Examination of witnesses (Question Numbers
Dr Thomas Mayer and Dr Marco Annuziata
16 NOVEMBER 2010
Q127 The Chairman:
Good morning, everybody, and welcome to our third witness session
on the report on economic governance. We are honoured today to
have two supreme experts on the subject. We are very grateful,
gentlemen, that you have managed to find time to come and see
us. I have to issue my normal caution to everyone: these are lofty
rooms and sound gets lost awfully quickly, so please use the microphones
or declaim as did our 19th-century forebears. I remind my colleagues
to state if they have a declaration of interest, although I think
that most have made a declaration by now. I say to the witnesses
that we will send a transcript of this session to you and we would
be most grateful if you could check to assure us that you know
that what has been set down is right, proper and correct. Some
supplementary points might occur to youso often, when you
leave the room, you wish you had said this or that. We would be
most grateful if you would put those down on paper and send them
to us, because we are anxious to get as much information and evidence
as we can collect. Would one or both of you like to make an opening
statement? In so doing, would you be kind enough to say who you
are and where you come from? If not, I will start with the first
question. Does anyone want to make an opening statement?
Dr Thomas Mayer: No, I would be quite happy
to react to the questions.
Dr Marco Annunziata: Likewise.
Q128 The Chairman:
Thanks very much. Dr Annunziata in particular stated in his written
evidence that the recent fiscal crisis in Europe has exposed a
number of flaws in the existing system of economic governance.
The most simple and fundamental is that the smooth functioning
of monetary union requires a much greater degree of centralisation
and co-ordination in macroeconomic decision-making, especially
as regards fiscal policy. To what extent is closer fiscal union
necessary for the eurozone to succeed? What does centralisation
and closer co-operation actually mean? Is it Brussels directing
to member states or simply some sort of bargaining process about
respective national positions? Dr Annunziata, would you like to
make a start?
Dr Marco Annunziata: Certainly. What is happening
in the eurozone right now is the following. The introduction of
a common monetary policy and common currency has been followed
by a massive degree of integration of the financial sector and
of the banking sector, evidenced, for example, by the distribution
of the holdings of sovereign debt of each individual country across
other member countries. Part of the concern that we have about
the current situation in Ireland, Greece and Portugal is that
sovereign debt issued by these countries is being held in significant
amounts by banks in other member countriesin the eurozone,
as in Italy and France, but also outside the eurozone, as in the
UK. This implies that shocks and instability in one member country
can no longer be isolated and contained to that country; they
spill over. This we have seen in the case of Greece; once instability
in Greece became manifest and triggered concerns in the market
as to whether Greece would be able to solve its debt, it was ultimately
necessary for the European Union to step in and to organise, together
with the IMF, a rescue mechanism to prevent the spilling over
of the instability to the rest of the area. That has one clear
implication, in my view, which is that, if one country deviates
in its fiscal policy from the prudent path, it has a negative
spillover effect on other countries. This is why, in my mind,
it is necessary to have a closer degree of fiscal co-ordination
and fiscal centralisation. If the consequences of one country's
fiscal policy are so quickly and so dramatically transmitted to
the rest of the area, then the rest of the area must have some
saysome influenceon the way each country's fiscal
policy is run. The most thorny question is how to organise this.
Unlike monetary policy, fiscal policy lies at the heart of the
exercise of sovereign power; decisions on taxation and spending
should lie with the elected representatives. This is where the
issues become especially complicatedhence your question
as to what closer co-ordination actually means. The simplest solution,
which is, however, the most extreme and dramatic, would be full
fiscal integration, where a central authority in Brussels would
to a large extent run fiscal policy for the whole of the euro
area, in a system similar to that of the US. That, of course,
is not feasible unless it goes hand in hand with political union,
because we cannot have fiscal policy being run by a policy institution
that does not reflect the will of the people. Alternatively, mechanisms
and rules have to be set in place. The stability and growth pact
was supposed to provide exactly this mechanism, by setting guidelines
and limits, not on the details of the composition of taxation
spending but at least on the fiscal deficit and the fiscal debt;
the result is fiscal policy which has implications at the macro
level. The problem that we have seen with the stability and growth
pact is that it has been impossible to enforce. There are in theory
sanctions, but sanctions have proven to be unenforceable. The
underlying problem is that to enforce sanctions you need somehow
to override the sovereignty of individual states, which is why
I am also sceptical about the strengthening of the stability pact
and, frankly, somewhat sceptical even of the idea of quasi-automatic
rules. The best and most pragmatic way to proceed would be if
eurozone countries agreed on what fiscal rules should be followed.
