Tag Archives: regulation

Fiscal rules and election campaigns

24 Sep

As the UK Labour Party’s annual conference kicks off this week, ideas are beginning to emerge about what Labour will offer in the run up to the 2015 general election. One of these ideas is to have the country’s independent budgetary body, the Office for Budget Responsibility (OBR), to audit all of the pledges made by Labour in its election manifesto. Assuming that Labour’s tax and spend plans are found to be consistent with budgetary discipline and pledges on meeting deficit and public debt targets, the OBR would thus bolster Labour’s claims to responsibility and sound fiscal management.

This idea is nothing new for the Labour party. When Tony Blair carried his party to victory in 1997, he had promised to match Tory party spending commitments. This pledge had been intended to bury the long-standing image of the Labour party as a motley crew of profligate leftwingers. Over time, we have seen fiscal policy steadily depoliticized through the creation of fiscal councils and various fiscal rules, a development supported by the Left and the Right. The IMF estimated in 2009 that 80 countries in the world have adopted a fiscal rule of one kind of another. Debt brakes have been inscribed into constitutions in Germany and in Switzerland. In the UK, the OBR was created in order that government be made accountable to an independent body for its public spending. Elsewhere, fiscal councils with varying powers have become a common feature of the macro-economic policymaking landscape, as the table below highlights.

Fiscal Councils

Austria

Government Debt Committee (1997)

Belgium

High Council of Finance (1989)

Canada

Parliamentary Budget Office (2008)

Denmark

Economic Council (1962)

Germany

Council of Economic Experts (1962)

Hungary

Fiscal Council (2008)*

Netherlands

Central Planning Bureau (1947)

Slovenia

Fiscal Council (2010)

Sweden

Fiscal Policy Council (2007)

United Kingdom

Office for Budget Responsibility (2010)

United States

Congressional Budget Office (1975)

* Hungary’s fiscal council was dismantled in 2010

The European Union as a whole is organized around a set of budgetary rules that are policed and monitored by the European Commission, the so-called Fiscal Compact of 2012.  Monetary and fiscal policy are slowly starting to look alike as both policy areas come under the oversight of independent bodies of experts.

The idea of the British Labour party to submit manifesto promises to an independent audit takes this idea one step further. The message is clear: a promise made about spending by politicians is only credible if it has been overseen by a body of experts. Credibility and responsibility lies with apolitical bodies. Politics, itself, is the terrain of half-truths and misleading creative accounting.

One problem with this is the idea that once a policy has been given the stamp of approval by a body of experts, it becomes incontestable. Especially in the realm of fiscal policy, this is nonsense. Spending plans are notoriously subject to revision and change because they rest upon assumptions about the wider economy. Small changes in growth projections throw even the most carefully prepared and audited spending plans into disarray. That a party’s manifesto commitments are given the all clear by the OBR tells us little about what a party will do once in government. The OBR itself operates according to a set of assumptions about the maco-economy that are constantly subject to revision and change.

Another problem is that parties and governments that rely on monetary and fiscal rules set by independent bodies are in effect out-sourcing responsibility to these agencies. At the same time, these agencies – fiscal councils, central banks – only operate according to strict mandates set by politicians. The result is that neither the politicians nor the agencies accept the responsibility of making choices that are not right or wrong in any objective sense, but are based rather on what one believes is the right thing to do. This leaves us with a vacuum at the heart of politics. Ed Balls’ idea of auditing his campaign pledges brings that vacuum into the election campaign itself. Far from being a moment where rules are challenged and redrawn, the 2015 campaign risks becoming subject to the same rules and constraints that govern everyday politics today.

A word of advice to Ed Balls? It’s not because the OBR has given your policies the all-clear that voters will trust you. That will only come from building a direct relationship with them and engaging with them as citzens.

