Examination of Witness (Question Numbers
49-81)
Mr Mark Cliffe
2 NOVEMBER 2010
Q49 The Chairman:
Good morning, Mr Cliffe. My name is Lyndon Harrison. I am Chair
of Sub-Committee A and we are most grateful to you this morning
for coming in and helping us with our report on economic governance.
Are you now able to hear me?
Mark Cliffe: Yes, I can hear you clearly now,
thank you.
Q50 The Chairman:
Thank you very much indeed. We will start the session in a moment
and I will ask you whether you would like to make an opening statement,
but, first, just a few housekeeping matters. There will be a record
of this session; we will send the transcript to you. If there
are errors or things you wish to add or adumbrate we would be
most grateful if you could do that. I understand that there may
be a pause on the line for some of the answers, so forgive us
if we don't seem to be sharp off the mark, but we are very grateful
indeed. Would you like to make an opening statement?
Mark Cliffe: No, I'm fine. I've received an
excellent set of questions so I'm happy to jump right in.
Q51 The Chairman: Well then, let
me ask you this one; what do you think of the likelihood that
the eurozone might break up, either partly or completely; what
are the factors that might cause this to happen; and how would
it benefit a member state that was either being evicted or which
chose to leave?
Mark Cliffe: I think the issue of the probability
of the eurozone breaking up is as much a political as an economic
question because, ultimately, if a country is prepared to make
the appropriate economic sacrifices it can remain within the monetary
union. I think it's fairly clear in the light of the events of
the last year or two that the probability, whatever it is, of
breakup has risen significantly. I think the economic crisis has
revealed a number of structural flaws within the monetary union—of
course some people would say that those flaws should have been
evident from the outset, but it is certainly clear that the markets
now put a significantly higher probability on at least some exits
from monetary union over the next few years. You can see this
from the very wide bond spreads that we have within the eurozone
at the moment. There have also been a number of surveys of businesses
and market participants. For example, there was a survey in June
that revealed that 50% of executives and bankers in this particular
poll expected that there was a chance of at least one exit within
the next three years. It was more likely than not. I think it
is certainly the case that the markets are now much more concerned
about the possibility of a breakup than they were a year or two
ago. What are the conditions that would drive this breakup? Well,
clearly it's anything that undermines the wisdom of common monetary
policy and the political support to maintain it. The most obvious
factor that would precipitate a breakup would be sustained weak
economic growth, whereby some of the members judged it to their
economic advantage to leave the monetary union in order to depreciate
their currencies and potentially lower their interest rates to
boost their economic activity. A second factor, obviously to some
extent related to this, would be rising budget deficits which
might lead to higher bond yields; this is market discipline kicking
in, as we saw around the back end of last year with the emergence
of problems in Greece. This puts considerable pressure on Governments
to impose potentially politically intolerable fiscal austerity
measures. That would be another trigger for a breakup or an exit
from monetary union. But we can't exclude the possibility that
some of the stronger members of the monetary union might wish
to leave if they felt it to their advantage, if they were perhaps
being forced to pursue excessively inflationary policies or if
they were being asked to bail out the weaker members; one has
in mind of course Germany in this context. A number of commentators
have suggested that the Germans and perhaps a number of other
core eurozone members might wish to leave. That's another possibility
that can't be excluded. In terms of the benefits for a member
state leaving, clearly this would be largely revolve around the
issue of gaining renewed independence in terms of monetary policy—and
fiscal policy, I hasten to add. There could indeed be an immediate
benefit for weaker members of the union from a sharp depreciation
in their currency. I think the longer-term benefits would really
revolve around renewed independence in terms of policy making,
but I hasten to add that the benefits would come along with considerable
costs. I'm not sure whether you have seen the report that we published
at ING in July which was called Quantifying the Unthinkable,
where we made the point that regardless of the longer-term benefits
of exit there would be severe transitional costs for any members
leaving the monetary union. There would obviously be severe logistical
and legal problems with such a step. There would be the risk of
substantial capital flight and systemic distress in the financial
system. I think there would be massive damage to consumer and
business confidence and a need to tighten fiscal policy aggressively
in order to restore confidence in the bond markets. These transitional
costs, according to our estimates, would be huge. We are not dealing
with some kind of abstract theoretical world about whether this
is an optimal currency union or not; but rather the hard reality
that the members are in it, there is no provision at the moment
for exit and therefore there would be very substantial transitional
costs from any kind of exit.