These fiscal rules could then be incorporated into national legislationviz.
the German example of constitutional rules on debt. These mechanisms,
made legally binding within each country according to popular
will, and therefore by legally elected representatives, would
be one way in which to ensure a sufficient degree of fiscal co-ordination
without going so far as a full centralisation of fiscal policy.
Q129 The Chairman: That is very attractive,
but I put it to you that in the single market legislation, if
it is incorporated at national level, we quite often find that
regulation varies from country to country. Do you think that it
would be possible to arrive at an ideal set of regulations that
could be applied nationally?
Dr Marco Annunziata: I think that in this case
it would be, because it would start from a recognition of the
fact that what needs to be limited is the extent of the deficit
in public finances and the extent and the level of public debt.
Limits would be imposed on these macroeconomic variables that
are easily identified and reasonably easily measured. Then, some
flexibility could be left to each country as to what correction
mechanism would kick in. Another example in the European Union
is Poland, which has constitutional limits on the debt to GDP
ratio with provisions that limit the flexibility in the budget.
If the debt to GDP ratio limit of 55% is breached, there are safeguards
limiting the level of expenditure. The details of these mechanisms
could vary from country to country as long as they are set in
stone in the legislation giving reasonable assurances that they
will guarantee an automatic correction of fiscal policy if certain
limits are breached. It should be possible to have a set of rules
that are in principle generally accepted and where the thrust
of the rule is the same across countries, whereas some of the
details of the implementation could vary from country to country.
Q130 The Chairman: Dr Mayer, would
you like to respond to that first question? In addition, are we
really saying that fiscal policy and monetary policy are now for
ever related to each other? Is it not very difficult now, as has
been the case, to separate those two sets of policies?
Dr Thomas Mayer: On the first part of your question,
why we are discussing the issue now, I would like to make a brief
historical analogy. European monetary union is often compared
to the gold standard and, in a way, it is somewhat similar. We
have seen that in the 1920s, at the time of the gold standard,
very big imbalances in the global economy built up. When the downturn
came in the wake of the 1929 stock market crash, it led to countries
defaulting. At the time, it was Germany that was the borrower
and the Americans who were the lenders. Germany defaulting was
a serious threat to bank and financial stability and there was
an ensuing depression. There was a lack of a credit mechanism
at the time to manage the situation in a better way. This was
also, historically, at least one element that led to the creation
of the International Monetary Fund post-World War II. What history
tells us is that when such big imbalances have built up and have
led to threats to the financial system and when these imbalances
are then viciously corrected by the market and the financial system
suffers, the central bank cannot alone ensure financial stability.
If you let the central bank ensure financial stability on its
own, it can do so only by printing money. You then have a need
for co-operation between the fiscal authorities and the monetary
authorities to ensure financial stability. We have seen this through
the financial crisis in the United States, where there was fairly
close co-operation between the Federal Reserve and the Treasury.
To some extent we have seen it in the UK, where we have had closer
co-operation between the central bank and the fiscal authorities.
If you transfer this analysis to the euro area, I would at least
argue that the ECB needs to have some help from the fiscal side.
