Andreas Dombret: Global reforms and the market economy system
Welcome address by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the reception given by the Deutsche Bundesbank at the Annual Congress of
the Verein für Socialpolitik, Frankfurt am Main, 6 September 2011.
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1. Welcome
Ladies and gentlemen, members of the Verein für Socialpolitik,
On behalf of the Deutsche Bundesbank, I would like to warmly welcome you to this
reception. I am especially delighted to accept the role of host at the Bundesbank's reception
once again this year.
The Bundesbank is a true friend and supporter of the Verein für Socialpolitik - and not
without a certain degree of self-interest. The Bundesbank considers science and research to
be fields of great importance, since the work of central banks is today - more than ever -
research and knowledge-based. Time and again, research work has been the starting point
for central bank policy decisions. Conversely, problems we are currently witnessing in the
central banks' various areas of operation stimulate new research projects. Moreover, central
banks offer an attractive research environment. I am therefore convinced that a close
exchange with research institutions and universities benefits all concerned.
The Bundesbank maintains contacts and works together with a wide range of institutions and
academics at the Goethe University. One such example is the Institute for Monetary and
Financial Stability; it is financed by the Monetary Stability Foundation, which in turn is run by
the Bundesbank. But cooperation also takes place on a less formal level, for instance with
the Center for Financial Studies and the Graduate School here in Frankfurt, to name but two
examples.
2. Lessons from the crisis - comments on the G20 agenda
The topic of this year's congress is "The order of the world economy: Lessons from the
crisis", and the scope of the programme demonstrates the range of the related questions and
answers.
What are the right lessons to be learned from the crisis? This question was the subject of
debate even before the first escalation of the crisis, namely the collapse of Lehman Brothers
in September 2008. Initially, it was thought by more than just a few that technical
improvements in financial market regulation - notably concerning the securitisation market -
would be a sufficient response to the crisis.
However, when the most severe global economic crisis in decades took hold in the autumn
of 2008, two points became obvious. First, reforms must be more broadly based in order to
make the world economy and the global financial system more robust and crisis-resistant,
thereby reducing the scale and the frequency of future crises. And second, intelligent and
consistent reforms of the economic framework can only be achieved through global
cooperation.
Despite - or perhaps precisely because of - the need for reforms, there is a not
inconsiderable risk that policymakers will make decisions which are difficult to reconcile with
principles of a market economy. Those who are already sceptical about the market economy
system and about globalisation, and who believe the current crisis to be the result of market
failure rather than political failure, may even welcome this. In my opinion, however, measures
that boil down to protectionism, continuous direct market intervention or more extensive
macroeconomic fine-tuning are the wrong answers to the crisis. Instead, the regulatory
framework needs to be adjusted in such a way that the focus is again put more squarely on
market-economy principles such as individual responsibility and private liability. The current
sovereign debt crisis and its background serve as a strong reminder both of the limits and
pitfalls of supranational economic policy cooperation and of the disciplinary effect of market
signals, incomplete though that effect may have been prior to the crisis.
At institutional level, considerable progress has been made since the outbreak of the crisis.
For example, the G20 has assumed the role of predominant international forum for financial
policy. The Financial Stability Forum was expanded to become the Financial Stability Board,
with a significantly widened range of tasks and members, and is a key driver of the reform of
financial market regulation. Within the European Union, too, institutional consequences were
taken in the wake of the crisis. A European System of Financial Supervisors was set up,
comprising supervisory authorities for banking, insurance and securities markets, to achieve
closer cooperation in European financial supervision, as well as the European Systemic Risk
Board, or ESRB for short. The ESRB represents the first time that macroprudential
surveillance has been established at European level. The central banks of Europe have a
vital part to play here because of the expertise they possess.
It is at the global level that, in some cases, widely diverging ideas on the role of economic
policy collide. Occasionally we experience joint commitment to the principles of free and
open markets, only to find that effectively implementing reforms is a good deal more difficult.
The G20 agenda clearly demonstrates that. It features a framework for strong, sustainable
and balanced economic growth, more stringent regulation of the international financial
system and the reform of the international monetary system including the role of the IMF.
The objective of the framework - strong, sustainable and balanced economic growth - is
surely undisputed. In addition, a process was launched on the basis of which G20 economies
can assess each other's macroeconomic policies. Through this Mutual Assessment Process
(or MAP), member states report on the implementation of their respective political agenda in
terms of their shared goal. Beneficial though a peer review of this kind may be, it must not
become a back door for macroeconomic fine-tuning.
