Speech at the ECPRD Seminar «Parliaments Dealing with Financial Markets’ Issues» Athens, Hellenic Parliament, 5-6 October 2017
As a decade has gone by since the beginning of the global financial crisis, governments and people are starting to take stock of the global economic experience since then.
The 2007 crisis has resulted in the largest contraction in economic activity in the post-war era.
It took several years for the largest economies to recover: US, Germany and France managed to recover only by 2011, while the UK and Japan by 2013.
However, in the Eurozone periphery, Italy, Portugal and Greece still have nοt made up the lost ground. Since 2008 – two years before signing the first economic adjustment program – Greece has lost almost 26% of its GDP and its unemployment rate remains at 22%, some 14 percentage points higher than in 2007.
European economies are today far poorer than the trend before the crash predicted.
The crisis has left the young without any hope that they will have the same opportunities to prosper as their parents.
The cost of financial institutions being bailed-out by governments in certain EU member states has been passed to future generations.
The IMF calculated the cost of extra debt taken on by governments and how much had been recouped by 2015.
It appears that Ireland and Greece are not likely to recover the full amounts and will be working through the costs, in terms of more debt, for years to come.
Along with the economic and social consequences in terms of stagnation and rising inequality, the crisis had a tremendous impact on politics by reshaping the political scene across the EU.
With the economic, social and political consequences of the crisis being so large, the question that arises is why financiers failed to foresee the crisis.
Many financiers in both sides of the Atlantic have argued that it had been impossible to see the crisis coming.
However, financiers should have paid more attention to the emerging global bubble from the way that many different markets, distinct from each other, had become synchronized.
So why were regulators, policymakers, investors, and banks so unprepared at the onset of the crisis?
I would like to argue that “market fundamentalism” -the idea that governmental policies cannot do much to improve on the outcomes markets produce without intervention- was the cause behind the crisis.
The financial system, particularly commercial and investment banks, had been deregulated since 1980.
Since then, greed won out over prudence and banks took too much risk with their depositors’ money.
A second question is why has economic recovery been so slow.
Why did the Eurozone not respond with monetary and/or fiscal policies, but instead overemphasized the role of structural reforms for recovery, thus failing to prevent the social and political tensions which gave rise to populism and political instability?
“Market fundamentalism” and institutional design deficiencies offer an explanation for the weak response by governments and European Institutions in addressing the crisis.
European policymakers, claimed initially that there is a “moral hazard” issue in bailing-out Greece and preferred to postpone their decisions.
As a result, the crisis spread across the EU. Action was taken only when it was realized that the crisis could cause an irreversible damage to the Eurozone.
What have EU governments done to avert the re-emergence of a crisis?
- a) They initiated the European Banking Union, aiming to decouple the banking sector from the state, thus preventing the use of taxpayers’ money to rescue failing banks.
This was achieved by establishing single EU mechanisms for the prudential supervision and resolution of banks. A common deposit guarantee scheme is also currently being developed.
Shifting from the era of bail-outs to that of bail-ins, banks’ creditors have to accept losses on their investment. In that way, tax payers are protected from risks taken by bank managers.
- b) They adopted the Six Pack, the Two Pack and the Fiscal Compact in order to enhance economic cooperation and surveillance -at least- in the Eurozone. All these mechanisms reduced the political autonomy enjoyed by national parliaments on budgetary issues.
- c) The ECB introduced unconventional or non-standard tools of monetary policy in order to avert a second Great Depression.
The introduction of Quantitative Easing along with the announcement of the OMT Program have led to an institutional conversion of ECB from its pre-crisis stance.
Today many question whether these non-standard measures could create new bubbles. The answer lies with regulators. With monetary policy, very expansionary regulators should be restrained from rekindling the incentives that led to the crisis.
- d) They established the European Stability Mechanism to support Eurozone countries in financial distress. Nowadays many are suggesting that ESM should be transformed into a European Monetary Fund.
The reforms in EU economic governance and crisis management bring us to the last question.
Do national parliaments have sufficient power and adequate mechanisms to prevent a new financial crisis?
In the case of Greece, the parliament’s institutional framework that existed before the crisis failed to bring out the unsustainable position of the Greek economy with the large twin – deficits and the rising public debt.
The major political parties and social partners failed to understand the complexities associated with the monetary union membership and the implications of globalization.
Year after year, governments, both conservative and socialist, were presenting before the Parliament budgets with very ambitious fiscal targets.
