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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
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