Greek crisis/EU support package – Financial regulation
Paris-Berlin, May 6, 2010
On 7 May, Euro Area heads of State and government will seal the joint financial support package for Greece. This decision will allow Greece to take the necessary measures to put her public finances and economy on a sustainable path and remove the threats to the stability of the Euro Area as a whole.
In the framework of the agreement concluded with the European Commission, European Central Bank and IMF, the Greek government has pledged to take courageous measures. We totally support its determination and are convinced that this will allow Greece to address the current economic and budgetary challenges and regain the confidence of the markets.
The euro is a major achievement of the European Union. It has greatly benefited every Euro Area Member State. We are fully committed to safeguarding the Euro Area’s strength, stability and unity.
This crisis has demonstrated that every Member State is responsible for the stability of the Euro Area as a whole and strength of the single currency. For the success of the economic and monetary union to continue, it is not enough to provide a solution to this crisis. We must go further and draw the lessons taking all necessary measures to avoid a repetition of this kind of crisis.
We need first of all to strengthen the Euro Area’s economic governance. At the March European Council, we decided to set up a task force to look at the measures needed to strengthen and complete the current framework, exploring all the options for strengthening the legal framework. To succeed in this effort, the task force will have to assess all the European Commission and Member States’ contributions. At our forthcoming summit, Euro Area heads of State and government will have to send the signal that they are ready to envisage for the Euro Area:
stepping up budgetary surveillance in the Euro Area, including more effective sanctions for excessive deficit procedures and strengthening the consistency between national budgetary procedures and the Stability and Growth Pact;
broadening surveillance to cover structural and competitiveness issues and imbalances, and enhancing the effectiveness of the European Union’s economic policy recommendations;
for the future, options for creating a robust framework for resolving crises respecting the principle of every Member State’s budgetary responsibility.
We must also improve the monitoring of statistics. The unreliability of the Greek statistics explains to a large extent the markets’ mistrust of that country. The Commission has made proposals on strengthening Eurostat’s investigatory powers. It is urgent for these to be implemented as soon as possible.
Besides strengthening the Euro Area’s internal mechanisms for preventing such crises, it is also essential to strengthen the regulation of the financial markets. The financial markets’ reaction over the past few days has fuelled the crisis by provoking large swings in the interest rates on some Euro Area countries’ sovereign debts, without this being related to the fundamentals.
In our letter of 10 March this year, co-signed by Mr Juncker and Mr Papandreou, we called for the intensification of European initiatives designed to increase transparency on the derivative markets on the basis of the G20 decisions. Firstly, it is necessary for the trade repositories to provide us with accurate information on the positions taken by market operators on European sovereign debts. Secondly, we call for the draft directive prepared by the Commission on European market infrastructure to be presented as soon as possible. This text will have to promote the creation and use of European central clearing counterparties and trade repositories in order to increase the transparency and security of derivative transactions. Furthermore, it is imperative to discourage speculation by introducing adequate requirements for capital or collateral for transactions of non-standardized derivatives and to deal with destabilizing short selling.
The decision of a rating agency to downgrade the rating of the Greek debt even before the authorities’ programme and amount of the support package were known must make us ponder the rating agencies’ role in propagating crises. The 17 November 2009 regulation provides for a system of registering and supervising rating agencies in Europe. The provisions of this regulation must be used to the full and will have to take account of the creation of the European Supervisory Authorities.
We must set ourselves the goal of swiftly conducting a review to assess whether the goal of improving the rating processes has been achieved. In the light of the events of the past few weeks, this review will have to look explicitly at the methods of rating sovereign debts and ways of communicating and disclosing decisions on rating changes, and take into account the possible role of the rating agencies in amplifying crises and their impact on financial stability. The European Commission should envisage putting forward proposals to increase competition on the credit rating market. Moreover, the European Commission should critically review the pertinence of using agency ratings in European regulations and envisage ways of reducing their use in capital requirements.
We must not forget the lessons of the past turmoil in the banking sector. States should not be compelled to rescue the banks. It must be possible for banks to go bankrupt without generating systemic risks for the whole financial sector. Consequently, France and Germany will support the establishment of a strict regime for managing and resolving crises and pledge to implement it. On the basis of the IMF’s April proposals, we shall also work, at both national and international level, on a system for ensuring fair contributions by the financial sector.
It is the duty of us all to safeguard the achievements of the euro. This means we have to increase the coordination of our economic policies and internal surveillance mechanisms within the Euro Area so that every country feels itself fully responsible for the euro’s stability. But it is also our duty to pursue the G20’s agenda for financial market regulation to prevent speculation jeopardizing the recovery efforts we have to make in the wake of the economic and financial crisis the world has just gone through.