Around the world, investors are agonising over a faltering economy. In the light of disheartening reports that – if not already here – a recession is inevitable, politicians are locked in negotiations to revive stagnant credit markets and bail out banks that are on the ropes or under severe pressure.
The financial turmoil that originated in the United States has now become a global problem. The crisis resulted from banks not knowing or caring enough about the risks they were taking and has intensified markedly on the EU banking sector.
In this respect the EU has published guidelines on how a member state, including Malta, can best support financial institutions in the current financial crisis. The commission intends to apply EU treaty state aid rules to support the economy of member states in the form of schemes and provide individual assistance to financial institutions under pressure due to the failure of the financial markets. The eurozone member states agreed a detailed programme of action to restore liquidity, recapitalise the banking system – including through governments taking shares in banks where appropriate – and protect savers’ deposits. The principles underpinning the programme aim to ensure that the action taken by member states is effective and mutually reinforcing so that what is done in one state does not cause problems for its partners.
The role of the commission is to apply EU law notably on competition and state aid. State aid rules fully allow for exceptional measures in the exceptional circumstances through which we are living and the commission is applying these rules flexibly and quickly.
Support schemes that take the form of guarantees or recapitalisation are aimed at stabilising financial markets while ensuring that the latter does not have any effects on competition. As such it is important that the aid measures taken do not choke competition, thus leaving economies more vulnerable to economic fluctuations. Even in such times of hardship, governments should direct resources into productivity-inducing activities.
EU state rules require that the measures taken do not give rise to the disproportionate distortion of competition – for example by discriminating against institutions based in other member states and/or allowing beneficiary banks to unfairly attract additional business solely as a result of the government support. The commission has approved plans by some member states to restore liquidity and confidence within 24 hours of their notification in final form (eg the Irish and UK schemes). Furthermore, the commission also requires that any commitments should be provided to member states only within a time frame that does not go beyond the turmoil currently causing havoc in financial markets.
The commission will be building on national action to increase the minimum level for national deposit guarantee schemes, so that depositors throughout the EU, including Malta, will benefit from additional protection and bolster confidence in retail level financial institutions to pursue upgrading confidence in the financial system.
The commission has already launched fast-track procedures to adjust accounting rules in order to be sure that assets are not undervalued, confidence is not unnecessarily undermined and EU financial institutions are not disadvantaged vis-à-vis their international competitors. The commission stresses the importance of all this work not being undertaken by one member state in isolation, and insists on coherence between national action and European action, between member states in the eurozone and those outside and between all the institutions of the EU and member states.
The commission believes Europe must learn lessons from the crisis and comprehensively rethink regulatory and supervision rules for financial markets, including banks, other lenders, hedge funds and private equity. In parallel with its immediate response to the current crisis, therefore, the commission is taking decisive action to reinforce the regulatory framework for the future. Can Europe weather the storm? It faces an unprecedented challenge. But it is extremely important to resist excessive pessimism that would make the situation worse. There is more coordination within Europe than ever before and Europe is working very closely to limit the amount of damage to our real economies. The euro greatly reinforces Europe’s resilience, provides stability for businesses and guards against the speculative runs on national currencies that have occurred in crisis situations in the past.
It seems quite natural to ask how the Maltese economy would have lived through this crisis, had we not been in the EU and adopted the euro. There is no concrete answer, but we would have had a much harder time maintaining financial stability. Our goal was not only to join the European Union, but also the eurozone. These great feats were achieved with serious benefits on all fronts – even support and security during times such as these.
www.davidcasa.eu