The workshop started by analysing if the European Union could respond adequately to the next crisis with its current instruments. The participants reached the consensus that more needs to be done to foster crisis management and there was even some sense of urgency. While they noticed a reduction in the level of private debt and an improvement in the financial situation of banks, they saw a high risk of a major economic slowdown in the coming year. In this context, the capacity of the private sector to bear the cost of an economic shock owing to diversified financing sources and cross-border investments (the so-called “private risk sharing”) was considered insufficient to help smooth a major shock as European firms and households remain mainly financed by domestic banks. To reduce national preferences for domestic bank financing, some progress toward more integrated capital markets could help, notably in the direction of harmonizing insolvency regimes, strengthening the supervisory authority and eliminating the bias towards debt to develop non-bank financing. In addition, regulations regarding bank capital requirements could give more incentives for diversification across countries. Another potential hindrance for private risk sharing is the absence of a European deposit insurance fund. This was considered key by most participants, who pointed to the inconsistency between banking supervision done at the European level while potential losses remain at the national level. In the same vein, there was broad consensus that the single resolution fund needs a fiscal backstop at the European level. The views of participants were more diverse regarding the benefits of “bail-in” procedures in case of bank bankruptcies, although all pointed to the importance of the implementation of minimum requirements for own funds and eligible liabilities – the so-called “MREL” – to make banks’ owners absorb part of the cost of a resolution. Participants’ views were also split on whether or not banks should face a limit on sovereign debt exposure and, if yes, how such limits should be set and enforced.
The workshop participants’ analysed in a second stage how the EU budget could help mitigate a sizeable economic shock. On this issue, there was strong consensus that the current situation was not satisfactory: the fiscal policy of EU member states tends to be overly pro-cyclical, particularly in good times. With very high public debt levels in most countries and limited fiscal space as a result, there is now a risk that fiscal policy could turn pro-cyclical even in a downturn. Participants agreed that progress should be made on two fronts in parallel to avoid this. Firstly, a common fiscal capacity should be added to the EU budget to complement monetary policy and national fiscal policies. The European Commission, the IMF and the OECD presented their recent work showing the benefits of such common fiscal capacities to help withstand future shocks. Secondly, all participants agreed that current European fiscal rules are too complex and not transparent and, as a result, probably not effective enough at reducing pro-cyclicality and bolstering fiscal sustainability. There was a general call for simpler fiscal rules, focussing on expenditure growth and having a debt ratio target as an anchor. Nonetheless, participants were split regarding the benefits of introducing sovereign debt restructuring as a tool to increase market discipline. While most participants agreed it would be an efficient way to make the no bail-out clause credible, they were in general reluctant to make debt restructuring automatic and had doubts on how it could be implemented in practice.
Finally, the workshop participants analysed how the EU budget and structural reforms could help economic convergence within and among member states. There was a general disappointment about the pace of convergence in Europe. Many participants were also worried that convergence between member states could be at the expense of divergence within member states: agglomeration effects tend to favour the most dynamic regions while other regions lag behind. This could fuel dissatisfaction among citizens, hurting the European project. Participants agreed that there is a need to evaluate more what works and what does not work at the European level to foster convergence. They felt there is still a lack of knowledge and that available empirical work is not always conclusive regarding the effectiveness of European tools (such as cohesion funds). They felt, however, that European funds should be spent more efficiently, which may require attaching some conditionality. Finally, all participants insisted that more attention to the political economy of reform is essential for the implementation (and acceptance) of structural reforms. This requires better communication, compensating losers and paying attention to the complementarities of reforms.
Vincent Aussilloux and Pierre-Louis Girard