The state of European banking

5 Oct

 

In his assessment of a new report published on banking reform within the EU, Martin Wolf starts off with an arresting statistic. In 2010, he writes, US banks had assets worth 8.6 trillion Euros. Banks in the EU had assets worth 42.9 trillion Euros. For the US, those assets represented 80% of GDP; in the EU, they represented 350% of GDP. The EU’s banking sector, claims Wolf, is too big to fail and “too big to save”.

Wolf’s fact raises interesting questions. Can we say that in Europe the expansion of the financial sector has been so significant that it dwarfs developments in the US and gives us an explanation for Europe’s current sovereign debt crisis? Explanations of the Eurozone crisis have in recent months increasingly focused on governance issues tied to the Eurozone itself and to poor economic performance of many Eurozone economies. Is the implication that the crisis is a European affair?

A useful place to look in order to answer these questions is the report that Wolf cites, put together by a group of experts and led by Errki Liikanen, governor of Finland’s central bank. Most of the coverage of the report has been about its recommendations: ones that are not so different from those of the Vickers report in the UK (see here for a comment on Vickers). However, the report itself gives a detailed account of the crisis and of the transformations in the European banking sector.

In general, it implies that whilst there is variation, there is no “European exception”. The origins of the crisis lie in the collapse in the sub-prime mortgage market in the United States, which put a number of lending institutions into serious difficulty. This localized crisis quickly fed through an internationalized financial system to affect non-US institutions. Many European banks were left with very bad loans on their books: the German bank, Deutsche Industriebank IKB, was one of the first to be bailed out by the Bundesbank. As early as August 2007, the interbank lending market in Europe dried up altogether: the ECB had to step in with an injection of 95 billion Euros. In December of the same year, it injected a further 300 billion. At issue here is the generalized dependence of US and European financial institutions on what turned out to be very bad loans.

On the size of the assets of European banks, compared to other parts of the world, the report also has a lot of good information. The report notes that the EU banking sector is very large when compared with other countries and regions, as the figures above make clear. However, it notes that this reflects the fact that bank intermediation plays a bigger role in Europe than elsewhere. What this means is that banks are the principal source of private sector financing in Europe in contrast to the US for example. Banks in Europe also have mortgages on their balance sheets, whereas in the US Fannie Mae and Freddie Mac soak up these mortgages and are government-sponsored institutions. The staggering difference in the assets of banks in Europe and the US is not automatically a sign of different trends in financialisation but points also to some more long-standing differences in the nature of private sector financing. The report also notes that the restructuring of the banking sector which occurred in the US post-Lehman, in particular the collapse of small and medium-sized banks, has not occurred in Europe. The level of total assets has thus remained constant, propped up by ECB and national government intervention in Europe. Here there is a marked difference between Europe and the US: interventions in Europe have prevented restructuring, in the US they were a conduit for change.

There is no particular European story to the growth of the financial sector in Europe. Some specific features of bank intermediation have interacted with more generic features of financialisation that we can observe in Europe and elsewhere. What is less clear from the report itself is whether the growth of the financial sector has been the result of changes within the non-financial sector, a freer regulatory environment or simply the working out of a speculative frenzy within financial institutions aiming to make more money in the short term, with little regard for longer term consequences. The recommendations of the report suggests it believes that the latter two factors are the most important.

On the LIBOR scandal

17 Jul

A feature of economic crises is that they propel into the spotlight the more obscure parts of markets and of capitalism. The Eurozone crisis has made everyone roughly conversant about government bonds and sovereign debt. Acronyms like the EFSF and the EFSM, triple A ratings and CDSs (credit default swaps), are regularly bandied about. The BBC’s website now has a handy online dictionary, the crisis jargon-buster, that defines various economic terms, from base rates through to liquidity traps. The murky world of lenders of last resort and the practices of seignorage have also entered into public discussion. Most recently, it has been the turn of LIBOR, otherwise known as the London inter-bank offered rate.