The Chairman: That is very useful indeed.
May we explore that further? I turn to Lord Hamilton.
Q52 Lord Hamilton of Epsom: The question
of managed default has been raised by the Germans, although it
hasn't been adopted by the Commission. Can you just take me through
how managed default would actually happen and work? I am unclear
in my mind as to how this could be processed through. Presumably
the Germans have given this some thought. Have you?
Mark Cliffe: Yes. I think certainly there are
a number of ways in which this would work. Essentially the idea
is that the burden of default would not fall entirely on taxpayers.
This has of course been the impetus behind the German push towards
some kind of managed default process. In other words, the bond
holders would have to share the pain. Obviously, the degree to
which they take the pain is something for discussion and negotiation.
The pain would perhaps involve a write-down in the principal on
the bonds or alternatively some kind of reduction of the coupons
or interest payments, or delay to the repayment of the principal
on these bonds. Obviously, some kind of process would have to
be put in place to decide exactly how big these losses are that
are imposed on the bondholders. In the market vernacular, these
are called "haircuts". The markets have a tendency to
overreact, fearing the worst; and therefore the presumption would
be that the haircuts perhaps would be less than current market
pricing. The precise details of the burden-sharing, as it were,
would obviously have to be worked out, and I think this is where
a considerable amount of work will be going on right now in devising
this managed default mechanism.
Q53 Lord Hamilton of Epsom: Are you
saying then that if the European banks took the full hit of the
devaluation, for instance, of the Greek currency, that would create
a banking crisis across Europe?
Mark Cliffe: Well of course this is a related
problem.[1]
I think this is perhaps something about which there has been an
awful recognition on the part of the core countries which are,
of course, the principal holders of the debt of the weaker members
on the eurozone's periphery. German banks and French banks are
particularly exposed and so at one remove it, as it were, comes
back to the state as a problem. As you well know, the financial
crisis has forced European Governments to step in to support their
banking systems, so sovereign default and bank default are obviously
closely connected crises, as we've discovered.
Q54 Lord Hamilton of Epsom:
Is there a role for the European Central Bank to step in and purchase
Greek Eurobonds in these circumstances?
Mark Cliffe: Well it already has been, and I
think this is part of the concern of the Germans and others that
the ECB has already been purchasing the government debt, not just
of Greece but of other affected members. Of course this has evoked
considerable controversy in Germany; not least at the Bundesbank
itself, because the ECB now is running a considerable credit risk
on these holdings of eurozone government bonds.
Q55 The Chairman: Do you think that
a well managed default is compatible with remaining in the membership
of the eurozone?
Mark Cliffe: Yes, I think it is. Indeed, I think
a well managed default is implicit in the insistence on sticking
to the so-called no-bail-out clause within the Maastricht treaty.
One has to remember that exit from monetary union does not in
itself solve your fiscal solvency problem; in some ways it makes
it worse, particularly if the leaving member—let's make
a presumption here that it's one of the weaker members—does
not redenominate its debt. For example, hypothetically, if Greece
were to leave the monetary union and was obliged to honour its
euro-denominated debt, its fiscal solvency problem would be greatly
exacerbated. So the presumption that most people in the market
have is that, if Greece were to leave the monetary union, it would
redenominate its existing debt into new Greek Drachma, as it were.
But of course that doesn't in itself solve the debt to GDP burden
that it's currently facing.[2]
Leaving the monetary union does give them the possibility of growing
faster and growing in such a way as to generate more income to
repay those debts. That's the logic. So in itself, exit from monetary
union is not a solution to the fiscal solvency problems of the
weaker members of the union.