Otherwise it is thrown back on dealing with the problem of financial
stability through purely monetary means, which is not what you
want. We all know from Walter Bagehot that you address liquidity
issues through monetary policy, but you should not address insolvency
issues in the banking sectors through monetary policy. Therefore,
I think that there is a case for a fiscal agent that supplements
the monetary agentthe ECB. I fully agree with what Dr Annunziata
said. We should of course have precautionary elements in economic
policy to avoid coming to such a dangerous situationto
a crisisbut we cannot be sure that with precaution alone
we can avoid a crisis.
Q131 The Chairman: What form would
this fiscal agent take?
Dr Thomas Mayer: There is a big debate going
on at this moment, today and tomorrow, at ECOFIN, about what has
been called a permanent crisis management mechanism. Such a permanent
crisis management mechanism would in my view have two key functions.
Function number one is that it would perform for EMU what the
IMF did in the gold standard post-World War II. The function was
to give, in times of emergency and financial distress, emergency
financial assistance coupled to adjustment programmes. The second
function would be to make a default of a sovereign possible without
this causing a systemic shock. That is obviously a very tall order,
but if there was the possibility of a sovereign default in EMU,
we would have a very strong disciplinary element for Governments
that would reinforce the points that Dr Annunziata made in introducing
disciplinary elements in national fiscal policies.
The Chairman: I am going to ask Lord
Hamilton to ask a question, which I know he is very interested
Q132 Lord Hamilton of Epsom: I am
absolutely fascinated by the concept of sovereign default without
systemic failure. How does this actually happen? Does the country
that defaults remain within the eurozone or does it fall out of
the eurozone and revert to its previous currency?
Dr Thomas Mayer: The discussions that have taken
place since the beginning of the year, when this came to the fore,
have basically concluded that evicting a country out of the eurozone
is impossible. We have put the legal framework together and that
was not foreseen; we cannot change it and we cannot find a majority
to introduce such an exit clause. At the same time, a voluntary
exit by a country in difficulties is also very unlikely, given
that the euro has provided, in times of financial stress, some
shelter to these countries and allows them to go about their affairs
in better ways than otherwise. If you want a practical example,
compare the fate of Iceland, which was not backed by the Community,
with the labours that Ireland is going through. So exit is not
possible. The task for the European Community is to find a mechanism
by which one can deal with an over-indebted country and in certain
circumstances provide some debt relief to it with the participation
of the private sector, so that over time the country can be restored
to financial health.
Q133 Lord Hamilton of Epsom: Does
that include the banks taking what is known as a "haircut"?
Dr Thomas Mayer: I am speaking not pro domo
when I say that this would be unavoidable. I do not think that
politically it would be acceptable to the financially stronger
countries to solve such a problem solely on the back of the taxpayer.
I do not think that the taxpayer would accept that, when they
are called on to make a contribution to resolve such an issue,
the lenders, who in the past have benefited from elevated returns
by lending money to the country, would be entirely spared.
Q134 The Chairman: Dr Annunziata,
would you care to contribute to the debate that has been started
by Lord Hamilton and Dr Mayer?
Dr Marco Annunziata: Yes. I completely agree
with the points that Dr Mayer made, but I would add the following.
I also feel strongly that some form of private sector participation
in the pain of haircuts is necessary and healthy. In some ways,
the reason why we find ourselves in the current predicament is
that we have had private investors in the first 10 years of the
eurozone buying up the debt of various eurozone countries as if
they carried the same risk. Therefore, the private sector has
exercised no role in assessing whether or not different fiscal
policies and different parts of productivity and economic strength
carry different implications for the tradeworthiness of the sovereign.
This can be addressed only if the private sector knows that, in
the case of crisis, it will suffer haircuts. Therefore, it will
be more careful in assessing the situation and will require a
higher-risk premium when it sees fiscal policy veering off track.
The question that you were posing is whether this can be done
without a systemic disruption to the financial system. This is
the most difficult question. It is easier to agree that, going
forward, haircuts should be included on new debts. So, for example,
as we have seen in the declaration of European Finance Ministers
in Seoul, it seems easy to agree that we should have a mechanism
in place such that new debt, issued after a certain date, will
be subject to haircuts. In a way, we are sidestepping the problem.