LIBOR, as its name would suggest, is the rate at which banks in London lend to each other. It is determined as a kind of average of the different estimates given by the banks of how much they think they would need to pay by way of interest to borrow money. Those estimates are given daily and LIBOR is calculated for different kinds of loan instruments and in different currencies. Banks in a bad way and likely to pay more for their loans would be expected to submit higher estimates. Banks with solid balance sheets would submit lower estimates. One would expect LIBOR in good times of financial calm to be low and steady. One would expect it to rise in dangerous moments of finance crisis (see here for the late 2008 movements of LIBOR).

The scandal is based on the rather intuitive idea that given that banks are setting themselves the rate at which they have to borrow and lend, they have a strong incentive to fiddle those rates. The discussion underway at the moment has a strong whiff of the unreal about it. Complaints are made about the temptation to manipulate and the lack of honesty in setting LIBOR. But what else do we expect to see? Are we meant to be surprised that banks are not the best judge of their own financial health, a least when such judgements will have self-fulfilling knock-on effects for them? And that they should shy away from honestly communicating the state of their balance sheets to other competing banks within the City? Is it not obvious that banks in a bad way would tend to systematically propose rates that are lower than what their troubled loan book would suggest? At the very least, the indignation betrays a seriously naïve view of how markets work. It is also not surprising that the Bank of England should have been complicit in the manipulation of this inter-bank rate given its proximity to the government’s involvement in mopping up the massive losses made by British banks after the Lehman collapse. It was after all in the Bank of England’s interest to make it as easy as possible for British banks to have access to liquidity. Otherwise, claim Bank of England officials, the inter-bank loans market would have dried up altogether and brought some banks down with it.

Making sense of this kind of scandal needs more than a bout of shoulder-shrugging “well, what do you expect?” from cynics. It needs a strong done of realism about the nature of markets and of capitalism. Redirecting private accumulation towards public ends has always been a matter of political struggle and state coercion. Political control over economic activity did not happen by accident. The indignation we see today about the LIBOR scandal needs to be transformed into a political movement capable of articulating a vision that goes well beyond the myth of munificent and self-regulating markets.

The Van Rompuy draft

28 Jun

This evening, heads of government will discuss a draft proposal put together by the President of the European Council, Herman Van Rompuy, and his team, prepared “in close collaboration” with the heads of the European Commission, the Eurogroup and the European Central Bank. Though it seems the terrain is already being prepared for an inconclusive summit, it worth looking at Van Rompuy’s draft to see exactly what is to be discussed.

The draft is striking by virtue of its conditional wording: there are many ifs, coulds, possiblies and maybies. The whole draft reads as a tentative and rather speculative account of what reforms the EU could take on board if it wanted to move forward with fiscal and monetary integration. There is none of the hubris or confidence one might find in earlier drafts produced by European institutions, confident of their authority and of member state compliance.

There are nevertheless a few measures that seem a bit more thought out and have a whiff of probability about them. One is the integrated supervision of banks, the so-called banking union. This measure seems likely largely because member states can all agree on the point that national regulators have been found wanting. Instead of national regulators that sign off on generous assessments of the state of national banks, something more robust is needed. What is surprising is that the draft – with the presumed agreement of ECB head, Mario Draghi – singles out the ECB as the institution most likely to take on this role. This is surprising because – as Dermot Hodgson as shown – the ECB is generally rather reticent about any attempt at expanding its competences. Far from being a power-hungry supranational actor, the ECB has shied away from taking on new roles. Its sole concern is its price stability mandate: anything else smacks of back-handed attempts at imposing some sort of political oversight onto the bank, a terrible idea according to mainstream central bank thinking. Either it has accepted this new role because it does see it as an opportunity to increase its power or it has had this forced upon it in some way. One reason may be a convergence between Draghi, Van Rompuy, Barroso and Juncker, on the need to set up this banking union in a way that avoids any messy involvement with domestic politics. By placing it within the ECB, Van Rompuy notes in his draft, existing treaty law (“the possibilities foreseen under Article 127(6) of the TFEU”, to be exact) should be sufficient. A tidy legal solution to a thorny problem, and one that Draghi can no doubt appreciate even if it means a slight expansion in the ECB’s remit.