The Chairman: Thanks very much. Lord
Trefgarne is interested in this topic.
Q56 Lord Trefgarne: Thank you my
Lord Chairman; good morning Mark Cliffe. If we put in place arrangements
for orderly withdrawal of countries that find themselves in difficulties,
does that not create the possibility that they would all rush
for the exit if the situation got bad?
Mark Cliffe: I think that's absolutely right,
yes. I think the logic of this at the moment is there is no provision
for any member to leave monetary union. This is meant to be a
permanent monetary union. Of course, the idea that any member
could leave would create a very damaging precedent; of course
the markets would then start to speculate about other members
of the union departing, which is why there is clearly a big incentive,
in terms of the crisis resolution mechanisms, for there to be
fallback provisions to support the existing members of the union.
So if one county gets into difficulty then one has to assume that
there's also money in a fund, for example, to support other members
who might be close behind in terms of getting into difficulty.
Q57 Lord Trefgarne: Thank you, but
if a country is faced with difficulty, it can't leave, but if
somebody is ready to bail them out one way or another—although
that's not the words that they use—there is not much incentive
for them to put their house in order, is there?
Mark Cliffe: I think there is because I think
what's envisaged here is that there would be pressure on the country
to tighten its fiscal stance under the arrangements. There would
also be some kind of bail-in provision whereby debt holders would
suffer losses. So while it is true that a lot of the debt of these
affected countries may be held outside the country concerned,
there would certainly be problems for domestic bondholders in
any bail-in provision that would be set in place in this kind
of mechanism.
Q58 Lord Trefgarne: Should we have
let Greece default—I say we, it wasn't down to us; but should
Greece have been allowed to default?
Mark Cliffe: I think many Germans would probably
agree with that assertion, but of course the problem is that the
creditors are also on the hook.
Q59 Lord Trefgarne: I am asking whether
you agree or not, it's your opinion I'm looking for.
Mark Cliffe: Sure. Personally I think it would
have been very difficult to have managed this process,[3]
given what we were talking about earlier on—that this would
have set a very dangerous precedent and would have required a
long preparation. If you remember how many years it took to prepare
for monetary union, preparing for exit, if anything, would probably
be just as complicated. Going back to the point I was making earlier,
the transitional problems of exit cannot be disregarded in this
process, regardless of the hypothetical benefits that there might
be for Greece in the longer term. Just to say one thing on Greece
itself; it faces a huge economic challenge in terms of being able
to stay in the monetary union. It is obviously now facing a prospect
of many, many years of fiscal austerity and severe adjustment
in terms of wages and prices, which is very politically challenging.
Q60 Lord Trefgarne:
If the countries gathering around Greece last time had not been
prepared to do what they did, she would have defaulted, presumably,
and then just have been ejected from the mechanism.
Mark Cliffe: Well, it wouldn't necessarily have
been ejected from the monetary union.
Lord Trefgarne: Well, that's what I mean.
Mark Cliffe: I think we have to differentiate
between default and exit from the union. One could argue that
the principal problem is a fiscal one and that in the first instance,
at least, a default would give relief on that problem. But of
course in the longer term the issue isn't simply about fiscal
discipline, it is also about Greece's ability to grow. If the
Greek economy can't grow it's never going to be able to repay
its debts.
The Chairman: Let's pass on. Lord Haskins.
Q61 Lord Haskins: Thank you; just
on the issue of default, there are defaults and defaults. You
are probably are aware that the Anglo-Irish bank, which is owned
by the Irish Government now, is renegotiating the terms with certain
of its bondholders. Is that a default and is it a default of the
bank or is it a default of the Irish Government?
Mark Cliffe: Sorry, I'm not quite with you here.
Basically if they are renegotiating the terms of the bonds, that
is to all intents and purposes a default. I mean, a restructuring
is typically a more politically correct term for default.
