Member of the European Commission, responsible for Internal Market and Services
Restoring confidence in the financial sector – acting regionally and globally
Asian Financial Forum
Hong Kong, 16 January 2012
Ladies and Gentlemen,
Thank you Professor Chan. I am very pleased to be with you today. And I would like to thank the organisers of the Asian Financial Forum and the Hong Kong Trade Development Council for their kind invitation.
It is a pleasure to be in Hong Kong today. Hong Kong is a traditional gateway between the East and West. It is a dynamic, service-based, open economy where the European presence is significant, in particular in the financial sector.
Europe and Hong Kong share close economic and commercial links. I understand why there are concerns here about what is currently happening in Europe.
Europe is facing difficult times. But the so-called "Eurozone-crisis" is sometimes difficult to understand. So, what exactly is this crisis about?
First, let there be no mistake: this is not a crisis of the euro as a currency. The euro is here to stay. In the last ten years, the euro has proven itself as a true world currency. It is used daily by people and businesses all over the globe. And despite the difficulties, it remains strong.
The current turmoil started in the United States four years ago, with subprime lending and the collapse of Lehman brothers. Because our financial system is so deeply interconnected, the chaos quickly spread to Europe and the rest of the world.
At the time, European countries had to invest massive amounts of public money to mitigate the effects of the economic and social crisis. They were right to do so. But this huge public spending came on top of years of deficits. This combination gave birth to the current sovereign debt crisis.
But the current debt levels must be put into perspective. In 2010, public debt in the Eurozone amounted to 85% of GDP. This compares to more than 100% in the US and nearly 200% in Japan. Our growth prospects and our unemployment rates are also broadly similar.
The real crisis the Eurozone faces right now is a crisis of confidence. Our political unity and our determination and our ability to rectify what is wrong with the way the euro currency works and is run are being tested.
We must not deny that the situation is serious. The economic recovery, which was well underway, has almost come to a halt. There are some positive signs but economic activity is generally expected to stagnate in the coming months. According to our 2011 autumn forecast, growth could fall to 0,5% in the euro area in 2012.
The sovereign debt crisis has spread and is spilling over into other markets, in particular the interbank market. We need to avoid another large credit-crunch and disastrous consequences for the real economy.
And more widely, we must restore confidence in the Eurozone and in the financial sector, in particular European banks.
This is a question of credibility. And of political responsibility.
We often hear that European leaders are too passive. Reacting too slowly. That we don't do enough.
I don't agree.
But you must realise this is not a sprint, it is a marathon.
And we, the 27 European Union Member States, need to agree and act together. On many different fronts at the same time. It is not always easy but we must and will succeed.
Ladies and Gentlemen, allow me to take a couple of minutes to explain what we are doing to deal with all these issues:
1. First of all, the sovereign debt crisis:
To deal with it, we must act on many fronts simultaneously.
We are providing strong financial assistance to Greece. Greece is an exceptional case and requires exceptional measures.
We are strengthening European banks. The biggest banks are being required to create a temporary buffer of 9% of the highest quality capital by the summer. And medium-term funding will be ensured through guarantees on bank liabilities. For the first time ever, the European Central Bank also recently stepped up its response to the euro zone crisis by providing 489 billion euro in three-year loans to more than 500 European banks. This move comes ahead of a crucial first quarter of 2012 for the Eurozone. Indeed, a large volume of bank debt is due for refinancing.
We have also agreed on a European financial stability fund with a lending capacity of 440 billion euro to help countries facing difficulties. We are currently working on different mechanisms to maximise the capacity of this fund.
But these immediate responses are not enough. We must also implement structural reforms. As Chancellor Merkel said over the week-end, the crisis cannot be solved overnight.
17 European countries share a common currency, the euro. But they still have 17 different budgetary and economic policies. This is no longer feasible.
We must build the economic pillar which was lacking when we created the euro 10 years ago.
A major step in this direction was taken in early December last year. Nearly all Member States agreed to move towards a new fiscal compact and to strengthen the coordination of their economic policies. This will involve strict rules, such as the requirement to have balanced general government budgets.
It will be demanding for EU countries. But these rules are necessary if we want to build a stronger and more convergent economic area. This is essential for one shared currency to be sustainable. We are determined to overcome the technical difficulties and we are making good progress.
The solution to the sovereign debt crisis is not less Europe but more integration.
2. Second, we must continue to act on our global commitments to financial regulation. Because financial markets are global. And differences will be exploited putting all these markets and our wider economies in peril.
In a few weeks, the European Commission will have tabled all 29 texts of its financial regulation agenda, translating G20 commitments into European law.
To start with, we have already set up three new European supervisory authorities for banks, financial markets and insurance and pensions. These authorities have been working for a year. They are now well established.
