oceans apart book

360 Pages·2011·5.17 MB·English

An ocean apart?
Comparing transatlantic responses to the financial crisis
Jean Pisani-Ferry, Adam Posen and Fabrizio Saccomanni, editors
Has the relationship between the European Union and the United States become a sideshow or is it A
n
still central to the global economy? Conflicting signals have been sent out since the outbreak of the o
c
global crisis. The creation of the G20 suggests that priorities have moved away from the traditional G7 ea AN
n
focus on the transatlantic economy. But many of the key policy debates, such as those on bank capital a
ratios and reform of financial regulation, have retained a characteristically transatlantic flavour. pa
r
t
?
There are reasons for this. The global financial crisis has been mostly a transatlantic crisis, and in the Co OCEAN
m
aftermath of the shock, the EU and US share common problems: deleveraging, unemployment, the
p
a
need for unconventional policy responses, reduced growth potential, high public debt, and political r
in
pressures for protection. Furthermore, the EU and US still constitute a major part of the global g
economy, and what happens to them matters for all. tra APART?
n
s
a
The EU and the US however have not responded to the shock in the same way. Their policy space and tla
policy traditions are different and this portends significant divergence across the Atlantic. How far nt
ic
this divergence will go and whether policymakers on the two continents will disagree or agree to re
disagree are the subjects of this volume, based on a joint Banca d’Italia-Bruegel-Peterson Institute s
p
conference, held in Rome in September 2009, with the support of the European Commission. on COMPARING
s
e
s t TRANSATLANTIC
Jean Pisani-Ferryis the Director of Bruegel and professor at Université Paris-Dauphine. He was o
t
previously Executive President of the French prime minister’s Council of Economic Analysis; Senior he RESPONSES
Economic Advisor to the French Minister of Finance; Director of CEPII, the French institute for fi
n
a
international economics; and Economic Advisor to the European Commission. He writes regular n TO THE
columns on Europe’s economic situation for Le Monde, Handelsblatt, Project Syndicateand the Chinese cia
magazine Century Weekly. l c FINANCIAL
r
is
Adam Posenis a senior fellow at the Peterson Institute for International Economics and an external is CRISIS
member of the Bank of England’s Monetary Policy Committee. He is a member of the Panel of Economic
P
Advisors to the US Congressional Budget Office, and previously was a consultant to the UK, US and is
a
n
Japanese governments and the IMF on global economic issues. Prior to joining the Bank of England, i-F
he was a visiting scholar at central banks worldwide, including the Federal Reserve Board, the erry
European Central Bank, and the Deutsche Bundesbank. , P
o
s
Fabrizio Saccomanniis Director General of the Bank of Italy. He is a member of the Directorate of the en
Bank of Italy, member of the Board of Directors of the Bank for International Settlements (Basel) and an
d
Alternate to the Governor in the Governing Council of the European Central Bank (Frankfurt). He joined S
a
the staff of the Bank of Italy in 1967, and has also worked at the International Monetary Fund and the cc JEAN PISANI-FERRY,
o
European Bank for Reconstruction and Development. m
a ADAM POSEN AND
n
n
i FABRIZIO SACCOMANNI
ISBN 978-90-78910-19-0
EDITORS
BRUEGEL/PETERSON INSTITUTE
FOR INTERNATIONAL ECONOMICS
€25 9 789078910190
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page i
An ocean apart?
Comparing transatlantic responses
to the financial crisis
Jean Pisani-Ferry, Adam Posen
and Fabrizio Saccomanni, editors
Bruegel/PIIe
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page ii
AnOCeAnAPArt?
COmPAringtrAnSAtlAntiCreSPOnSeStOtheFinAnCiAlCriSiS
©Bruegel2011.Allrightsreserved.Shortsectionsoftext,nottoexceedtwoparagraphs,maybe
quotedintheoriginallanguagewithoutexplicitpermissionprovidedthatthesourceisacknowledged.