That may already be reflected in the selection and design of the indicators used for the
assessment. For instance, in the first stage of the "assessment of external sustainability"
within the MAP, a specified set of indicators is observed which are intended to identify
macroeconomic imbalances. This procedure would appear, initially, to be an appropriate
means of filtering for more precise analysis in the second stage. For instance, no one would
deny that persistent current account imbalances pose a problem. But it is not clear why
current account surpluses should be dealt with in the same way as deficits - symmetry of
statistics does not imply symmetry of causes and risks.
In this context, the economic policy implications are also the subject of contentious debate.
Besides the outright rejection of pronounced positive or negative current-account balances, the
Bundesbank takes a dim view, in particular, of endeavours to reduce such balances by direct
political intervention. Current account positions are not to be condemned per se, especially
when - as in the case of Germany - they result from market processes and make sense given
the demographic changes that are underway. More important and lasting effects would be
achieved by eliminating barriers to an endogenous adjustment of current account balances,
such as pegging exchange rates at levels which are difficult to justify in terms of fundamentals.
But focussing on mere balances and thresholds tends to deflect attention from such topics.
Considerable progress has already been made in financial market regulation. And given that
weaknesses in regulation were one of the main reasons for the financial crisis, this was, in
my opinion, a matter of priority. Of course, mention must be made of the reform of the capital
rules - also known as Basel III - which will lead to a quantitative and qualitative improvement
of banks' capital and, as a result, increase their loss absorbency capacity. The more losses
the banks' investors can and must bear themselves, the lower the danger that the taxpayer
will again have to come to the rescue. At the same time, the phenomenon of systemically
important financial institutions shows that Basel III cannot be the final step. Supplementary
rules for dealing with the "too big to fail" problem must follow and are at the top of the reform
agenda, along with the even more complex monitoring and, where necessary, regulatory
treatment of the shadow banking system.
One major milestone was certainly the decision taken by the Group of Governors and Heads
of Supervision on 25 June of this year. The oversight body of the Basel Committee agreed
on key procedures for dealing with global systemically important financial institutions. In
future, these banks will be subject to additional capital surcharges ranging between 1 and 21⁄2
percentage points depending on their degree of systemic importance. This will better enable
companies to price the economic cost of - or any further increase in - systemic importance
into their calculations. In my view, disincentives such as these are generally preferable to
"hard" structural interventions such as explicit size limits.
A third topic on the G20 agenda that I would like to touch upon is the discussion on reforming
the international monetary system. This is a very multifaceted topic ranging from the
treatment of capital flows, the appropriate level of foreign reserves and the strengthening of
IMF surveillance to the future role of the International Monetary Fund. The last-mentioned
point, for example, concerns whether considerably more funds should be placed at the IMF's
disposal and global financial safety nets created under the direction of the IMF. In this way,
financial aid could be granted more easily and under more lenient conditions than in the past.
Like many other IMF members, the Bundesbank is critical of these endeavours. There is no
disputing the major role played by the IMF in, for example, providing analytical insight into
the crisis and managing adjustment programmes. However, global financial safety nets
without adequate conditionality would weaken rather than strengthen the financial
responsibility of the individual countries. Particularly in light of the sovereign debt crisis, we
consider this strategy unsuitable as a means of making the international monetary and
financial system more resilient. Moreover, central banks' monetary policy autonomy would be
substantially restricted if the IMF were to become a "world central bank" or the global lender
of last resort - which is what almost unlimited liquidity provision would in fact mean: for the
IMF, unlike central banks, cannot itself create liquidity. Consequently, the national central
banks of countries whose currencies are part of the basket of special drawing rights would be
required to provide liquidity, whatever the amount.
3. Conclusion
Ladies and gentlemen,
The financial and debt crisis is, unfortunately, far from over. This was made abundantly clear
again this summer. I have deliberately disregarded current actions to cope with the crisis,
focussing instead on lessons from the crisis and casting a sceptical eye on some aspects of
the global reform agenda. Let it be understood that the Bundesbank certainly does not reject
this agenda, since it addresses the areas that need to be addressed; moreover, reforms are
crucial to establishing more solid foundations for the global economy.
However, it is important to avoid measures which hamper or prevent market-economy
processes without recognisably reinforcing stability. Blind faith in the market lost its appeal,
at the latest, with the onset of the crisis. Yet this does not mean that statism and government
control are the right answers to the crisis. The cost of attempts to achieve politically desirable
market results and structures is likely to be high - indeed, too high. The prime objective of
the global reforms ought to be to identify weaknesses in the existing regulatory framework
and to adjust the framework accordingly. In this admittedly often lengthy and arduous
process, the Bundesbank sees itself in the role of committed advocate and constructive
admonisher.
Thank you very much for your attention. I wish you an enjoyable evening at the Deutsche
Bundesbank's reception here at the Goethe University in Frankfurt.