The problem that we are facing today is that a number of European
countries are saddled with substantial amounts of public debt.
The question that you are posing is whether the current problem
can be addressed by, for example, imposing haircuts on the holders
of the debts of Greece, Ireland or Portugal, should they require
help from the IMF and the EFSF, without creating a systemic crisis
in the eurozone. That is a very difficult question to answer.
I can tell you what I think that we should be looking for. Normally
we would be looking for what is driving the behaviour of private
investors. What would drive private investors to cause contagion?
If they face haircuts on Greek and Irish debt, what will lead
them to sell off Portuguese and Spanish debt on the market? Part
of it is the investor's ability to discriminate between the situations
of the different countries. Here, some progress has been made
compared to April and May, when investors looked at the eurozone
as one homogeneous country in terms of public debt. I think that
investors are now much better able to discriminate between the
weaker countries, which are currently identified as Ireland, Greece
and Portugal, and countries that are in a somewhat more resilient
position, such as Spain and Italy. I say "somewhat more resilient"
and not strong in absolute terms. The other issue is the transmission
channel. The fact that private investors can discriminate a bit
more gives us a bit more confidence that systemic contagion can
be avoided. The other element to watch out for is the transmission
of the shock through the financial system. One concern that markets
will have is that, if losses are imposed on banks, they will be
located not just in the countries suffering a debt crisis but
across the European Union. Would these losses be of a size that
is disruptive and constitute a threat to the stability of the
system? Can the Governments involved step in to help to stabilise
the financial sector with, for example, capital injections? These
are the issues on which one should focus to understand whether
or not systemic contagion can be avoided. I believe that we are
moving towards a situation where systemic contagion can be avoided,
but these, I believe, are the crucial issues in this regard.
Q135 The Chairman: Dr Annunziata
and Dr Mayer, do Ireland and Portugal today represent a systemic
Dr Marco Annunziata: I think that they definitely
represent a contagion risk in the sense that, as we are already
seeing, instability in Ireland is spilling over into significant
concern and therefore the risk of widening of sovereign debt spreads
for Portugal but also, to some extent, for Spain and Italy. There
is definitely a contagion effect at work. I would also say that
a lot of the concern that we see in the markets right now is driven
by uncertainty over what will happen in terms of a possible debt
restructuring mechanism going forward. It strikes me that the
market does not have any uncertainty over whether Ireland will
be helped. There is not the uncertainty that we had at the beginning
of the year with Greece, when there was genuine uncertainty over
whether it would be helped. Now we have statements of commitment
from the European Union and the EFSF is operational. The markets
know that the IMF and the EFSF will step in but they do not know
what the implications will be in terms of a discussion on that
restructuring. In my mind, this is what makes the current situation
in Ireland so disruptive in terms of the wider effect of instability
and spread across the other countries.
Dr Thomas Mayer: If we did not have the euro
area safety net that was constructed, I would answer, "Yes,
Ireland does pose a systemic threat". Since we have the euro
area safety net, we have now the possibility of taking care of
Ireland or any other countryas long as they are not too
big, I have to say as a small caveatto carry them on. However,
as Dr Annunziata has said, it is presently very difficult to connect
the situation now with the past, when investors were buying euro
area sovereign debt indiscriminately and assuming that there was
no risk and that this was a risk-free asset. In fact, that behaviour
was at least also indirectly encouraged by the authorities, as
there was no equity set aside required for banks for euro area
sovereign debt. It was treated by almost all sides as risk free.
We need to connect this regime to a regime where we have to say
that there are associated default risks. It is a very difficult
task, but there is a silver lining on the horizon that I believe
makes it eventually doable. When I personally as an economist
do my analysis, I would come out and argue that there may be cases
of sovereign insolvency in the GIP group of countriesGreece,
Ireland and Portugalbut I think that we can say with considerable
confidence that the rest of the euro area is solvent.
