How Europe beat the financial crisis – and the risks it still faces

Moscovici Greece 2018

Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs visit to Athens. © European Union , 2018 / Photo: Yorgos Karahalis.

This article is brought to you based on the strategic cooperation of The European Sting with the World Economic Forum.

Author: Kalin Anev Janse, Secretary General, European Stability Mechanism (ESM)

Ten years after the financial crisis, what is the most important news for me, coming from the other side of the channel?

It is that Europe is booming – and particularly, the euro area economy.

This impressive comeback is no coincidence. It involved a lot of hard work by many players. And before we turn to today’s bubbles and risks, I want to remind you of the fundamentals we built over the last years that underpin today’s success.

I met some 150 of our investors over the last year, all over the world. Increasingly, they see Europe as a safe haven. This has partly to do with the political uncertainties in the US and UK, but the main reason is the political achievements in the euro area. For those of you on Twitter, hashtag #EUROBOOM is still relevant.

So, what did Europe do?

Firstly, euro area countries implemented massive reform efforts. Some of the countries that received financial assistance from the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM), such as Spain and Ireland, have among the highest growth rates in Europe today.

European Commission: Winter 2018 Interim Economic Forecast
Image: European Commission: Winter 2018 Interim Economic Forecast

Secondly, the unorthodox policy measures by the ECB played a key role. Also on the list is the closer economic policy coordination between the euro area counties. This makes it harder to repeat the mistakes that led to the crisis. Next are the first two pillars of Banking Union – the Single Supervisory Mechanism, which now oversees the 130 systemically important banks at the European level, and the Single Resolution Board, which was set up to wind down failing banks across Europe.

Last but not least, the ESM, my institution, serves as a rescue mechanism for euro area countries that have lost market access. We were not there at the beginning of the crisis, but the ESM is a permanent institution, so we will be ready to fight the next crisis when it comes.

We have disbursed a total of €279 billion to programme countries. Funding these programmes has made us a key market player: we have issued more than 100 benchmark bonds and 130 bills over the last seven years.

These achievements would have been unthinkable only a few years back, but, as a result, the euro area economy is now back on track and rapidly growing again. The reduction in political risk after the French elections last year certainly supported this recovery.

Today’s risks

Understanding how we dealt with the last crisis is important also for thinking about today’s risks. In my view, there are three main sources of risk: cyclical risk, complacency, and new icebergs.

So, cyclical risk first.

The euro area economy grew 2.4% last year and is due to grow 2.3% this year. This is well above the potential, so at a certain moment growth will slow down.

Some countries, like Germany and the Netherlands, may already be close to moving to full employment. At the same time, asset prices – like stocks, alternative investments, and real estate – are at record highs.

Image: Eurostat

Some of these bubbles may be small, but you do want to be on time to spot which of these smaller bubbles has the potential to become big and cause greater damage to the economy.

The second source of risk lies in the fact that not all our policy responses are complete. These are the areas where complacency might kick in. Completion of the Banking Union is the first that comes to mind.

The Single Resolution Fund (SRF) needs a financial backstop so that it can handle even the largest bank failure. The SRF’s war chest will reach its final level of €55 billion in 2023. A backstop that would roughly double that amount through an ESM credit line of about the same size seems reasonable.

A more controversial issue is a common deposit insurance for Europe, which would make the banking system safer because it would prevent country-wide bank runs. Before this can happen, countries need to clean up the balance sheets of their banks. Otherwise, there is the risk that healthy banks in one country will need to pay for past mistakes made by their peers in other countries.

Further steps to deepen Monetary Union are also on the political agenda at the moment. One is developing the mandate of the ESM, and possibly turning it into a European Monetary Fund.

European integration has often accelerated the most during a crisis, and because the economy is doing well now, there is a risk of complacency and a delay of the reform efforts. Leaving some unfinished business will make us weaker to cope with future crises.

Crises often emerge when and where we least expect them. Therefore, we ought to be on the lookout for new unknowns.

The last source of risk is what I call new icebergs. Crises often emerge when and where we least expect them. Therefore, we ought to be on the lookout for new unknowns. What areas are we not paying enough attention to today? Let me give you a few candidates.

The first and most important one is cyber-security. This is a threat not only to the financial industry, but also to our global supply chains. The iceberg here is that while executive teams have a very good understanding of traditional market, credit, and operational risk, few are tech natives.

You can’t blame them though, because the average Darknet attacker or crypto-currency trader is between 15 and 25 years-old. They can bring companies down, and even entire banking or government systems. Recently, this happened in the Netherlands when the website of the tax authority was brought down for several hours. An 18 year-old hacker was later arrested over the crime. Do today’s top managers have the knowledge to prevent such events?

Another iceberg is formed by unregulated financial services and protectionism, and their implications for global economic trade and growth.

