“Inevitable Financial Repression Needs Countervailing Measures”. Comments made by David
Croughan, Member of the Employers Group, European Economic and Social Committee, Brussels at
the EuroFinuse Conference entitled “The Financial Repression of Savers and Investors” held in Vienna
on 18 October 2013.
Financial repression, a term coined in the 1970s to describe how governments dealt with the post war
debt mountain, has re-entered the lexicon of financial commentators since the rapid rise in sovereign
debt resulting from the financial crisis. My comments in the main are confined to financial repression in
the euro area.
The debate around financial repression is often couched in conspiratorial terms between governments
and central banks who seek to channel the precious funds of savers and investors into the financing of
sovereign debt on the cheap by offering very low interest rates to service the debt and with the hope
that a steady bout of modest inflation will gradually erode the debt as years go by.
The payers are the savers and investors who suffer losses through negative real interest rates and the
beneficiaries are debtors and tax payers. Let us just remember that the debtors and taxpayers are not
aliens from another world, they are in fact the government (of the citizens) and the voters. In the
circumstances in which we find ourselves, particularly in the euro area, much government debt results
from governments picking up the tab of bust banks to ensure that the financial system did not collapse;
some of it, too, resulted from fiscal governance.
That is not to say that there is no financial repression. There is. The amount of repression experienced in
different Member States in part is determined by the inflation rate which is not uniform throughout the
European Union. So in many Member States interest rates are negative in real terms harshly penalising
savers and damagingly pushing down the return on assets in pension funds. Even worse governments
have raided pension fund reserves from both the private and public sector to divert resources into
plugging the hole in public finances, which may result in adverse consequences in years to come.
But we also have to understand that Member States chose to enter economic and monetary union with
an architecture which was seriously flawed because a “real and genuine economic and monetary union”
would have had more than a single currency, a single monetary policy and a totally inadequate Stability
and Growth Pact. It should have gone beyond the deeply rooted and understandable concerns of
maintaining national sovereignty to a governance that included a European wide banking union, and an
economic and fiscal union.
In the euro area, we faced huge mounting and unsustainable debt levels, very high unemployment,
terribly disruptive problems of financial fragmentation and hugely divergent interest rates, the pressures
of which built to a serious existential risk for the euro in the middle of 2012. For some countries
sovereign debt was mispriced because built into the sovereign risk was a euro existential risk because
there was no effective backstop. Even the rational behaviour of investors heaped oil on troubled waters
in the rush to a safe haven as they dumped within the euro area high risk government stocks for safe
German stock, driving down interest rates thus making German debt servicing cost free. And, again, lets
keep in mind that a lot of that risky sovereign debt went to bailing out bank debt.
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A thoughtful paper by Ad van Riet brings some balance to the question of financial repression. If the
objective of the measures taken are to correct market and regulatory failures; to restore financial
stability; to control excessive risk taking; to enhance the capacity of banks to withstand major shocks ; to
reduce excessive market volatility, all of which pertain to the euro area crisis, then in large part key
corrective actions inevitably must be taken. These actions can be viewed positively if they bring support
and stability to the financial markets and resilience to the financial institutions, while still preserving the
independence of the central bank and avoid moral hazard. I think by and large we have to accept in the
euro area that this has been the case.
The actions can be viewed negatively if the purpose was to evade market discipline (which is not the
case) or to persuade financial institutions to allocate savings to governments at below market rates
(which is happening) or to claim pension reserve funds which will store up serious problems for the
future (which is happening).
I would argue on balance that most of the actions taken were necessary even though they come with
some serious collateral damage, such as financial repression, and sometimes these actions were too
little too late.
Obviously the real policy solutions lie in getting significant growth going again to generate the
conditions to make a meaningful impact on the appallingly high level of unemployment and,
particularly youth unemployment.
Of all the many policy options that must be pursued the big elephant in the room is the urgent
implementation of a full banking union. The euro crisis is not over yet even though the precarious
phase of 2012 has abated following the unequivocal stance taken by the ECB.