Q62 Lord Haskins: But two years ago
the Irish Government assured the bondholders that their position
was secure. The point I'm trying to make is there are defaults
and defaults; this seems to be an acceptable default, but when
does it become unacceptable?
Mark Cliffe: Well I suppose it's a question
of the circumstances of the time, because they probably made that
pledge in good faith and they didn't anticipate that the situation
would continue to evolve as it has, which has obviously not been
very pleasant for the Irish state over the last couple of years.
So that's presumably the logic behind this decision.
Q63 Lord Moser: You know that we
in this Committee are very much concerned with economic governance
generally in the EU, so it's quite important for us to understand
to what extent progress in that direction would help against a
breakup or whether it is virtually irrelevant.
Mark Cliffe: I think this is actually extremely
important, because I go back to the point that I made, which is
that the integrity of monetary union isn't just about fiscal discipline
and fiscal responsibility; it's also about economic growth. Therefore,
economic governance has to concern itself not just with fiscal
balances, it has also to look at underlying real economic balances—and
also financial stability, I should say. For example, if you think
of Ireland and Spain, they were actually running budget surpluses
in the run-up to the crisis. With the benefit of hindsight we
can see that those surpluses were based on a bubble in the real
estate market, which of course has burst. So had there been more
attention paid to what was going on in the private sector—obviously
in this case, specifically in the real estate markets—we
might have stood a better chance of taking pre-emptive action
to avoid the kind of imbalances that eventually emerged and created
the problems.I also mention financial stability here, because,
to go back to the point we touched on earlier, there is clearly
a connection between the fiscal problems and the problems of the
financial sector. So we need to be clear on the kind of risks
that are being run within the financial system as well. That is
something that needs to be monitored at the same time as part
of this new system of economic governance and surveillance.
Q64 Lord Haskins: Presumably all
the European nations, whether they are in the eurozone or not,
would like to avoid a walkout. I mean, presumably none of them
are hoping for a walkout. If that is the case, roughly speaking,
the question is whether Van Rompuy's taskforce goes far enough,
or is strong enough, to help avoid the breakup, or whether it
is a bit too weak.
Mark Cliffe: I think this is a very good point.
I think what we come to here really is a matter of political will.
To go to your point, it's very clear that the political will to
sustain monetary union is still very strong. Angela Merkel herself,
and I will just read the quote to you from our report, said in
May, "If the euro fails it is not only the currency that
fails, then Europe fails. The idea of European unity fails".
The problem with this is that it then becomes a question of: is
there sufficient political will to countenance the kind of fiscal
transfers and burden-sharing that would make it sustainable in
the long run? Many Germans pointed out that monetary union should
have been preceded by political union, not followed by it. Now
we are discovering the truth of that observation because the Germans'
patience for bailing out the weaker members of the monetary union
is wearing extremely thin. I think there are some really hard
discussions to come in coming up with a really durable system
of economic governance for monetary union.
Lord Haskins: Thank you very much, that's
very helpful.
Q65 Baroness Hooper: Mr Cliffe, you
referred earlier to the part played by the crisis-resolution mechanism.
In your opinion, should there be a permanent crisis-resolution
mechanism and if so what form should it take?
Mark Cliffe: Well, certainly from the point
of view of the financial markets they would like to see this put
in place. Of course the devil is in the detail, as we have been
seeing over the last few days. In the midst of this debate the
markets have now started to recognise that the so-called bail-in
process, whereby the bondholders would have to take some of the
pain from countries getting into difficulties, has led to a substantial
sell-off in some of these markets. Nevertheless I think they would
like to know what the rules of the game are, and then the markets
could go ahead and start to price in what is likely to happen.I
think it's also important in terms of setting in place the right
sort of incentives for politicians and policy-makers. Of course,
ultimately, this does beg the question of the political will actually
to stick to the rules. I think that part of the problem that the
markets have been wrestling with is that the original stability
and growth pact was not actually fully enforced. Indeed the Germans
themselves backed away from it when they themselves got into difficulty
in the early part of the last decade. I think the markets really
want to see something that is convincing, that is clear, and then
we can perhaps get to a position where the risk premium that we
see in the bond markets starts to subside and this itself provides
an economic benefit for the countries in the eurozone, because
clearly it's in nobody interests that we see consistently high
long-term interest rates.