Published under the editorial responsibility of Jean Pisani-Ferry, Director of Bruegel. Opinions
expressedinthispublicationarethoseoftheauthor(s)alone.
editorialcoordination:Stephengardner
Production:StephengardnerandMichaelHarringtonofM.A.T.S.Typesetting
Cover:Jean-YvesVerdu
Bruegel
33,ruedelaCharité,Box4
1210Brussels,Belgium
www.bruegel.org
ISBN:978-9-078910-19-0
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page iii
Contents
Foreword........................................................................................................................................1
Transatlanticcooperationincrisismanagement:anhistoricalperspective
FabrizioSaccomanni.................................................................................................................3
Theinternationaltransmissionofthefinancialcrisis
GianMariaMilesi-Ferretti.......................................................................................................17
Commentson‘Theinternationaltransmissionofthefinancialcrisis’by
gianMariaMilesi-Ferretti,PaoloPesenti............................................................................48
Implicationsofthefinancialcrisisforpotentialgrowth:past,present,
andfuture,CharlesSteindel..................................................................................................55
Commentson‘Implicationsofthefinancialcrisisforpotentialgrowth:
past,presentandfuture,’byCharlesSteindel,AngelUbide........................................77
Centralbankresponsestothe2007-08financialcrisis:thecaseforfurther
action,JosephEGagnon........................................................................................................81
Commentson‘Centralbankresponsestothe2007-08financialcrisis:
thecaseforfurtheraction’byJosephgagnon,StefanGerlach...............................103
Commentson‘Centralbankresponsestothe2007-08financialcrisis:
thecaseforfurtheraction’byJosephgagnon,HeinzHerrmann............................107
Comparingtransatlanticresponsestothefinancialcrisis:thefiscal
policyresponse,MarkAHorton.........................................................................................111
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page iv
Commentson:‘Comparingtransatlanticresponsestothecrisis:thefiscal
policyresponse’byMarkHorton,RobertoPerotti........................................................146
TheresponseoftheFederalreservetotherecentbankingandfinancialcrisis
RandallS.KrosznerandWilliamMelick..........................................................................148
Commentson‘TheresponseoftheFederalreservetotherecentbanking
andfinancialcrisis’byrandallS.KroznerandWilliamMelick,ThomasWieser..183
Theeuropeanunionandthemanagementofthebankingcrisis
JeanPisani-FerryandAndréSapir....................................................................................190
Commentson‘Theeuropeanunionandthemanagementofthebanking
crisis’byJeanPisani-FerryandAndréSapir,ThomasGlaessner.............................216
uSandeureformeffortstoimprovethemanagementofsystemicfinancial
risk,GarrySchinasi...............................................................................................................228
Commentson‘uSandeureformeffortstoimprovethemanagementof
systemicfinancialrisk’bygarrySchinasi,PeterGarber............................................259
Pro-cyclicalityofcapitalregulation:Isitaproblem?Howtofixit?
PaoloAngelini,AndreaEnria,StefanoNeri,FabioPanetta,MarioQuagliariello...263
Commentson‘Pro-cyclicalityofcapitalregulation:isitaproblem?Howto
fixit?’byPaoloAngelini,Andreaenria,StefanoNeri,FabioPanettaandMario
Quaglirariello,Hans-HelmutKotz......................................................................................312
Commentson‘uSandeureformeffortstoimprovethemanagementof
systemicfinancialrisk’bygarrySchinasi,andon‘Pro-cyclicalityofcapital
regulation:isitaproblem?Howtofixit?’byPaoloAngelini,Andreaenria,
StefanoNeri,FabioPanettaandMarioQuaglirariello,KlausRegling......................316
Anoceanapart?Comparingtransatlanticresponsestothefinancialcrisis:
takingstock:globalimplicationsoftransatlanticdifferences,panelsession.....320
Aboutthecontributors.........................................................................................................342
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page 1
Foreword
Hastheeu-uSrelationshipbecomeasideshoworisitstillcentraltotheglobal
economy?Conflictingsignalshavebeensentoutsincetheoutbreakoftheglobal
crisis. The creation of the g20 and its designation as ‘the premier forum for
internationalcooperation’suggestthatattentionandprioritieshavemovedaway
fromthetraditionalg7focusonthetransatlanticeconomy.Butmostofthekey
policydebatesofthelasttwoyearshaveretainedacharacteristicallytransatlantic
flavour. This applies to the controversy about the pace of consolidation which
resultedinanopenuS-germanriftattheTorontosummitinJune2010;tothe
discussiononthenewbankcapitalratioswhichagainwasessentiallyaeuro-
American affair; and to the broader conversation on the priorities of financial
regulatoryreform,forwhichthebigactionagendashavebeentheuSDodd-Frank
Actandtheeuropeanendorsementofablueprintforcoordinatedsupervisionand
asingleeuropeanmacroprudentialbody.True,otherissues–theglobalrebalanc-
ing,orthecreationofglobalfinancialsafetynets–havehadadistinctiveg20
scope.Butatleastafairshareoftheinternationaldebatehasbeentransatlantic.