On the “integrated budgetary framework”, another important chunk of Van Rompuy’s draft, it is obvious what might be accepted by national leaders and what remains pretty unlikely. The key suggestion is that stronger measures to control the upward end of government spending need to be introduced. Van Rompuy suggests that in the end “the euro level area would be in a position to require changes in budgetary envelopes if they are in violation of fiscal rules”. This begs the question of what the sanction would be exactly – probably, fines of some sort – but it also makes clear how the evolution of economic governance in Europe is following well-trodden lines. What is being suggested here is really a constitutionalizing of limits to what governments can spend: exactly what national governments have been discussing for some time and what former French President Nicolas Sarkozy had proposed in France.

The push to make excessive spending truly illegal is hardly new and the ideas are familiar to anyone who followed the events of the 1990s and the Maastricht criteria. Overwhelmingly, economic growth is assumed to come from private sector activity, supply-side reform and from a focus on exports. There is to be a minimal role for public spending in any national growth strategy. National government discretion with regard government spending, and especially the idea that market instability should be compensated by discretionary uses of the public purse, has little role to play in the draft. That the fiscal excesses were more consequence than cause of the present crisis, and were initially the result of massive wealth transfers in the form of bank bail-outs after the Lehman Brothers collapse, is not taken into account. Even the part of the draft that mentions a “European resolution scheme” to be funded by bank contributions – “with the aim of orderly winding-down non-viable institutions and therefore protect tax payer funds” – pales in comparison to the tax-payer funded European Stability Mechanism that is vaunted as a possible “fiscal backstop to the resolution and deposit guarantee scheme”.

What remain far more tentative are the parts that describe the issuance of common debt and the creation of a fully-fledged European treasury: ideas that are being firmly resisted by Chancellor Merkel. And the mention of strengthening democratic legitimacy is an afterthought in a draft that focuses on measures intended to restrict as much as possible the room of manoeuvre for nationally-elected representatives.

There is little evidence of federalizing ambition in Van Rompuy’s draft. The most likely measure – the banking union – is proposed in a way that avoids having to rewrite any existing laws. The suggestions about common budgetary rules are driven by national governments so lacking in authority that they need binding external frameworks in order to impose any sort of fiscal discipline on their own societies. The reaction to this end of week summit will most likely be disappointment at what is not in the final communiqué. But judging from Van Rompuy’s draft, the real problem is what is in it.

If in doubt, regulate…

13 Jun

Another idea that has gained traction in recent days is that of a European-wide banking union. This idea, as with Eurobonds, is not new but the most recent bail-out of the Spanish banking sector has put it back onto the agenda. Key figures – from the President of the European Commission to the head of the European Central Bank – have come out in favour of a banking union. The fact that the bank at the centre of Spain’s difficulties, Bankia, was for so long able to hide its problems, even to the point of being fêted as a success story until not very long ago, has made many doubt the ability of national regulators to properly keep a tab on what their banks are doing. Ergo, the turn towards a pan-European regulatory solution.

Exactly what a European banking union would look like or what powers it would have depends on who you ask. Maximalists tend to hover around the EU institutions as they believe such a union would further strengthen the EU. According to Commission President, Jose Manuel Barroso, a banking union could include an EU-wide deposit guarantee scheme, a rescue fund financed by banks themselves and the granting an EU authority the power to order losses on banks. Minimalists, from within national regulatory bodies, claim that only a small set of powers need be transferred to a Brussels-based body. They also stress that a European banking regulator already exists in the form of the London-based European Banking Authority. The EBA already has powers to make rules and to force banks to comply. It was behind this year’s stress tests of Europe’s biggest banks and the demand that they boost their capital ratios. Minimalists also say that only a small number of big banks should be supervised. What Merkel called the “systemically important banks”.