The EESC in its Opinion passed at the October 2013 Plenary on a Proposal for a Regulation establishing
uniform rules and a uniform procedure for the resolution of credit institutions states that:
“The EESC welcomes the proposals to set up a Single Resolution Mechanism (SRM) and associated
financing mechanism, which, alongside the proposals on the Single Supervisory Mechanism (SSM), the
European Stability Mechanism (ESM) and the recovery and resolution of banks (BRRD), forms an
important new building block in developing the banking union
Since the crisis, and in response to it, the option has been raised of transitioning to a stronger Economic
and Monetary Union based on integrated frameworks for the financial sector, budgetary matters and
economic policy. An integrated financial framework, or "banking union", is thus a vital part of policy
measures to put Europe back on the path of economic recovery and growth.
The EESC sees banking union as a vitally important priority, due to the contribution it can make to
restoring much-needed confidence among businesses and the public, and in the interests of proper
financing for the economy. It reduces the current fragmentation of the internal market and thus helps
to level the playing field within the EU, while at the same time strengthening the European banking
system and reducing the risk of contagion.
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The Committee feels that work needs to be done on the various components (SSM, ESM, BRRD, SRM)
of banking union, and that the logical sequence and internal consistency of the proposals needs to be
respected when implementing them. It would also draw attention to the rules – currently under review
– to protect small savers by means of the deposit guarantee scheme.”
We must recognize the plight of high unemployment from the large fall in economic activity in the EU.
The biggest supplier of jobs is the SME sector . Following the crisis and the consequent fragmentation of
financial markets access to credit for SMEs and its cost is differs significantly from one member state to
another. There can be an enormous gulf in the cost of credit for SMEs that are geographically close and
have viable businesses because they are located on different sides of member state borders.
We therefore need to break the dependence on the SME sector on bank finance to fund so much of its
investment needs. The EESC welcomes a variety of necessary developments that are gaining traction for
both working capital and investment finance for SMEs, which were set out in the July 2013 Opinion
responding to the Commission Green Paper on long term financing of the European Economy. The EESC
said that:
“If banks are likely to play a less prominent role in the future as providers of long-term financing, then
opportunities may arise for other intermediaries such as national and multilateral development banks,
institutional investors, sovereign funds and, crucially, bond markets. However, it is important to avoid
creating obstacles that prevent banks from fulfilling their role as the main providers of long-term
financing, and that a legal framework be in place that avoids driving financing and capital flows outside
the regulated sector.
Some Member States have been relatively successful in incentivising pension related and other savings
by astute use of the taxation system. Citizens tend to balk at the prospect of paying tax on income
earned and then more tax on long-term savings out of this post-tax income. In the context of socially
responsible investment, it should be possible to design and market suitable low or zero tax personal
savings products with appropriate annual limits so as to encourage greater long-term financial planning.
In terms of venture capital the Green Paper contains some interesting suggestions. The EESC has already
proposed that the EIF's role should be enlarged beyond providing loans to include the provision of
venture capital. This was what its creators originally envisaged back in 1994. If the EIF, like the EIB, were
to be adequately recapitalised then it could become one of the main providers of venture finance for
SMEs.”
Continuing progress must b e made under the Euro semester process on ensuring that the economic
imbalances hitherto ignored before the crisis continue to be corrected and maintained as imbalances in
all areas of competitiveness and productivity are too wide and have greatly contributed to the crisis. We
now have a strengthened methodology under the annual Euro Semester cycle including an Annual
Growth Survey, an Alert Mechanism report, National reform Programmes and Country Specific
Recommendations designed to co-ordinate national economic policies.
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More attention is likely to fall on how surplus countries may also make reforms that have a positive
impact on the European Union, which could involve fully implementing the single market for services or
would focus on how some of these surpluses could be directed to investments in other parts of the
Union.
It might take some time to move from coordinating national economic policies to European economic
policies. Hopefully, under the right conditions of democratic accountability, member states will become
less precious about national sovereignty. We are advancing forward in gradual steps with the fiscal
compact and under the so-called two-pack (which has no meaning at all to the average citizen),
Governments this year had to submit their draft budgets for scrutiny by the Commission before they
were made public.
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