But let me conclude on a positive note: Europe has some unique assets that we can be proud of – great human talent, strong educational systems, and cities that continuously rank as the best places to live in the world. We are leading on ethics, social mobility, and democracy, so there is hardly a better place to live in the 21st century than Europe.

What gives me most optimism about Europe is our track record over the past 70 years of successfully dealing with crises, and coming out of them even stronger.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

This 3D-printed steak could help us reduce meat consumption

‘Virginity testing’: a human rights violation, with no scientific basis – UN

Destabilizing Lebanon after burning Syria; plotting putsch at home: King and Crown Prince of Saudi Arabia

A Valentine’s Special: heart has nothing to do with it, it’s all Brain

‘Global trust’ declining, ‘our world needs stepped-up global leadership’

The next talent opportunity for the digital workplace? Neurodiversity

On flight to sustainable development, ‘leave no country behind’, urges aviation agency

5 things you probably didn’t know about global health

We all have a ‘hierarchy of needs’. But is technology meeting them?

What slums can teach us about building the cities of the future

WEF Davos 2016 LIVE: “No other problem has jeopardised the EU as much as the refugee question” Joachim Gauck, President of the Federal Republic of Germany, cries out from Davos

Cyclone Idai: UNICEF warns of ‘race against time’ to protect children, prevent spread of disease in flood-ravaged Mozambique

Why it’s good to turn your colleagues into friends

These countries are driving global demand for coal

As the inventor of copy and paste dies, here are other computing innovations we take for granted

UN recognises role of sport in achieving sustainable development

Climate change: ‘A moral, ethical and economic imperative’ to slow global warming say UN leaders, calling for more action

Hurricane Dorian: Bahamas death toll expected to rise as thousands remain missing

UN chief condemns air strike that hit school bus in northern Yemen, killing scores of children

COP21 Breaking News: “We must accelerate the process”, Laurent Fabius cries out from Paris

A profitability roadmap for the fast-changing automotive sector

Climate action ‘both a priority and a driver of the decade’: Guterres

Now is the time to seize ‘unprecedented opportunity’ of the Sustainable Development Forum, says ECOSOC President

Relieving the suffering of dying: Home Palliative Care as a spiritual coping strategy

To recruit younger people, you have to understand them. Here’s a guide

Close to 7,000 evacuated from Syrian towns after enduring nearly 3-year siege

This Danish scheme is offering free kayak rides… for picking up trash

European Junior Enterprises to address the significant skills mismatch in the EU between school and employment

Global trade is broken. Here are five ways to rebuild it

Thought AIs could never replace human imagination? Think again

EU responds to terror fallout by eroding borderless Europe and molesting the refugees

Will Boris Johnson’s victory lead to a no-deal Brexit or is there still time?

WHO coronavirus briefing: Isolation, testing and tracing comprise the “backbone” of response

5 creative alternatives to plastic packaging

5 ways companies can support their remote workforce

More billions needed to help Eurozone recover; ECB sidesteps German objections about QE

Mergers: Commission approves GlaxoSmithKline’s acquisition of Pfizer’s Consumer Health Business, subject to conditions

Sochi not far away from Ukraine

“A global threat lies ahead worsened after the EU’s green light to the Bayer-Monsanto merger”, a Sting Exclusive by the President of Slow Food

“BRI cooperation is entering a new stage: we need a new and more constructive approach rather than waste time on suspicion”, China’s Ambassador to EU Zhang Ming underlines live from European Business Summit 2019 in Brussels

How interoperability establishes blockchain’s utility and effectiveness for trade finance

MEPs to prioritise environment and climate action in next long-term budget

Joint UN-Red Cross appeal to end rising sexual violence as a weapon of war

Journey of my life

The EU Commission is lying to the “Right2Water” campaign

The need to resume preventive policies for chronic noncommunicable diseases

Thursday’s Daily Brief: Press Freedom Day, Tuna Day, cultural dialogue, #GlobalGoals awards, updates on Syria, Somalia, Mali

Uncovered liabilities of €5 billion may render EU insolvent

The decline of our oceans is accelerating, but it’s not too late to stop it

Trade Committee MEPs give greenlight to landmark EU-Japan trade agreement

Digital Single Market: Cheaper calls to other EU countries as of 15 May

These are the world’s healthiest nations

Humanitarian emergency in Venezuela was central debate of the EuroLat plenary

Empowering people living with HIV ‘will end the epidemic’, says AIDS agency chief

This robot has soft hands. It could be the future of sustainable production

The costs of corruption: values, economic development under assault, trillions lost, says Guterres

North-east Nigeria displacement crisis continues amid ‘increased sophistication’ of attackers, warns UN

‘Three-country crisis’ across central Sahel puts whole generation at risk, warns UN food agency

Renewable energy could power the world by 2050. Here’s what that future might look like

As Alan Turing makes the £50 note, how do countries design their currencies?

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s