Over the weekend, two heavy-hitters (of a sort), Niall Ferguson and Nouriel Roubini, weighed into the debate. They noted that for two years now inter-bank lending in Europe has been replaced by a singular reliance on ECB financing. And some countries – Greece and Spain – are experiencing a steady rise in withdrawals from their banks. As well as a direct recapitalization of the European banking system, Ferguson and Roubini argue that an EU-wide system of deposit insurance needs to be established, alongside a European-wide system of banking supervision and regulation.

Some of the same criticisms made of Eurobonds can be made of the banking union idea. That the political conditions for its creation are absent is evident from the kind of discussions being had about how such a banking union would be set up. Cognizant as ever that national publics are unlikely to wave through any forward movements in integration, some suggest that instead of creating a banking union via an EU treaty change – a slow and complex process, fraught with opportunities for sabotage by recalcitrant domestic populations – it would be possible to simply give over the regulatory power to the ECB. And this could be done without a treaty change but just by a unanimous vote of the European Council. As Alex Barker on the FT Brussels blog writes, this “avoids the political headache of more treaties” and “is faithful to the unsaid rule of this crisis: central bankers should win more power, regardless of whether they deserve it”. That so much thought is given about how to push through such a banking union without going through democratic procedures of ratification suggests the solution itself lacks the public support it would need to be a success. Even short-term fixes such as providing banks directly with extra capital raise big questions about how the money being provided will actually be used. There is always a balance to strike between politics and expertise and giving new institutions the powers to make decisions based on expert judgement is not necessarily anti-democratic. But when the democratic authorization is entirely absent, or when new institutions are created in ways that explicitly avoid any wider public debate about their merits, we can be confident that the stick has been bent too far in the direction of expertise.

Another problem is that – in line with another unsaid rule of the present crisis – the banking union seems to represent a case of “if in doubt, regulate”. As already mentioned, a European Banking Authority already exists. But critically, a more muscled Brussels-based variant wouldn’t necessarily address any of the more fundamental questions about the financialisation of Europe’s economy and the way this financialisation has interacted with some of the structural features of the Eurozone. More regulation can simply mean refusing to look more closely at the root of the problem. It is unsurprising that the EU’s kneejerk reaction to a problem is to try to create new regulation. We should resist the temptation to regulate and think instead about the fundamental causes of the present crisis.

In From The Cold

13 Mar

Over the weekend, the Financial Times reported on a story about a deal between the UK and European officials intended to bring the UK back in from the cold after the row over the fiscal pact late last year. This row had left the UK isolated with many accusing Cameron of sacrificing the UK’s relationship with the EU in order to defend his friends in the City of London.

As we argued then, the idea that continental Europe had finally liberated itself from the neoliberal anti-regulationist shackles of London finance was greatly over-done. This sentiment was a mixed bag of Euro-chauvinism and some false hopes placed in the socially progressive potential of the Sarkozy-Merkel alternative. However, what was striking was Cameron’s apparent willingness to alienate all his European peers. His break with the consensus was exactly the kind of actions that the EU is meant to guard against: as Perry Anderson has put it, in the EU any such kind of public disagreement is considered a serious breach of etiquette.

This is what makes the FT’s weekend story interesting. It reports that British and European officials discussed the possibility of swapping the portfolios of European Commissioners, bringing the Frenchman Michael Barnier over to foreign affairs and putting Baronness Ashton in Barnier’s place as Commissioner for the Internal Market. Barnier and Ashton would thus swap places in order that Cameron can reassure the City that at the person responsible for financial regulation in Brussels is the reasonable and compliant Cathy Ashton, and not the hard-headed Paris-backed Mr Barnier.

