EU sets out ambitious plans to tackle financial crisis

The European Commission announced on Wednesday (October 29) it will outline late November an economic recovery plan for the European Union to guide it from the present “financial crisis” to the “sustainable development” to avoid the prospect of recession.

“We will bring forward on November 26, a comprehensive EU recovery plan, based on the framework we have approved today,” Commission President Jose Manuel Barroso told journalists, adding, “that recovery plan will include targeted short-term actions to add to the medium-term reform agenda.”

Outlining a four-pronged framework as the basis of the plan, Barroso highlighted pragmatic measures to help families and households across Europe, coordination and solidarity among member states, full use of flexibility allowed by EU rules and global governance.

SOCIAL RESPONSIBILITY

"Our top priority is to minimise the impact on jobs, purchasing power and prosperity of our citizens," he said. “We must keep unemployment to the absolute minimum and support those who have lost their jobs," Barroso added.

In a commission communication relating to the financial crisis, released after the press conference, the Commission stressed the need for social solidarity, saying that households and employees need to be cushioned from the full effects of the economic downturn.

The communication stated the chances for reviewing the terms for releasing money from the European Social Fund, which aims to provide educational opportunities and improve job skills, and review the effectiveness of the Global Adjustment Fund, which was established in 2007 to help workers laid off by companies that have moved their operations outside Europe.

Addressing a joint press conference with Barroso, European Economic and Monetary Affairs Commissioner Joaquin Almunia said, “We are now facing not only a financial crisis but a serious slowdown in our economies that is hitting households, businesses and jobs.”

FLEXIBILITY IN APPLICATION OF RULES

Calling on member states to use flexibility provided in European fiscal rules in the case of sharp slowdowns, Almunia said, “They should use the room for manoeuvre they have to cushion the impact," adding, “we have red lines, we cannot put an excessive burden on the next generation.”

Almunia said: "Given that inflationary pressures are now easing, monetary and fiscal policy can contribute to supporting demand ... member states can now use the room for maneuver they have created.”

Almunia insisted that the Stability and Growth Pact is the appropriate policy framework for the EU, adding that in case of extra-ordinary condition like present, the pact will be interpreted flexibly, allowing budget deficits to exceed three percent of gross domestic production provided the deviation is small and temporary.

“The pact is about peer support in a difficult situation as the one we are living in and not only about peer pressure,” he said.

Echoing Almunia, Barroso said EU countries should use to its full potential the flexibility that exists within the EU fiscal discipline, as well as within the competition, state aids and internal market rules.

Warning, “We need to swim together or else we will sink together,” Barroso also acknowledged that the member states held the "main instruments" for reviving growth and not the European Union adding, “Europe must confront the economic downturn with the same robust and coordinated approach we have taken on the financial crisis.”

Commission President Barroso, however, cautioned against using the financial crisis to bring in protectionism saying, “Trade barriers shut out prosperity and open the gates instead to short-term, economic populism. So yes to pro-activism, but no to protectionism.”

ENHANCING ROLE OF EIB, EBRD

Barroso and Almunia also urged the member states to look at the possibility of strengthening supranational financial institutions. Barroso said governments should also consider giving more money to the European Investment Bank that could direct funding to infrastructure projects or provide loans for small businesses hit by the credit crunch.

The European Bank for Reconstruction and Development (EBRD) could also receive more capital. The commission communication stated, “The EBRD has been playing a key role in financial sector reform and in financing the private sector in our newer member states. In the current financing environment its activities in these countries could be strengthened.

FINANCIAL SOLIDARITY

In the spirit of solidarity, EU governments agreed late Tuesday (October 28) to lend Hungary 6.5 billion Euro in a joint bid with the International Monetary Fund (IMF) to help the country deal with the financial crisis.

Barroso said the EU stands ready to provide substantial medium-term financial assistance to other member states experiencing balance of payments pressures or serious financial stability risks saying, “we need to be prudent but also vigilant.”

Amid fears that several new EU member states and other countries might eventually need assistance, Commissioner Almunia confirmed that no other country has asked for a rescue package similar to one provided to Hungary.

Hinting at the crisis-situation in Ukraine and others, Commission President Barroso said, “neighbours are under stress but EU institutions are ready to provide.”

INTERNATIONAL COOPERATION

Barroso promised EU support to improve cooperation and coherence at international level saying, “When you have global interdependence, you need global governance.”

Commenting on the Summit of Group of 20 in Washington on November 15 to reform the global financial system, Barroso said the summit must deliver the first results so as to rebuild a climate of confidence, which is part of the solution to the current crisis.

Urging China to be part of the solution, Barroso said, “China has been benefiting from this globalisation and has made big financial reserves and its time to show that they can help in this time of crisis.”

Barroso called on the IMF to be prepared to intervene with emergency financing as there were signs that the crisis is spreading to emerging markets. China and the Gulf countries could do more to help the IMF support countries hit by the financial crisis, Barroso said adding, “The idea put forward by (British) Prime Minister Gordon Brown, and I completely agree with him, is that China and others could help more the IMF ... Not only China but also the Gulf countries could maybe give a concrete demonstration of their sense of responsibility.”

