“We need strong euro, strong supervisory authority, and strong bank stress tests,” Minister for National Economy, György Matolcsy, said at the press conference, which closed the first day of Economics and Finance Ministers’ informal meeting (ECOFIN), on 8 April. The Eurogroup and the 27 Member States discussed the financial aid to Portugal, and actual questions related to the stability of the eurozone, and the EU at the meeting in Gödöllő, near Budapest.
Following the Portuguese caretaker government’s official request for financial assistance from the European Union (EU) and the International Monetary Fund (IMF), the Eurogroup discussed the Iberian country’s present financial state on its own, then with Economic and Financial Ministers of Member States, outside the euro zone. The Eurogroup and ECOFIN ministers acknowledged Portugal’s request for financial assistance in a statement, and asked the Commission, the European Central Bank, the IMF, and Portugal, to draw up measures to safeguard their financial stability.
Financial assistance to Portugal
The programme, subject to strict conditions, will rest on three pillars: an ambitious fiscal adjustment to restore fiscal sustainability; structural reforms to enhance growth and competitiveness, and measures to maintain the liquidity of the financial sector. The EU participates in the process through two financial instruments, the European Financial Stability Facility (EFSF), and the European Financial Stabilisation Mechanism (EFSM); both were set up in 2010. According to Olli Rehn, European Commissioner for Economic and Monetary Affairs, the EU and the IMF will provide two-thirds and one-third of the rescue package, respectively.
Rescue proceedings have only just begun. The development of structural reforms and measures for fiscal adjustments with Portugese authorities, will take a few weeks. At present, it is difficult to estimate the EU’s exact contribution to the rescue package, Olli Rehn said at the first press conference, which followed the Eurogroup’s discussion, and the joint meeting of the Eurogroup and ECOFIN ministers of Member States, outside the euro zone. In response to a question, he said, according to a preliminary and rough estimate, Portugal will need approximately 80 billion Euros of financial assistance. Portugal will only receive this financial support if it agrees to the EU and the IMF programme setup, which is anticipated to take three year to implement.
Fruitful debate on the scoreboard
At their working lunch, the Ministers returned to the question of the Portugese and Irish financial crises. According to the acting chair, György Matolcsy, they conducted a “fruitful debate” on one of the most important elements of the package of six legislative proposals, aimed at the reform of economic governance, the selection of 8-10 indicative designs of the scoreboard to be used in the so-called surveillance framework for macro-economic imbalances. By keeping track of these indicators, the Commission could foreshadow the danger of imbalances. The selection of indicative designs of the scoreboard stirred debate among Member States, but at the press conference that closed the first day of the ECOFIN meeting, Olli Rehn voiced his hopes that they will shortly reach an agreement. Mr Rehn and Governor of the European Central Bank, Jean-Claude Trichet, added that the current account would be an important indicator. They think the crisis displayed, “the main danger is a large and consistent deficit in current account,” Mr Matolcsy said, although Hungary is not yet a member of the eurozone, it considers strong euro is highly important; consequently, the Hungarian Presidency concentrates on the adoption of the six legislative proposals on common economic governance.
The Ministers also discussed the present economic situation. They agreed that economic recovery in the eurozone is well under-way; however, since the publication of the Commission’s last interim forecast, economic uncertainties has increased more, due to the renewed commodity price volatility and the recent events in the Middle East and North African region. At the press conference, Mr Trichet and Mr Rehn both called attention to the danger of inflation. The European Commissioner for Economic and Monetary Affairs highlighted the intertwin connection between the debt crisis and the vulnerability of the banking sector.
New challenges in the field of financial regulation
Alexander Lamfalussy, a famous economist of Hungarian origin, who is considered to be the father of the euro; Jacques de Larosière, former Managing Director of the IMF and former Governor of the European Bank for Reconstruction and Development (EBRD), and the leaders of the newly-established financial supervisory authorities, all contributed to the working session. Ministers surveyed the first experiences of the operation of the new financial supervisory structure, and the preparation of bank stress tests, in the presence of presidents of Member State central banks. Jean-Claude Trichet, Sharon Bowles, Chair of the European Parliament's Economic and Monetary Affairs Committee, and European Commissioners Olli Rehn, and Michel Barnier, all contributed to the discussion.
During the discussion, a number of participants called attention to the potential conflict between financial integration and financial stability. Increased financial integration is a desirable goal in itself, they said, but it also brings additional regulatory challenges. The EU faces a double task: along with the development of the single financial market, it has to enhance its resistance against crises, as the prevention of a crisis always costs less than the removal of its consequences. Participants agreed that, even though the new EU financial supervisory structure is a great step forward, the work is not yet complete – the practical implementation of the regulation is crucial. In relation to this, participants agreed that the new supervisory authorities could not fulfil their mission efficiently, unless they employ qualified and skilled staff, in an adequate number, and manage to ensure fast and direct collection of data and data forwarding from Member State supervisory authorities.
Getting ready to handle the consequences of stress tests
All contributors to the debate agreed on the need for stricter and more robust stress tests. The tests are about to be conducted on European banks, to make them more credible for investors and markets than in the first two cases. The aim is to identify weak spots quickly in the banking system, and to resolve them by restructuring and recapitalisation. European Commissioner Olli Rehn, stressed that capital grants have to be in conformity with EU regulation on state subsidies. At the discussion, it was highlighted that the governments of Member States have to get ready, to handle the consequences of stress tests, and to take measures to have back stops, before carrying out the tests. Therefore, if needed, they could assist vulnerable financial institutions immediately.
It was agreed, that one of the main lesson of the crisis is that the main problem did not lie in financial regulation, but in the supervisory system. The role of the newly established European supervisory authorities will be critical, in not only managing the process of stress tests, but in enhancing the overall regulatory and supervisory system. With reference to this, Michel Barnier reminded participants of the eight related legislative proposals, and urged the European Council and the European Parliament to reach an agreement on them as soon as possible. The participants of the informal meeting of ECOFIN ministers also highlighted the importance of having a more global approach by increasing the regulatory convergence between the EU and the USA.