Therearereasonsforthisstateofaffairs.Tostartwith,whatisknownasthe
globalcrisishasbeenfirstandforemostatransatlanticcrisis.Asdiscussedin
severalcontributionsinthisvolume,thewakeofthecrisisfinancialintegration
through portfolio diversification essentially remained an eu-uS phenomenon.
Accordinglythesubsequentfinancialturmoilprimarilyaffectedtheeuropeanand
Americanfinancialsystems,andothereconomiesindirectlyonly,throughtradeor
capitaloutflows.Itisthereforenaturaltoseethesametworegionstaketheleadin
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page 2
settingtheagendaforfinancialreform.Second,theproblemstheyarefacinginthe
aftermathoftheshock–thetravailsofdeleveraging,unemployment,theneedfor
unconventionalpolicyresponses,theloweringofthegrowthpotential,theriseof
publicdebt,politicalpressuresforprotection–arelargelycommon.Third,while
theyarenotthemaincontributorstoworldgrowth,theeuandtheuSstillconstitute
thebulkoftheglobaleconomy,andwhathappenstothemmattersconsiderably
forall.
TheuSandtheeuhoweverarenotrespondingtothesameshockinthesame
way and this is what makes the comparison interesting. It is telling that the
sovereigndebtcrisesdevelopedineuropeinthefirsthalfof2010andtriggereda
movetowardsconsolidationwhiletheuSfiscalsituationisbymoststandards
worsethantheaggregateeuropeansituation.Itistellingalsothattheprioritiesof
financialreformhavenotbeenthesame.Clearlyneitherthepolicyspacenorthe
policytraditionsareidenticalandthisportendssignificantdivergenceacrossthe
Atlantic. How far this divergence will go and whether policymakers on the two
continentswilldisagreeoragreetodisagreeisoneofthekeyquestionsforthe
futureoftheglobaleconomyintheyearstocome.
Allthisjustifiesarevivalofthetransatlanticeconomicconversation.Thejoint
Banca d’Italia-Bruegel-Peterson Institute conference, held in rome on 10-11
September2009withthesupportoftheeuropeanCommission,aimedtocontribute
totheconversationthroughresearchandpolicydiscussions.Wehopethatthe
paperscollectedinthisvolumewillhelpfosterafact-based,analyticallysound
discussion.
JeANPISANI-FerrY
Bruegel
ADAMPOSeN
PetersonInstituteforInternationaleconomics
andFABrIzIOSACCOMANNI
Bancad’Italia
2 OCeANSAPArT
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page 3
transatlantic cooperation in crisis management:
an historical perspective
FABrIzIOSACCOMANNI1
Arelationshipinsearchofaformat
The opening lines of robert Kagan’s celebrated pamphlet on the relationship
betweenAmericaandeuropereadasfollows:‘Itistimetostoppretendingthat
europeansandAmericansshareacommonviewoftheworld,oreventhatthey
occupythesameworld’.Hegoesontoarguethat‘onmajorstrategicandinter-
nationalquestionstoday,AmericansarefromMarsandeuropeansarefromVenus:
theyagreeonlittleandunderstandoneanotherlessandless.Andthisstateof
affairsisnottransitory–theproductofoneAmericanelectionoronecatastrophic
event’(Kagan2003,p3).greatincipit,butthatwas2003;subsequentevents,like
theglobalfinancialandeconomiccrisisof2007-09andtheelectionofBarack
Obama,seemtohavebroughtAmericansandeuropeansbackonthesameplanet,
downtoearth.