Q136 The Chairman: So a permanent
mechanism is urgently needed.
Dr Thomas Mayer: It is needed, yes. The legacy
of the past is fortunately not so big that we could not do some
preparationwe have until the middle of 2013, which is for
how long the euro area safety net existsto take care of
any events that may happen with these countries.
Q137 Lord Jordan: As the present
crisis develops, why is Ireland refusing help? What does it have
Dr Marco Annunziata: It is gaining some time.
Ireland is refusing help for the time being because at the government
level it is fully funded for another six or seven months. In order
to finance its budget deficit, it does not need to access the
markets until the middle of next year. The Irish feel, I believe,
that they have already made a tremendous effort in terms of fiscal
austerity plans and in terms of beginning to address the problems
in the banking system. Therefore, if they have a little bit of
good luck or good news in the growth outlook either in Ireland
or in the global picture, especially the US and UK, with which
Ireland has substantial trade links, that might be enough to restore
market confidence before they need to access external financing.
I think that this is why they are trying to buy time, thereby
avoiding a situation in which they would instead be subject to
negotiations with the IMF and the European Union before perhaps
imposing further constraints.
The Chairman: I am going to ask Lord
Marlesford to ask his question now, but would you incorporate
the relevance of the question that we had assigned about the United
Q138 Lord Marlesford: It is relevant.
What I am unclear about, from both of you, is whether you see
the problem as a eurozone problem, an EU problem or a world problem.
Dr Mayer started telling us the history, quite rightly and interestingly,
but that was a world problem that had no connection with a sort
of eurozone equivalenteveryone was using different currencies.
I want to ask about the relevance of the currency. Does the currency
matter or is it merely a matter of who has a problem in paying
back debts to whom?
Dr Thomas Mayer: It is first and foremost a
eurozone problem, because in a figurative way it is a quasi-recreation
of the gold standard, where such things can happen. This could
not happen in the UK, where the Bank of England can step in and
provide liquidity to the Government if needed. So it is a eurozone
problem, but the external, spillover effects of the eurozone problem
turn it into an EU and a global problem. If we have a major default
of a sovereign in the eurozone, I think that this would have global
ripple effects. Remember that what triggered the 1931 global banking
crisis was the default of the Austrian Creditanstalt. This was
a smallish bank in a smallish country that introduced a second
leg to the depression. So I would say that this is a eurozone
problem but with global effects.
The Chairman: With great apologies to
Baroness Maddock, we have to move on. Because we have a flow of
discussion and debate, I will ask Lord Moser whether he would
intervene at this point.
Q139 Lord Moser: Dr Mayer, you made
an optimistic point a few moments ago about how troubled countries
could be helped. Then you said, I think, "as long as the
problem is not too big". That leads me to ask a question
that I was going to ask a bit later. In some of your briefing
papers, you propose a European monetary fund as a solution. Could
you say a word about that?
Dr Thomas Mayer: Yes. In essence, this idea
of a European monetary fund was inspired by two historical precedents.
On the one hand, there were the deficiencies of the gold standard
and the answer from the architects of the post-World War II financial
system in the creation of the International Monetary Fund. That
is one element where we can learn from historical experience and
that we can use to fortify the euro area. The other historical
element was the way in which countries eventually dealt with the
Latin American debt crisis of the late 1970s and the early 1980s.
You might recall that, when Mexico was threatening to default,
we had a standstill agreement initiated by the IMF under the leadership
of Jacques de Larosie"re that meant that we would not have
a situation where the banks had immediately to write off the debt
of the defaulting countries. After several years, we then had
an almost orderly default, which was managed by the issuance of
so-called Brady bonds. The principle of the Brady bonds was that
investors could exchange an impaired, unsafe asset against a safe
asset at a discount. If you held a Latin American debt paper that
was promising to pay you back at 100% but this promise was not
very credible at the time, you could switch it over and obtain
a payment backed by the US Government guaranteeing you a repayment
of 100X percentthe X, I have to say, differed from
country to country. If you put these two elements together, you
arrive at what I called earlier a European monetary fund, which
has the ability to manage the adjustment process in a fixed exchange
rate system where you cannot move the exchange rate any more.