Q66 Baroness Hooper: Thank you. So
do the European Financial Stabilisation Mechanism and the European
Financial Stability Facility go some way to meet the requirements?
Mark Cliffe: I think they do. I think the problem
is that the EFSF is due to lapse in 2013; hence the debate about
what comes next. One of the important issues about this, apart
from the precise details of how this actually works is, are these
funds sufficient? The markets recognise that Greece, and indeed
Portugal, are relatively small countries; while obviously they
have substantial debts in relation to the size of their economies,
in the broader scheme of things the markets could absorb the losses
that might flow from some kind of restructuring of their debts.
However if we were to look at a country like Spain, or, worse
still, Italy, then that's a completely different question because
the scale of their debts are far greater; in fact the Italian
government bond market is the biggest in Europe, so therefore
you can see the problem. We would need to see a fund in place
which is of convincing size.
Q67 The Chairman: So it would be
a permanent crisis-resolution mechanism, Mr Cliffe, would it?
Would it apply to the eurozone and, beyond, the rest of the EU,
and would there be any role for the IMF or the ECB in developing
that?
Mark Cliffe: On the technical sense one we would
certainly expect to see—the European Central Bank involved
in the development of this. Indeed it is already involved; the
boundaries between monetary and fiscal policy have become distinctly
blurred during this crisis, of course. As for the IMF, I think
this again is partly a question of politics and partly a question
of credibility. I think for both reasons the Germans were very
keen to have the IMF involved with the fund that was put in place
back in May. Whether that is something that the members would
want to have in future I somehow doubt. I think there's obviously
a strong preference for a European solution, because where is
the money ultimately going to come from? Ultimately, it has to
come from eurozone taxpayers, I would say.Your question also raised
the question of whether this would also involve non-eurozone members
like the UK. I think that's again more of a political question—is
this an act of good will on the part of UK and other non-members
to be communitaire and really play their part in the interests
of the broader stability of the European Union?
Q68 Lord Jordan: Good afternoon.
The competitive imbalance between Germany and Greece is substantial.
It's not likely to change very much in the future; it can improve
a bit but it's not likely to change. Can the eurozone survive
a continuing competitive imbalance between member states?
Mark Cliffe: Certainly life would be a lot easier
if economic activity was growing rapidly. I go back to the point
I made earlier which is that, of course, in the end, if you don't
grow you can't repay your debts anyway. A small economy like Greece
is obviously very much dependent on what's happening in the rest
of the world, in its trading partners. If we have a buoyant global
economy then these imbalances can be papered over. Of course,
the flip side of that is that if we see a renewed recession then
they are in deep trouble because of the competitiveness gap that
currently prevails. That is why these economies are now being
effectively threatened with years of austerity—not just
fiscal austerity but pressures on the private sector to improve
competitiveness which would involve potentially downward pressure
on wages and efforts to improve productivity by whatever means.
Of course the Germans will point to the restructuring that they
have been through over the last decade, but the challenge for
these economies is that they are potentially facing a very deflationary
scenario because in order to regain competitiveness—unless
you can find the means for a productivity miracle—you have
to reduce your wage levels if your trade partners are running
very low inflation rates. Deflation is a situation that is very
difficult to manage economically, and indeed politically.
Q69 Lord Jordan: Do the markets believe
that some of the measures now being pursued by the European Community,
such as the crisis-resolution mechanism and other mechanisms,
will help countries to improve their general competitiveness?
