eco TV Week

A new momentum for the European Union

6/2/2017

Europe’s momentum is picking up, not only in terms of economic performance but also as far as policy and vision are concerned, witness the agreement this week on simple and transparent securitisation and the publication of a reflection paper on the deepening of the economic and monetary union.

William DE VIJLDER

TRANSCRIPT // A new momentum for the European Union : June 2017

Brussels, that is the European Union, has been grabbing headlines this week, in a positive sense.

Europe’s growth is robust. Its openness implies it is benefitting from the acceleration in world trade growth and China’s reflation effort last year. Domestic demand has been driven by expansionary monetary policy which has boosted confidence. Capital expenditures have picked up on the back of faster earnings growth and household feel more upbeat given the decline in unemployment.

The cyclical story looks great and is well known by now but the structural divergence in economic performance remains big. One of the structural challenges is financing of economic growth given the capital and liquidity constraints on banks.

That’s why this week’s agreement between the European Parliament, the Council and the Commission on a package that sets out criteria for simple, transparent and standardised securitisation (STS) was good news.

The deal is one of the cornerstones of the Capital Markets Union (CMU) because securitisation allows banks to transfer the risk of some exposures to other institutions or long-term investors. Thereby it is freeing up capital which can be redeployed to generate new lending to households and SMEs. It is estimated that it could unlock up to EUR 150 billion of additional funding to the real economy.

Another important piece of news this week was the release of a reflection paper on deepening the EMU. The necessity is beyond question and was already emphasized in the Five Presidents Report of 2015.

The real difficulty is how this ambitious goal can be achieved? Since the sovereign crisis, the ECB has basically made up for the gaps in the Eurozone construction. Its leeway to fight a new recession, when it comes, has been curtailed by the extent of effort it needed to undertake (think of its balance sheet size).

Deploying policy coordination to avoid a new crisis is a laudable ambition but recessions can also originate abroad which begs the question of how to increase the potential of macroeconomic stabilization using fiscal policy.

The press release of the European Commission also mentions the idea of a euro area Treasury possibly with a euro area budget although the reference to “could be considered at a later stage” brings a necessary sense of realism.

In deepening the EMU the necessity of the task is proportional to the challenge of achieving it.

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