Cause and Effect in European Politics and Law

The recovery of the EU economy will take more time than the American

Adelina Marini, June 2, 2009

The latest proposal of the European Commission for a European supervisory structure is an attempt to reach a compromise between those who are pressing for a single European regulator and those who think that supervision needs to continue to be carried out in individual member states. This is what the analyst of the Centre for European Reform in London (CER) Philip Whyte explained in an interview for euinside. He said that the idea to legislate the future financial crises out of existence by regulation is a little bit optimistic, but the fact is that the financial sector is inherently crisis prone and so a more realistic ambition is to make sure that we don’t have a recurrence of crisis of this kind of scale. "But it’s also wrong to expect regulation to do all the heavy carrying because one cause of the financial crisis has been the global macroeconomic imbalances and arguably excessively loose monetary policy for the past 5 or 6 years. So I think it’s important to get the whole regular to reform agenda in its proper context."

Given the fact that the crisis has been caused to some extent by global imbalances, I asked Philip Whyte whether the imbalances within the EU itself could be a reason the European economy to recover more slowly than the American?

PHILIP WHYTE: I think there’s a danger that the recovery in the EU will be slower than in the US for all sorts of reasons. One is that, arguably, the European countries have done less to stimulate or provide monetary and fiscal stimulus to their economies than the US. And another is that part of the EU are in a deep trouble. There’re countries like Spain, for example, which experience quite strong growth over the past decade, but in which wages were growing consistently faster than productivity. So a country like Spain, because it can’t restore its external competitiveness through depreciation of the exchange rate is gonna have to be condemned to a decade or perhaps more of no growth in wages. So the outlook for Spain looks quite difficult for example.

- The ECB (European Central Bank) also criticised to some extent the proposal, although there was an agreement with the Commission, but do you think that this type of proposal is in a way doubling the functions of the ECB?

PHILIP WHYTE: First of all the ECB doesn’t necessarily want to get dragged into baring some sort of responsibility when it doesn’t really feel it has the instruments at its disposal to effectively carry them out because the ECB in this new architecture will be charing a macro-prudential risk assessment committee and inevitably it might subsequently be blamed if a big institution would have failed and the ECB was seen to perhaps not really on the ball, its reputation could be damaged even though it was not really responsible for regulating the institution itself as supervising the institution concerned.

Philip Whyte also said that the proposal of the Commission shouldn't be limited to the euro area only. The main reason he said is that there's no specific pattern of cross-border lending. For example cross-border lending between countries in the West of Europe is much less than between other countries that have significant cross-border borrowing. Whyte gave Sweden as an example of giving a lot of lending to the Baltic states.

The deadline for collecting opinions and position to the proposal of the Commission is the 15th of July. On the 14th of July will be the first session of the new EP which means that the comments will be considered most probably by the next Commission.