Beyond supervision, our agenda aims to achieve four main objectives:
1. First objective: reinforcing stability and improving the governance of financial institutions
As regards banks, we have proposed increases in capital and liquidity requirements, in compliance with the Basel III agreement.
Capital requirements will also become stricter and more risk-sensitive for insurance companies, with the "Solvency II" directive.
And Europe has adopted legislation requiring registration and strict supervision of hedge funds and other investment funds.
Finally, in October we tabled a new proposal on credit rating agencies. It addresses over-reliance on ratings, conflicts of interest, lack of competition and the specificities of rating sovereign debt.
I don't think it is worth discussing in depth Standard and Poor's downgrading of several Eurozone countries a few days ago. Precisely because the views of rating agencies should only be one amongst many others.
All I want to say on the issue is:
I want to see rating agencies operate in full transparency
I am surprised time and time again by the timing agencies choose to make such announcements
I think it would be right for agencies to take better account of the unprecedented efforts being made by governments, as I have just set out in detail.
2. Second objective: improving financial markets' effectiveness, integrity and transparency
We now have rules on short-selling and credit default swaps. In exceptional circumstances, national supervisors will have the right to ban these transactions for a limited period of time.
We hope to reach an agreement soon to increase transparency on OTC derivatives. This is a huge – but largely hidden – market of more than 600 000 billion euro a year.
We are also revising our legislation on securities markets (MiFID). The new text will regulate new trading venues and technological developments, such as high frequency trading. It will also address the issue of excessive price volatility in commodity derivatives markets.
3. Third objective: enhancing consumers' and investors' protection
We have taken a number of initiatives to guarantee deposits, up to 100 000 euro.
We also want bank fees to be transparent. And we want to make sure that consumers of retail investment products have access to targeted and clear information about investment opportunities.
Our regulatory focus for 2012 will be on consumers.
4. Last objective: a framework for crisis resolution for banks in Europe.
Since 2008, European countries have given huge support to banks. 4 600 billion euro have been brought to the financial sector, either through direct funding or guarantees.
We must avoid such a burden being shouldered by taxpayers again in the future. Assistance should be dependent on strict conditions. Therefore, our framework will give supervisory authorities the right tools to prevent and manage banking crises.
Ladies and Gentlemen, Let me also mention that our current reforms are not limited to Eurozone governance and financial regulation.
These are essential pre-requisites, but not sufficient, for a return to growth. And it is only return to strong growth which can lead us out of the crisis over the long run.
Back in Brussels, I am also responsible for the European single market that has 500 million consumers and 22 million companies.
To help get European growth back on track, we have adopted the Single Market Act. It includes initiatives to support the real economy, for instance by giving SMEs easier access to finance.
All these actions – and many others – will help restoring sustainable growth. But for this to happen, they will need to be based on a sound and healthy financial system.
At regional level but also on the global stage.
These reforms are important for Hong Kong and the Asian region too as we all share a common goal of making financial markets more transparent and responsible.
Europe has taken the lead in the implementation of G20 commitments on financial regulation. We now expect our partners, either in or outside G20, to do the same.
Finally, to conclude, let me express my belief that in every crisis, there are opportunities. I see at least three.
1) Opportunities for Europe, which will be forced to put its public finances in order. Austerity is painful. But a dose of it is the only way forward for European governments. I also believe Europe will emerge from this crisis more, not less, united.
2) Opportunities for Asia: the economies of East and South Asia are rising fast. By 2015, one-third of world growth will be generated by China alone. The Asian banking sector is also growing fast. Increasingly, it will play a more influential role in the world banking system. With this dynamism and greater influence comes responsibility. We will all need Asia to play its role of contributing to restoring global financial stability and sustainable growth.
3) Opportunities at the global level: to work together more closely. The current crisis is not only a "European crisis". It affects all countries. Therefore, we should reinforce global governance. How? By encouraging cooperation and information exchange among supervisors and regulators. The Financial Stability Board has a great role to play here.
Ladies and Gentlemen, Europe has seen many crises in its long history, mostly of its own making. We have learnt the lesson that it is only by working together, building firm institutions based on the rule of law that we can move forward.
The challenge in these early years of the 21st century is to stabilise our finances and restore economic growth and confidence.
We are taking giant steps to improve European governance by integrating economic policy to an unprecedented extent.
In Europe we have understood that to share sovereignty is to enhance it.
Those who know our history also know that our determination is unbreakable.
Therefore I remain confident that our efforts will drive Europe out of the crisis, and that the year of the dragon will be full of hope for the world economy.
Let me wish you all good luck for the New Year. Kung Hei Fat Choi! And thank you for your attention.