If that adjustment process fails, you have a mechanism that would
allow an orderly burden sharing among all the stakeholders in
the system. The stakeholders in the system are the population
of the affected countrythey would of course have to make
a contribution to adjustment through austeritythe taxpayers
in the other countries of the European monetary union, who probably
will have to make a contribution as well to safeguard financial
stability, and the creditors, who would also have to make a contribution
to a resolution of the problem.
Q140 Lord Moser: But will there be
a sort of European IMF?
Dr Thomas Mayer: A European IMF-plus.
Lord Moser: What is the
Dr Thomas Mayer: The plus is the ability to
restructure the debt of an insolvent country that cannot be restored
to normal operations because it is over-indebted. This was an
element that the IMF lacked. In 2002, the IMF tried to build a
debt restructuring mechanism for severance. At the time it was
pushed forward by the IMF's deputy director, Anne Krueger. This
effort failed because people could not agree on a move of sovereignty
from the national to the supranational level. There would have
to be some authority guiding the process, but the shareholders
of the IMF were not willing to accept that. This time around,
the situation is different in so far as members of the euro area
have already shifted a significant degree of their sovereignty
to the supranational level. So the situation is not directly comparable
to the discussion that we had in 2002 in the IMF context, where
the creation of such a debt restructuring mechanism failed because
the countries were not under a pre-existing umbrella of a supranational
Q141 The Chairman: Dr Annunziata,
I think that I may have cut off your earlier contribution. Would
you tie that in with this question: if we did create an EMF, would
that in effect sideline the IMF?
Dr Marco Annunziata: That is a very appropriate
question. We have to ask ourselves what we want to add to the
existing framework that would actually be useful. The IMF, in
terms of the design of the adjustment policies, needs to go hand
in hand with any external financing and debt restructuring mechanism.
The IMF has an enormous and unparalleled degree of expertisehopefully,
no European institution will ever be in a position to accumulate
the same degree of expertise going through another crisis. Therefore,
the involvement of the IMF would remain extremely precious and
essential to help us to guarantee a greater degree of external
monitoring. That is why, in the end, the current arrangement that
we have in place implies the intervention of the IMF, side by
side with European financing via the EFSF. The IMF not only has
greater expertise but is also more of an outsider and therefore
a more objective monitoring and enforcement mechanism. The European
equivalent of this mechanism, as Dr Mayer was saying, should combine
the two crucial aspects of providing guided assistance to external
financingguiding the crisis and helping a country through
the crisistogether with some mechanism that imposes the
cost on the creditors. It is essential that we combine these two
components and that we do not shy away from the problem of existing
debt, as it is the existing stock of debt in a number of countries
that constitutes the problem and the source of instability. It
is not a debt that will be issued in the future. As for how broad-ranging
these arrangements should be, I support what Dr Mayer was saying
in response to Lord Marlesford. This is a eurozone problem. The
source of the problem is the common currency, so the rules that
come into place in terms of limits on fiscal policy and the mutual
support mechanism should be there for eurozone members. They are
essential for eurozone members. There is no automatic argument
as to why they should be extended to EU members that do not belong
to the eurozone. There is an issue, as Dr Mayer was pointing out,
of spillover effects coming from whatever happens in the eurozone
to neighbouring countries. Here, the UK has a clear vested interest.
From the UK's perspective, the issue is more strategic, if you
will. What is the best way to influence the process in a way that
is beneficial to the UK? Is it easier to do it through voluntary
participation in these arrangements or via an outside influence
while staying outside? But the problem is born of the adoption
of a common currency, so the eurozone is the natural arena and
range of countries where the new rules absolutely need to be applied.