On the subject of overhaul of the relevant financial institutions, the commission communication stated, “Europe is well placed to play an active role in designing the new global architecture and making it work effectively,” based on key principles of efficiency, transparency plus accountability and representation.

LACK OF CONFIDENCE
   
Commenting on the plunging stock markets even with the pumping of liquidity in the banking system, Barroso blamed it on lack of confidence in the economy, Barroso said, “People are expecting the negative effects on the so-called real economy and that's why it's important ... that we are acting in a coordinated way to address the problems of the real economy.” Barroso sounded positive as he declared, “Europe will come through this financial storm and will emerge stronger.”

Almunia said that he had made a proposal to raise the maximum EU aid to member states facing financing troubles to 25 billion Euro as according to a 2002 rule, the EU can provide up to 12 billion Euro in total financial assistance to member states that do not use the Euro when they run into a balance of payments crisis.

"We sent to the council (of member states) proposals for increasing this ceiling to 25 billion Euro," Almunia told journalists. EU officials later said that it will be on the agenda of the meeting of the EU finance ministers on Tuesday (November 4) in Brussels.

Interview with Jean Lemierre, President, EBRD

On the sidelines of attending “The European Bank for Reconstruction and Development: Focus on Eastern and South Eastern Europe,” an event organised last week at the Parliamentary Assembly of Council of Europe, Jean Lemierre, President of the EBRD spoke to Tejinder Singh (Tito) about the EBRD’s expanding role with a new policy to go further east and south in a changing world since its inception in 1991 when communism was crumbling in central and eastern Europe and ex-soviet countries needed support to nurture a new private sector in a democratic environment.

Q: With a “no-dividend” policy for 2006 although mentioning record profits, how strong is the EBRD position to expand its business?

A: The decision to put all of the profits for 2006 into reserves was fully consistent with the new strategy for the bank unveiled in May 2006 which foresees a shift in the bank’s activities further east and south and the assumption of greater risks. The bank needs these reserves in order to prepare for possible greater risks as we increasingly step up the pace of our investments, especially in the former Soviet Union and in the Balkans. Business volume in 2006 was 4.9 billion Euro and we expect roughly the same magnitude of investment in 2007.

Q: What is your opinion on how best to use the profits?

A: The final decision on the use of the profits will ultimately be taken by our shareholders but the debate on how to allocate income started at our Annual Meeting in Kazan this year. This issue needs a thorough debate and the discussions will continue until our next Annual Meeting in Kiev in 2008. There are three options under consideration. In addition to adding further to reserves there will be the option of using funds to support the bank’s activities, in areas such as providing technical assistance, training, supporting nuclear decommissioning projects and also supporting the bank’s activities in promoting energy efficiency. And then there is the option of returning some of the profits to the shareholders. The shareholders will take this decision.

Q: You are extending your role to Balkans and the Commonwealth of Independent States. How far you ready to go in Mediterranean other than EU members?

A: An expansion outside of the current countries of operation is not under discussion.

Q: How soft are the EBRD loans and what kinds of activities are being financed?

A: Not soft at all. The EBRD does not provide soft loans. If it did it would be competing with the private sector which is precisely what the Bank does not do. The bank invests either with loans or with equity stakes, usually in projects where the commercial sector is either not prepared to go at all or not prepared to invest alone. By investing in such projects the EBRD provides what we call “additionality.” The projects are aimed at promoting the process of economic transition, whether by working to improve corporate governance, possibly by taking a seat on a company board, or by helping to develop management or to support efforts to cut energy costs via energy efficiency measures. The bank is active across all sectors. Development of a vibrant financial sector is particularly important to the development of a market economy overall. But we are also active in working on infrastructure projects to help remove the bottlenecks that are obstacles to economic development. And we support private sector industry, either by direct loans or by loans to banks which then act as intermediaries and lend on to micro and small and medium enterprises.

Q: How much does politics play a role in loan dispensing? Does EBRD give any consideration to human rights records of the countries?

A: Politics and human rights do play a role. This is stipulated in Article 1 of the bank’s founding treaty which says the Bank will foster the transition towards open market-oriented economies and promote private and entrepreneurial initiative in countries “committed to and applying the principles of multiparty democracy, pluralism and market economics.” Where this is an issue we restrict our activities largely to investments purely in the private sector. And we also use policy dialogue to help produce positive developments.

Q: What is your vision for EBRD in coming years?

A: The vision is to carry out our role in supporting the further transformation of the economies in the areas where we are active; To see more countries in Europe preparing the way to accession to the European Union and benefiting from that membership; To see other countries increasingly becoming an integral part of the global economy, by joining the World Trade Organisation and playing as an equal partner in the global economic arena; To see in oil and gas rich countries a greater diversification of the economy to build for a sustainable future.
The process of transition has been hard. The collapse of the previous system was a huge shock. The pain endured by many people was great. The vision is also to see all people in the region ultimately benefiting from this huge challenge.


Interview with: Jean Lemierre taken at the end of June 2007 for New Europe, the European Weekly - Issue : 736