Mark Cliffe: I think if you look at what has
been happening to bond spreads over recent weeks, the answer to
that is no at this stage. At the moment the focus is really more
on the fiscal aspects of the probem than the underlying real economic
aspects of the problem. We've had endless debates across Europe
for the last 10 to 20 years about improving economic performance,
improving the structure of the European economy, and I think the
markets are rather sceptical about the ability of European politicans
to deliver on this. This is where there will have to be more work
done in the longer term if monetary union is to be truly sustainable.
Q70 Lord Woolmer of Leeds: Good morning
Mr Cliffe. Could you tell us something about the current state
of proposals on the matter of macroeconomic surveillance and,
in relation to that, what are the essential variables that would
have to be considered to determine whether or not an imbalance
exists?
Mark Cliffe: My impression is that this is still
at a fairly early stage of discussion. One of the reasons for
this, I think, is that there is probably a greater emphasis from
some of the core countries on fiscal discipline than there is
on improving economic performance. I think that in this regard
there are a whole host of variables that would need to be monitored
closely in terms of macroeconomic surveillance; this would include
trade and capital flows; I think it would include divergences
in price and cost competitiveness; I think it would include an
examination of private sector indebtedness—going back to
the remarks I made earlier about the likes of Spain and Ireland.
I think there would also have to be monitoring—just in general,
of what's going on in the housing markets, which of course have
been the source of many of the difficulties through the course
of the financial crisis. Related to that, of course, is monitoring
of credit and monetary growth, and in turn the balance-sheet strength
of the banks. I think all of those things would need to be watched
very closely.
Q71 Lord Woolmer of Leeds: Who would
do that monitoring and, having monitored, who would decide what
actions, if any, needed to be taken by which country, and how
would that be enforced, given the complexity of the variables
you have just mentioned?
Mark Cliffe: Clearly it is not an easy exercise.
In terms of the institutions that are qualified to do this, I
would imagine that you would have to be looking at arms of the
European Commission and also the European Central Bank, but one
could also envisage that a separate body might be set up to do
this, perhaps at somewhat arm's-length from the political arm
of the European Union, maybe to give it greater credibility and
room for making independent assessments.
Q72 Lord Woolmer of Leeds: Would
markets be impressed by monitoring bodies; wouldn't they want
to know who would do what, what actions would follow, what enforcement
mechanisms there would be over—again I say—a wide
variety of economic variables: fiscal, monetary, trade, you've
mentioned, and competitiveness? What body could possibly not only
monitor but take actions and enforce them that would satisfy the
markets?
Mark Cliffe: Sure, I think you have to make
a distinction between the surveillance aspects and the analytical
aspects if you will, and the policy and political aspects of enforcing
the necessary responses to any problems or imbalances that were
identified during the course of the surveillance.
Lord Woolmer of Leeds: Finally—
Mark Cliffe: And you know that's obviously—
Lord Woolmer of Leeds: Carry on. Sorry.
Mark Cliffe: Sorry. I would say that this is
something that the euro group will probably have to, in the end,
take the lead on and that this would have to go to the highest
levels of Government for agreement, because the markets obviously
want to see a clear commitment from the politicians actually to
act upon those problems rather than just monitor them.
Q73 Lord Woolmer of Leeds: There
has already been established, or is being established, a macro
financial stability committee of Finance Ministers, the European
Central Bank and so on. I assume that this extra surveillance
could not be done by that body. This would have to be an additional
body.
Mark Cliffe: Not necessarily. I would have thought
that would be one body that could take on this task. As I say,
you come back to your very important point: how is this actually
going to be enforced? That is something that the politicians would
have to come up with some kind of clear answer to, frankly.
Lord Woolmer of Leeds: Thank you.
Q74 Lord Vallance of Tummel: Chairman,
first, I need to declare an interest as a member of the International
Advisory Board of Allianz SE, the insurance and financial services
group. Perhaps, Mr Cliffe, that leads me into my first question,
which is: a number of my German colleagues would argue strongly
that there is no culpability in running a large account surplus;
that is just a function of their competitiveness. Do you share
that view or would you see large surpluses as equally undesirable
as large deficits?