The Chairman: Thank you. Baroness Maddock,
take us in a fresh direction, please.
Q142 Baroness Maddock: I wanted to
ask about the stability and growth pact. First, what economic
indicators should be monitored under the stability and growth
pact? Dr Annunziata, I know that the Italian Government insisted
that aggregate debt included private as well as public debt as
part of the budget criteria of the stability and growth pact.
Do you believe that this view has any merit? Would it help to
detect excessive credit expansions such as the housing bubbles
that we have seen? Would it help to detect those in advance? Do
you think that this approach is closer to the way in which the
markets look at the financial stability of countries?
Dr Marco Annunziata: It is not surprising that
my Government, the Italian Government, are pushing for an approach
that would consider private debt as well as public debt given
that Italian household private debt, at this point in time, is
relatively low. But that approach is correct from a theoretical
standpoint. While public debt has sustainability issues of its
own, from the point of view of the systemic stability of a country
it is the sum of public and private debt that matters. This is
the way in which markets tend to look at it. In fact, something
that we have observed even since 2008-09, since the earlier phases
of the crisisand by crisis, here, I refer to the subprime
crisisis that the widening sovereign debt spreads were
more significant for countries that had large current account
deficits, reflecting a public and private sector debt, and relatively
more muted, for example, in the case of Italy, because Italy had
a smaller private sector debt and a smaller current account deficit
debt, even though the Italian public debt reissue was the highest
of the countries being considered. So it is a sensible step towards
enlarging the stability pact to a broader set of variables. The
suggestions coming from the European Commission are to look at
the current account deficit and indicators of competitive and
central activity. They are all going in the right direction of
looking at sustainability from the point of view of a country
and not just the Government. Looking at current accounts and the
private sector would help as an early warning signal to monitor
what is happening. For example, are asset or housing bubbles being
created? Is there excessive credit growth in the economy? It would
be a helpful way to monitor them. The tricky question will then
be how you address them. This is something that Dr Mayer referred
to at the beginning. Some of these distortions might be born of
monetary policy but cannot necessarily be addressed by monetary
policyfor example, in countries such as Spain or Ireland,
where we saw an excess of credit growth over the last several
years before the crisis. That is, in some part, to be attributed
to the single monetary policy, which, being a common monetary
policy for the whole of the eurozone, necessarily cannot be appropriate
for each single individual country. So it might be the source
of excess credit or imbalances in individual countries. The question
then becomes how you address those. Should you, for example, impose
stricter rules on fiscal policy to counterbalance the impact that
the common monetary policy is having? This is a difficult question.
Should a country that is running a balanced budgetbut,
because interest rates are relatively low, given its level of
growth, credit growth acceleratesbe asked to run a budget
surplus of 3 or 5 per cent of GDP to counteract the monetary policy
and therefore offset the imbalance in the private sector? It is
another very difficult question that would arise. But definitely,
in terms of extending the range of indicators, this will go in
the right direction.
Q143 Baroness Maddock: Dr Mayer,
do you have anything to add to that?
Dr Thomas Mayer: One small comment. The pact
wants to foster stability and growth. For stability and growth,
we need fiscal stability, financial stability and international
competitiveness. But, in the past, we have only really intensely
monitored fiscal policy.
The Chairman: We are pressed for time
and we have our third witness with us. With the indulgence of
Sir Martin Jacomb, perhaps I can ask Baroness Hooper and Lord
Vallance to telescope their questions. I am going to give you
an opportunity, gentlemen, to make any final points that you are
anxious to make before us today, after which I intend to close
Q144 Baroness Hooper: Do you consider
that the new European Systemic Risk Board has a useful role and
how will that role develop in terms of macroeconomic events and
The Chairman: While you are thinking
about that, perhaps Lord Vallance could ask his question.
