This was the topic of the Presentation given by Mr. Emmanuil Schizas, Senior Economist Analyst of ACCA.
Attendees got a peek – ahead of anyone else – of unpublished Q3 2013 findings of ACCA’s Global Economic Conditions Survey; drawing on four and a half years of interviews with accountants, ACCA can now explain much of what had driven the recovery so far, and how solid a recovery it is.
- Political uncertainty in the US, Europe and South Asia derailed the recovery substantially in 2011 and 2012. It was further fuelled by geopolitical risk fanned by the Arab Spring.
- The long cycle of commodity price inflation was also hugely influential:its end in early 2011 finally allowed central banks around the world to provide substantial and co-ordinated stimulus
- In Europe, the impact of Mario Draghi’s ‘whatever it takes’ commitment and the ECB’s liquidity operations cannot be overstated .
- Austerity has of course also held the European economy back but ACCA and IMA members now think that it has mostly run its course. Instead it is now the former big spenders, such as the US and China which will start to rein in spending – this too should have a mild dampening effect on the recovery.
After the bail-in
The Cyprus bail-in was a dramatic event that made headlines and sent alarms ringing around the world. Yet it barely put a dent in the cheap-money fuelled recovery of the global economy. More importantly, when surveyed in Q2 2013, our members across sectors generally felt that many of the principles of bail-ins are sound – limiting the taxpayer’s exposure, bailing in creditors and particularly senior bondholders. On the other hand, members took a very dim view of the authorities’ decision to bail in deposits but not the ECB’s claims on Cypriot banks, as well as the need for capital controls.
In the aftermath of the bail-in, it is plain to see from survey and anecdotal evidence that Cyprus’s banking sector has not emerged in good enough health to inspire trust among depositors – as a result it is generally unable to extend loans to businesses. Cyprus’ severe credit crunch will continue to reverberate through the banking sector for years, as delinquencies and non-performing loans are rising steadily – as of Q3 2013 they have already roughly doubled year on year.
Indeed if a successful legacy is to emerge from the Cyprus bail-in, it will mostly be seen in the rest of Europe and beyond – where the authorities, despite occasional denials, have accepted bail-ins as a legitimate part of their resolution toolkit since as early as mid-2012. Nearly one in five ACCA and IMA members believe that bail-ins could occur in their own countries too over the next five years. Apart from Cyprus, the countries most at risk appear to be Malta, Luxembourg, Belgium, the Netherlands, Greece and Italy. Future interventions, however, are most likely to involve ‘statutory bail-in instruments’ – alternatives to deposits which are not at the core of the banking system – and will need to come with a clear roadmap defining the hierarchy and calculation of claims.
What the experience of Greece can teach us
In Cyprus the starting point is very different compared to Greece – there isn’t an overwhelming competitiveness gap with Eurozone peers; indeed Cyprus was living broadly within its means both in fiscal terms and in terms of competitiveness. Early results from the IMF’s First Review are broadly encouraging.
However, some lessons need to be learned from the Greek programme. First and foremost is the need for more sober and less optimistic forecasts. The IMF’s researchers have generally accepted that they have either underestimated fiscal multipliers or overestimated potential output in bailout countries. Either way, forecasts need to reflect the lessons learned.
Second, it is important for authorities on the ground to take ownership of the adjustment programme and choose a mix of reform, revenue, spending and benefits interventions that they can defend as though it was their own. Some combinations are better than others; but controversially the better combinations rely substantially on benefits (pension and national insurance) cuts. Moreover, policymakers should not overestimate their ability to avoid revenue-based measures, i.e. additional taxation. Fiscal adjustments of over 4% tend to be impossible without tax hikes.
Third, debt sustainability must be seen for what it is – a moving target. Policymakers much not rely on arbitrary benchmarks but rather seek internally coherent targets.
Finally, in forecasting macro economic variables is crucially important to look beyond headline indicators. In the case of labour market estimates, it’s important to forecast what kind of people will be most likely to slide into unemployment; the implications for policy are very substantial.
Europe’s master plan
It’s important to treat European policymakers with a mix of scepticism and sympathy. Their job is very difficult, and even with the best of intentions it could fail spectacularly.
Ultimately, their task has been to insulate Europe’s real economy from the ailing sovereigns and financial institutions of its member states. The key is to ensure, in particular, that the smaller core economies aren’t excessively vulnerable to shocks originating from poor bond market conditions or exposure (through their banks) to non-performing loans abroad.
During the crisis, peripheral countries became net exporters of financial contagion to the core for the first time – the relationship runs the other way around when markets assume solidarity between member states. Europe has, since the second Greek bailout, returned to this ‘normal’ status quo, which signals that the financial segment of the crisis in Europe is over.
The European Institutions have responded to the crisis with antidotes to what they see as the institutional weaknesses of the Eurozone: new instruments of integrated fiscal governance; measures to promote ownership of fiscal governance at the national level; a joint system of supervision, regulation and resolution that will truly deliver a single market in financial services; and a more powerful set of liquidity tools for the ECB.
These are very solid interventions and deserve at least some praise. But it’s clear that the institutions delivering them are struggling with maintaining legitimacy. Since mid-2011, a majority of EU citizens do not trust any of the European institutions, and the gap has only widened since. Least corroded is the image of the European Parliament, which citizens feel they can hold to account to some extent, but a new wave of protest votes at the European elections could jeopardise even that.
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