Mark Cliffe: I think for the country concerned
they are not equally undesirable. Clearly if you are in the advantageous
position of being a substantial creditor, that gives you a lot
of freedom for manoeuvre; you are not going to be at the whim
of your creditors in the way that debtors are. I think the issue
here which creates a problem for monetary union is that countries
that are systematically running surpluses may therefore be creating
problems for the debtor nations to the extent that they are not
stimulating demand. If the surplus is a reflection of weak domestic
demand then clearly that is a problem for the debtor nations,
because who are these debtor nations going to be exporting to
in the future? So this is the source of the tension and it is
a sort of collective action problem because, of course, in the
longer term, not everybody can export their way out of difficulty.
Maybe we could make an argument for the European Union operating
as a greater Germany—in other words becoming an export-led
zone in the global economy—but I am not sure that this is
going to be very well received by the international community,
not least the US, which of course is at the moment on a campaign
of global rebalancing; the focus of their ire at the moment is
Asia in general and China in particular. But I think the Germans,
who are very keen in this global context to point out that the
eurozone is not running a substantial surplus, might find that
their kind of economic model is not one that can be applied to
the eurozone as a whole.
Q75 Lord Vallance of Tummel: I think
we accept—don't we?—that there should be some sort
of penalty for running excessive deficits; I think that is more
or less understood. But is there such a thing as an excessive
surplus, and if so, should that be penalised?
Mark Cliffe: This is indeed a very difficult
issue, because Europe isn't actually on another planet and in
principle there isn't a particular problem with the eurozone collectively
running a surplus with the rest of the world. Obviously, within
that the picture what we see is that Germany is the dominant player
in Europe and it's obviously in absolute terms running far and
away the biggest surplus in Europe. I think it is very difficult
to identify the point at which a surplus would become excessive.
This is where the matter of judgment comes in, which is rather
unfortunate, because people are rather keen on having rules rather
than discretion in this regard. Rules are being imposed on the
debtors but not on the creditors and that's, I think, just an
unfortunate fact of life.
The Chairman: Thank you very much indeed.
Lord Hamilton, before we move to our final set of questions from
Lord Haskins.
Q76 Lord Hamilton of Epsom: Can we
just return to Lords Woolmer's point about monitoring and surveillance—which,
I think we are all agreed, is pretty meaningless unless it is
followed with enforcement. If enforcement was going to be introduced,
could that be done within the existing treaties or would this
mean a new treaty would have to be drawn up?
Mark Cliffe: That's a good question. I think
it would be very difficult to have a convincing enforcement mechanism
without some kind of treaty change. Of course we have in the stability
and growth pact, the idea of penalties, but they were not enforced.
I think the markets will remain sceptical of these penalties and
of sanctions really being enforced unless there is some more substantive
change in the legal framework. I think that that would probably
be the judgment of most market operators.
Q77 Lord Hamilton of Epsom: But Mr
Von Rompuy has ruled out any idea of a new treaty, so that means
we are a bit stymied on that one, doesn't it?
Mark Cliffe: Yes, it's indeed going to be extremely
difficult. I think that the question here is to what extent the
burden is going to be placed on the bondholders—in other
words, the market players—as opposed to, as it were, the
recalcitrant states. Because if we are going down a path where,
effectively, the problems lead to a bail-in of the bondholders,
you are likely to see continuing problems in terms of the level
of interest payments that some of these states will have to pay,
because, having had their fingers burnt during this crisis, the
markets are not going to be in a very forgiving mood. Hence I
think there is a need for some more substantive change to make
this sustainable in the longer term. Of course, they could get
lucky and we could have a burst of strong economic growth over
the next two or three years but that's clearly not something you
would want to rely on.