Few majority MPs -if any- were ready to raise doubts on the underlying assumptions and reject the budget on those grounds.
The opposition parties, as a rule, always rejected the budget, as did professional unions and professional associations arguing that it doesn’t support growth and social cohesion and that it is very restrictive, i.e. they were asking for even higher spending.
To understand why Greece failed to keep its public finances in order, we have to concentrate on the institutional framework for the budgetary process.
The European Commission in 2007 found that Greece had the weakest budgetary procedures among the 18 countries examined.
Before the 2009 crisis, almost a third of the general government revenues and expenditures were outside the budgetary process.
Government ministers acted and spent money as semi-autonomous state agents.
The political parties, in their effort to win popular support, were ready to introduce new social or investment programs boosting public spending and introducing tax cuts at the same time, irrespectively of the economic cycle.
This is why Greece experienced deficits even during years of high growth. Between 2001-2009, fiscal deficits were typically at least 70% higher than their targets.
Despite the fact that the Greek constitution envisages a powerful role for the Parliament in the approval of the State budget, in practice, prior to the crisis the Parliament had little information and, consequently, power to monitor the execution of the approved budget.
Greece’s failure to keep its public finances in order was matched by a failure of European institutions, the very institutions responsible to assess the fiscal situation of Eurozone countries within the context of the Stability and Growth Pact.
An attempt to reform public financial management in Greece has been the Law 3871/2010 on “Fiscal Management and Responsibility”, which was voted in August 2010.
This Law introduced a medium-term budgetary framework for the general government to be approved by the Parliament.
Furthermore, the General Accounting Office is required to submit to the Parliament and make available to the press consolidated reports at a general government level covering public revenue, expenditure, liabilities and financing on a monthly, quarterly and biannual basis.
In this way, the execution of the general government budget is closely and transparently monitored.
In order to improve the quality and accuracy of statistical data the government passed in 2010 the Law 3832 and established the Hellenic Statistical Authority (ELSTAT) as an independent Authority subject to the control of the Hellenic Parliament.
Moreover, in order to facilitate MP’s tasks, the government established in 2010 the Parliamentary Budget Office which operates as an independent unit of the Greek Parliament.
Finally, in 2014 the Greek government passed a Law that established the Fiscal Council as an independent Administrative authority that reports to the Hellenic Parliament when requested or before a parliamentary committee when required.
Before the crisis, similar institutional deficiencies in the budgetary process and/or the supervision of financial institutions were common in other Eurozone countries that also lost access to capital markets and were forced to request financial assistance.
Over the last ten years, the huge economic and social consequences of the crisis dictated the need for institutional reforms which affected national parliaments
During the same time, there is an ongoing debate in the EU about the role and the power of national parliaments in determining economic policy at the national level as a result of the progressive transfer of substantial competences from the national to the supra-national arena.
National legislatures have lost a great deal of policy-making autonomy and control over the Council of Ministers, the European Commission, the European Council and the ECB, who dominate decision making in EU.
Concerns are raised that the role of national parliaments during the crisis has been affected by the often non-transparent and fast-paced intergovernmental negotiations of bail-out programs and Eurozone governance arrangements.
There are many asymmetries as regards the position of the member states and their parliaments in the Eurozone crisis.
Parliaments of countries that received financial assistance are more bound by external constraints.
On the other hand, the reform of the EU economic governance has provided national parliaments with an input to exercise in a more systematic way powers they already had.
As a result of the crisis, the duty of information owed by the executive to the parliaments has been strengthened significantly.
At the same time, the scrutiny and oversight powers of parliaments have been enhanced to guarantee the control of the governments’ position before and after their engagement at European level.
At this time, it is not yet clear whether these reforms can compensate for the loss of legislative powers suffered by national parliaments.
Despite the reforms introduced by the EU and the transformation of the role of national parliaments, one lesson we can learn from financial history is that it is practically impossible to prevent a new financial crisis.
Policymakers should be aware that there will likely be another financial crisis pretty soon with their frequency continuing to be high until we create a more stable global financial framework.
Nevertheless, if policymakers keep in mind the huge and painful cost inflicted on citizens in most Eurozone countries, “act properly” by avoiding the fallacies of market fundamentalism and by blocking the ears of policymakers to prevent them from hearing the Sirens of deregulation who are calling for a relaxation of the regulations introduced after the crisis, then there is reason to hope that we may have fewer crises in the future arising from the financial system.