Q145 Lord Vallance of Tummel: My
question opens up quite a wide debate. Our witnesses may want
to consider whether they might want to write in rather than answer
now, but let me ask it. The debate that we have been having this
morning centres on reinforcing financial and fiscal disciplines
and one form of crisis management or another. However, in your
written evidence, Dr Annunziata, you emphasise the equal importance
of, I think your phrase was, "fostering convergence in competitiveness".
I wondered if you might expand a little as to what you mean by
competitiveness in this context. Presumably, it goes beyond relative
wage levels. How in practical terms would you see convergence
Dr Marco Annunziata: I start with one comment
on the Systemic Risk Board. The European Systemic Risk Board can
play an extremely important role, which should be complementary
to the monitoring being implemented under the stability and growth
pact. Before the summer, we discussed increasing the range of
macroeconomic variables that could be included under the stability
pact but, to understand whether or not systemic risks are being
created, we need to go beyond that. We need to look not only at
the increase in public and private debt in individual countries
but also at trends in individual financial sectors, how the risk
is being located within the sector and to what extent the interlinkages
across the banking sector in Italy, France, Spain and Greece create
the risk of transmission of imbalances. This is where the European
Systemic Risk Board would come in. It would have an enormous amount
of work to do in terms of just gathering information to put us
in a better position to assess how significant the systemic risk
is. We have discussed it before with reference to Ireland. Now
we both feel that we are in a better situation to assess the systemic
risk and feel that it is limited. There is some progress compared
to the beginning of the crisis, but there is still an enormous
amount of work to do. In that respect, the Systemic Risk Board
will be extremely precious. In terms of competitiveness, what
I meant is thatthis goes hand in hand with what Dr Mayer
said a moment agoin the eurozone we have been focusing
on the criterion of fiscal prudence, but the problem is that,
at the same time, we have allowed countries to move in completely
different directions as regards productivity growth and competitiveness.
This has created a situation where some countries have been running
enormous levels of private debt, not just because households or
corporations were borrowing a lot more given a lower level of
interest rates, but also because these countries had seen a deterioration
in the external competitiveness of their industrial systems. That
meant that they were no longer able to export on the external
market, either within or outside the euro area. These issues need
to be monitored because otherwise they will continue creating
enormous imbalances between surplus countries and deficit countries.
This goes to the heart of a debate that goes beyond the eurozone.
What should be the burden of adjustment between countries running
current account surpluses and countries running current account
deficits? What I meant in my remarks is that there should be a
strong emphasis on structural reforms, pushing countries to liberalise
their markets and to improve their education system and research
and development efforts to try to make the entire eurozone more
competitive on the global market.
The Chairman: Dr Mayer.
Dr Thomas Mayer: Very quickly on the European
Systemic Risk Board, I think that this is an integral part of
the monitoring of financial stability, as seen as part of the
whole. On the question of international competitiveness, what
we need is more cost discipline. The countries that have accumulated
the large external deficits did so because there was no pressure
for cost discipline. As credit was easily available, these deficiencies
did not show up. Like Dr Annunziata, I think that the best means
to achieve cost discipline is competition. If you have more intense
competition in the single market, this would be a big leap forward
in ensuring cost discipline and, therefore, a restoration of international
The Chairman: Colleagues, I apologise to
those of you who have been unable to ask a question today. We
are enormously grateful to Dr Annunziata and Dr Mayer for the
answers to the questions that we have been able to put. If there
are further points or, indeed, points that you feel you have not
had the opportunity to reply to, we would be most grateful if
you could write them down. The point on competitiveness that Lord
Vallance was asking about was extremely important and interesting,
as were so many others.
Lord Trefgarne: I was going to ask whether
we could have a note on the question that I would have asked about
the eurozone bond.
The Chairman: Yes. It would be good if
we could give you some guidance about those questions that we
were not able to turn to, as Lord Trefgarne has pointed out. In
the mean time, we will send you the transcripts. Please correct
them and let us know if you have further ideas. Take away our
enormous thanks for this morning's session.