InfactAmericansandeuropeanshavealwaysbelongedonthesameplanet,
thoughtheyhavehaddifferencesofviews,interestsandapproacheseversince
giovannidaVerrazzanoin1524sailedthroughtheNarrowsintowhatisnowcalled
NewYorkBay.Themainsourceofdifficultiesintherelationshiphasbeen,ofcourse,
thedifferentpoliticalandinstitutionalset-upsofthetwopartners:Americanshave
belongedtoonenationsince1776,whileeuropeansbelongtoadiversegroupof
mucholdersovereignnations,someofwhichhaveembarkedonlyrecentlyona
1. DirectorgeneraloftheBancad’Italia.IamgratefultoJuanCarlosMartinez-Olivaforhisvaluable
contributiontothepreparationofthispaper.
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page 4
process leading to ‘ever closer union’. To find the appropriate partner for a
transatlantic dialogue has never been easy, but the Americans have been
historicallythefirstattryingtoestablishacooperativeframeworkwithwilling
europeannations,sometimestocounterthehostilityofothercountriesfromthe
same Continent. France was the first european country to enjoy a ‘special
relationship’withtheAmericanStatesintheirearlyyearsasBritishcolonies,and
laterasanindependentnation.FrenchpoliticalthinkerssuchasMontesquieu
exertedastronginfluenceontheideasandactionsofthe‘foundingbrothers’2of
theunitedStates,anditisnotbychancethatmajorAmericanpoliticalfigures,like
BenjaminFranklinandThomasJefferson,thoughtitimportanttoserveasAmerican
ambassadorstoParis3.
Thetransatlanticrelationshipremainedsomewhatinthebackgroundduring
thenineteenthcentury,astheuSconsolidateditselfasanation:itwastheperiod
of ‘isolationism’ initiated by the Monroe Doctrine; of the Civil War; and of the
expansionoftheuSpresenceinthewesternhemisphere,whichculminatedatthe
endofthecenturywiththewaragainstSpain,overuSinfluenceoverCubaandlatin
America more generally. The uS paid increased attention to europe during the
twentiethcentury,wellbeforetheuSestablishedanewspecialrelationshipwith
anothereuropeancountry,theunitedKingdom,duringthesecondworldwar.Afew
examplesmaysufficetosupporttheargument.When,afterthe1907banking
crisis,theuSdecidedtoestablishacentralbank,Congressconductedhearingswith
majoreuropeancentralbanksinordertodrawfromtheirexperienceinthedesign
ofwhatbecamein1913theFederalreserveSystem4.Afterthefirstworldwar,
PresidentWilsonlaunchedtheleagueofNationsprojectwhichwasabasisfor
2. Tousethefelicitousdefinitionofellis(2001).
3. Franklinwas‘commissioner’and,subsequentlyMinisterPlenipotentiary,toFrancefromSeptember
1776totheendof1784.Duringthisperiod,henegotiatedseveraltreatiescoveringnationaldefence,
tradeandthegrantingoffinancialassistancebyFrancetotheunitedStates.Franklinalsoestablished
excellentrelationshipswithFrenchscientistsandphilosophers,inparticularwithVoltaire(Franklin,
1990).JeffersonwasFranklin’ssuccessorinParisfrom1785totheendof1789andhegreatly
contributedtofosteringtheFrench-Americanallianceandfriendship.Heevencollaboratedwiththe
Marquisdelafayette–oneofhisclosestfriends–indraftingtheDeclarationofrightssubmittedby
lafayettetotheNationalAssemblyinJuly1789intheearlydaysoftheFrenchrevolution(ellis,1996).