Q78 Lord Haskins: We are all struggling
with this idea of penalties and punishment for people who behave
badly. The only thing that really concentrates national treasuries'
minds is when they go out to borrow money in the bond market and
find that their rates are going up very high. That certainly is
the ultimate penalty that they have to suffer. Why, however, did
the bond markets not see all this coming? In other words, had
Greece, Ireland and Portugal been faced with paying more for their
money than they were in the run-up to the crisis, would that not
have changed the situation very dramatically? Why did the markets
not spot this coming—perhaps nobody did—and could
we find a way of making sure that the markets are more responsive
in the future, because that is the real way to concentrate people's
minds.
Mark Cliffe: I agree, and I think that this
is certainly the logic of the German position on bail-ins, which
is to make it crystal clear to the markets that taxpayers will
not be offering blank cheques in future. Of course, it's easy
with the benefit of hindsight to say that the market should have
realised that this was a problem, but I think there is another
dimension to this which is that the markets were always rather
sceptical of the political will to stick to the "no-bail-out"
provisions in the Maastricht treaty. In other words, they thought
they were going to be bailed out. That's always the source of
the problem. This is an issue: when it comes to the crunch will
Governments be prepared to let the pain be inflicted on the bondholders,
bearing in mind that a lot of the bondholders are actually in
the creditor nations of Europe? We go back to the point made earlier
on, that the Germans and the French are overly exposed to the
government debts of southern Europe.
Q79 Lord Haskins: And do the markets
still think that governments will bail out the bondholders or
have they leant their lesson?
Mark Cliffe: Well I think if you look at the
current level of bond yields I think they've learnt the lesson.
Q80 The Chairman: Two final questions
if I may, Mr Cliffe. Does the creation of a permanent crisis-resolution
mechanism constitute an important step towards the creation of
a minimal fiscal Europe, and could you say a little bit more in
relation to your last answer? Would a permanent mechanism result
in moral hazard, or is moral hazard a figment of the imagination
of economists?
Mark Cliffe: To take this as a whole, I think
this really begs a question of where the money is coming from
for the stabilisation mechanism, because I think the central problem
that German politicians have identified is that, at the moment,
Germany is most exposed to picking up the bill if there are any
difficulties in the monetary union. That is clearly a position
that they find unacceptable and that the German people find unacceptable.
Hence, if there is going to be some kind of crisis-resolution
fund put in place, let's call it a European monetary fund, for
want of a better term, who is going to put the money into the
pot? Well, the idea is that the countries that are running high
budget deficits or have high public debts should be putting in
a disproportionate amount of the funding for such a fund. In other
words, this is like an insurance fund and this, hopefully, will
get round some of the moral hazard problems—as it were—that
we currently face under the current regime.
Q81 The Chairman: Mark Cliffe, the
Committee is tremendously grateful to you for speaking to us this
morning. As I mentioned earlier, if there is anything you wish
to add to your evidence we would most grateful if you could write,
and if you could examine the transcript of this meeting just to
correct anything which is inaccurate. Again, we are most grateful
to you Mark Cliffe, and thank you for speaking to us from Amsterdam.
Thank you, dank u wel, tot ziens.
Mark Cliffe: Well thank you very much. It was
a great privilege and I'm sorry that I couldn't be there with
you in person.
The Chairman: Thank you very much indeed.
1 Note by witness : To clarify:
"managed default" by a Eurozone member state in its
government debt does not necessarily require (indeed, may be motivated
by the desire to avoid) the devaluation that would follow exit
from monetary union. However, such devaluation would impose currency
losses on the foreign holders of the leaving member's government
debt which would be akin to the effects of a default. Further
it is possible to conceive of situations in which the devaluation
of the currency and default would both occur, compounding the
losses for foreign holders. Back
2
Note by witness: In the first instance the
redenomination of existing debt would simply leave Greece where
it started in terms of its public debt to GDP ratio, since both
would be recalibrated in new Greek Drachma. Back
3
Note by witness: To clarify: this answer mistakenly
addresses the question of a Greek exit from monetary union, not
default per se. The answer to Q61 gives a fuller clarification
of the distinction. Back
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