This story is good evidence of what has already been commented on at the Current Moment: the desire of the EU’s member states to remain part of the club, almost at any cost. Cameron was willing to have a public fight but his officials then worked behind the scenes to see what arrangement could be found. This desire to avoid exclusion has driven much of the UK’s policy towards the EU for some time: public protestations matched by private assurances and continued close relationships between officials and experts. This also tells us something about the nature of the Commission’s portfolios: rather than being themselves political offices, they are instead titles that can be traded in order to fashion a deal. As the FT put it, British officials were reportedly “handed Barnier’s head on a plate” by Commission officials hoping to bring Cameron round on the fiscal treaty.

The fiscal pact has been ratified in the absence of the British. But further down the line we will see the British government somehow assimilated into the European policy process and able to work the rules round so that they can accommodate British interests. That is the proper etiquette of the EU.

Towards a European Tobin tax?

23 Jan

Reports in the press this week suggested that German Chancellor, Angela Merkel, had been won over to the idea of introducing a tax on financial transactions at the European level.  This has been primarily a French idea so far, with Nicolas Sarkozy a convert to a policy he had previously dismissed as ridiculous. The Tobin tax idea had been taken up by the French anti-globalization movement at the end of the 1990s and early 2000s and was virulently opposed by most of France’s political class. Today, in a very different political climate, the idea has been given a new lease of life.

Whether or not a financial transaction tax is finally introduced remains uncertain. This week’s press also reported that Sarkozy – who faces an election in the coming months and has committed himself to this tax as a demonstration of his activism in regulating financial markets – might settle for a tax on share trading as a first step. This already exists in the UK in the form of stamp duty on stock exchange transactions. Keeping the UK on board with any new European regulations would be welcomed by other European leaders as lasting rifts and real isolation are anathema to the EU. Bringing Cameron back in from the cold would be attractive to all involved in last year’s falling-out between the UK and the EU. Such a tax would, however, leave unregulated all other kinds of financial trading like derivatives and high-frequency trades. These have been identified as the real targets but an initial tax on share trading might solve Sarkozy’s problem of having committed to introducing a financial transaction tax before the election.

Is a financial transaction tax really the solution to the current crisis? The main rationale for it today is that it would serve as an alternative source of revenue for bail-outs and other expensive public actions that have up until now been funded by the taxpayer. That such a tax could improve government balance sheets to the point of reducing the need for austerity seems rather fanciful. What it would challenge, however, is the idea that governments defer unconditionally to their financial sectors. Whilst governments routinely stand by and watch as industries relocate to the Far East and shed thousands of jobs, they seem unable to accept that any such “creative destruction” should operate in finance. To many, this smacks of double standards and a tax on financial transactions would demonstrate – at the very least – the exercise of some political muscle vis-a-vis banks and financial services.

This argument about the symbolic nature of such a tax is not a bad one. But it tends to miss the bigger picture. The reason why a Tobin-style tax has become a popular idea amongst European governments is that it is like the famous phrase of Tomasi di Lampudesa’s The Leopard: things must change so that they remain the same. There is nothing in a financial transaction tax that really challenges the relationships and interests that together have given us this debt-finance growth model of the last 40 years. Nor would the tax really reverse the striking rise in inequality that has come to characterise our societies. The theory of the present crisis of capitalism contained within the Tobin Tax idea is that responsibility lies in the financial sector and that whilst the economy is generally sound, a few bad financial apples are bringing us all down. By taxing them and redistributing the revenue according to priorities set by elected representatives, we can return to the status quo ante.

One argument we’ve been pushing at The Current Moment is that financialisation is as much about a change in the real economy as it is about the financial sector itself. Isolating finance from its place in the wider economy, as the idea of a financial transaction tax does, misses the nature of the problem. This idea is also naive in that it imagines that relationships between real people can be transformed via a state-levied tax. Societies, today as in the past, are based around relationships that can only be changed by real political struggle. There is no short-cut or easy way around the problem of either redistribution or of making European societies more productive. The financial transaction tax is a coward’s way out of tackling today’s economic and social crisis and will only entrench, rather than transform, existing inequalities.

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