4. InSeptember1909,SenatorNelsonWAldrich(ChairmanoftheunitedStatesNationalMonetary
Commission)andProfessorAPAndrews(SpecialAssistanttotheCommission)metinPariswithFrench
monetaryauthoritiesandwithanumberoffinancialexperts,includingTitoCanovai,Secretarygeneral
oftheBankofItaly,togatherinformationrelevantforthepurposeof‘endowingtheunitedStateswitha
financialsystemassolidasthatofgreatBritainorFrance’(asreportedbytheNewYorkTimeson29
September1909).SubsequentlySenatorAldrichaskedCanovaitowritefortheMonetaryCommission
areportonthehistoryofbankingandcreditinItaly(seeCanovai,1911).Thereportwaspartofthe
backgroundmaterialtothe‘SuggestedPlanforMonetaryreform’preparedbySenatorAldrichin1911.
4 OCeANSAPArT
1833 Oceans_8.3.11.qxp:oceans apart book 9/3/11 16:05 Page 5
political and economic cooperation between the uS and europe. Within that
framework,therewereanumberofinternationalinitiatives,suchasthemonetary
genoaConferencein1922,wheretheestablishmentofa‘gold-exchangestandard’
was first discussed; the establishment in 1930 of the Bank for International
Settlements; and the london economic Conference of 1933, which tried un-
successfullytodealwiththeconsequencesofthegreatCrash.Throughoutthis
period,transatlanticcooperationamongcentralbankswasparticularlyintense,
buildingontheclosepersonalrelationshipsbetweenFederalreservePresident
Benjamin Strong; the governor of the Bank of england, Montagu Norman; the
governoroftheBanquedeFrance,emileMoreau;andeventhePresidentofthe
reichsbank,HjalmarSchacht(Ahamed,2009).
With the outbreak of the second world war the extraordinary season of
internationalcooperationstarted,ofwhichtheAnglo-Americanalliancewasthe
pivot.TheuSleadershipistobecreditedforprovidingastrongimpulsetoward
multilateralcooperationandinstitution-building.Infact,theclosecollaboration
betweentheuSandtheuKduringwartimewasthetriggerforabroaderframework
forinternationaleconomiccooperation,whichbenefitedgreatlyfromthestrong
intellectualleadershipofJohnMaynardKeynesandHarryDexterWhite.Anglo-
Americancollaborationlaidthefoundationsforthepost-warworldmonetaryorder,
pavingthewayfortheBrettonWoodsconferenceof1944where730delegates
from44alliednationsgathered5.
TheMarshallPlanlaunchedattheendofthewar,providesfurtherevidenceof
theuSdesiretoextendtherangeofitspost-warassistancebeyondtheuK,to
includeformerenemiessuchasgermanyandItaly.europewasindirestraits,and
therewerenosignsofrecovery.In1947,therealoutputofeuropeancountrieswas
stillmuchbelowthecorrespondinglevelofthepre-warperiod.Thesituationwas
made more severe by discriminatory practices and bilateral arrangements in
internationaltrade,alegacyoftheprotectionistpoliciesadoptedduringthe1930s
andduringwartime.Inturn,thescarcityofgoldanddollarsineuropeancentral
banks’reservesmadethereturntotradeliberalisationimpossible.georgeMarshall
understoodthatitwasintheinterestoftheuSto‘saveeurope’(Behrman,2007).
TheMarshallPlanledtothecreationoftheOrganisationforeuropeaneconomic
5. TheBrettonWoodsConferencewasthestartofanewcourseintransatlanticrelations,butsincetheuK
andtheuShadstronglydifferentviewsonthefunctioningoftheinternationalmonetarysystem,the
jobofthetwoleadingnegotiators,KeynesandWhite,wasfarfromeasy.Theyhadmetin1935for
consultationsaboutapossiblemonetaryagreementandwentthroughperiodsofconfrontationand
openhostilitybeforetheywereabletodevelopamutualrespectandtofraternisewitheveryappearance
ofenjoyment(Horsefield,1969,p.56).
OCeANSAPArT 5