necessary to engage multilaterally to preserve open trade. • EU is the largest economic entity in the world (and most Russia’s most important partner). It is also the most integrated international economy in the world. Coordinated action is key to explore synergies and to avoid negative spillovers. • Policy responses are (and have been) based on the judgment according to which the current financial and economic crisis is an exceptional event that justifies exceptional responses. Restoring financial stability is a necessary – albeit not sufficient- condition for sustainable recovery.

3. Outline • Factors contributing to the current global crisis. • Events in economic and financial markets after October 2008. • Policy responses to the global crisis. • G 20. • Conclusion.

4. 1. Factors contributing to the current global crisis • Macroeconomic factors - The “Great Moderation”. Low nominal interest rates. Compressed risk premia. Real estate and asset price inflation. Strong growth of money and credit. Large global imbalances. • Microeconomic factors - Financial innovation: new financial instruments of unprecedented complexity, development of the “originate and distribute” of bank operations, poor risk management and governance, inadequate regulation and supervision.

5. Table 1: Real GDP growth forecasts, EU-27 and euro area (annual average % change) 2008 2009 2010 Commission EU Euro area EU Euro area EU Euro area February 2008 interim 2,0 1,8 - - - - Spring 2008 2,0 1,7 1,8 1,5 - - September 2008 interim 1,4 1,3 - - - - Autumn 2008 1,4 1,2 0,2 0,1 1,1 0,9 January 2009 interim 1,0 0,9 -1,8 -1,9 0,5 0,4 IMF Spring 2008 1,8 1,4 1,7 1,2 - - July 2008 update - 1,7 - 1,2 - - October 2008 1,7 1,3 0,6 0,2 - - November 2008 update 1,5 1,2 -0,2 -0,5 - - January 2009 update 1,3 1,0 -1,8 -2,0 0,5 0,2 March 2009 update 0,9 -3,2 0,1 OECD - euro area June 2008 - 1,7 - 1,4 - - September 2008 update - 1,7 - 1,3 - - November 2008 update - 1,0 - -0,6 - 1,2 March 2009 interim - 0,7 - -4,1 - -0,3 Source: Commission, IMF and OECD forecasts, various issues as indicated 2. Events in economic and financial markets after October 2008

6. 2. Events in economic and financial markets after October 2008 • Financial systemic-risk pressures have abated since September-October 2008 as the result of unprecedented and continuing government financial support. • Nevertheless, markets have not yet returned to normalcy and risk-perceptions—as reflected in interest-rate spreads—are still well above early-crisis and especially pre-crisis levels. • The crisis is in a stage where the contraction in economic activity is now affecting banks’ loan book.

7. 2. Events in economic and financial markets after October 2008 Figure 1. Average Libor interest rate in Euro Area, UK, US - as of April 1, 2009

8. 2. Events in economic and financial markets after October 2008 • However, pressures are still strongly present in the credit markets that directly finance the real economy. Figure 2. Spreads in consumer finance sectors as of Jan 12, 2009

9. 2. Events in economic and financial markets after October 2008 Figure 3. CDS spreads for US and European corporates as of March 31, 2009

10. 2. Events in economic and financial markets after October 2008: Russia

11. 2. Events in economic and financial markets after October 2008: Russia

12. 3. Policy responses to the global crisis • In today’s conditions of financial turmoil the transmission mechanism cannot be relied to operate as in normal circumstances; hence fiscal policy is needed to complement monetary policy. • The spillovers across nations are very significant in the present circumstances – hence steps to strengthen international policy coordination and cooperation. • Inter-linkages and interdependence are particularly strong in the EU (the EU as example).

13. 3. Policy responses to the global crisis EU Member States are faced with a common disturbance, experience strong spillovers in their policy actions and share central common interests: • The EU’s Single Market and the Single Currency. • Structural Adjustment and Sustainable Growth. • Financial Stability and overall Macroeconomic Stability. • Multilateral governance for the global economy.

14. 3. Policy responses to the global crisis • Central bank’s liquidity provision and aggressive lowering of interest rates; • Extension of guarantees on banks’ liabilities. • Capital injections and (in some cases) state-control • Treatment of impaired assets. • Discretionary fiscal stimulus and automatic stabilizers. • A review of the regulatory and supervisory framework in the EU

15. 3. Policy responses to the global crisis: Russia • An extensive set of policy measures has also been taken by Russia, which is rather similar to what the EU adopted: • 1. Provision of domestic liquidity to the banking sector; • 2. Provision of external liquidity (to banks and companies); • More flexible exchange rate policy; • Package of fiscal support measures; • 4. Other measures (tax cuts, bank deposit insurance extended, increase in unemployment benefits, caps set for currency swaps and foreign assets of banks, takeover and re-capitalisation of banks).

16. 4. G 20: EU • Main messages for the G-20 summit from the EU are: • Coordinated macroeconomic policies. • 2) Preserve international trade. • 3) Enhance sound regulation & strengthen transparency. • 4) Reinforce international cooperation and promote integrity in financial markets. • 5) Increase IMF’s lending capacity. • 6) Reform the WB and the MDBs.

17. 4. G 20: Russia • Russia has been an important contributor to international consensus: • A larger representation of emerging countries in the IFIs. • The improvement of the IMF's early warning capabilities and the expansion of the FSF membership. • On the financial regulatory and supervisory areas, Russia is very close the EU approach. • Beyond the G20 meetings themselves, the existing framework for discussions on macro policies between the Commission (notably DGs ECFIN and MARKT and also the ECB) and Russian authorities, the Annual Plenary of the "EU-Russia Macroeconomic and Financial Issues Dialogue" has been instrumental for the exchange of information and views.

18. 6. Conclusion • Existing EU State-aid rules & ex-ante guidance of the EC have played a major role in ensuring consistency between the measures taken by Member States, therefore contributing to a coordinated, cooperative outcome (Single Market). • Key characteristic of intervention: Reconciliation of short-term and longer-term perspectives of public is crucial (e.g. banking system). • Reconciliation between the short and long run perspectives is also present in fiscal policy. Discretionary expansion must be (coordinated) timely, targeted, and temporary (SGP).

19. 6. Conclusion • Building the ground for sustainable recovery requires (as a necessary, albeit not sufficient condition) the restoration of financial stability. • But to prevent and manage future crises, further progress in the area of regulation, coordinated supervision and crisis management procedures is essential. • These policy questions and challenges are also relevant for Russia (domestically… • …and more broadly they apply globally. They affect Russia as an important stakeholder.

20. The Global Crisis: a EU Perspective Vitor Gaspar, Director General of BEPA (Bureau of European Policy Advisers) European Commission Higher School of Economics X th International Conference Moscow, Russia, 7-9 April 2009 The views expressed are my own and do not necessarily reflect those of the European Commission.