A4-0441/98

Resolution on the world monetary and financial crises and their effects on the economy of the European Union

The European Parliament,

- having regard to the autumn 1998 economic forecasts from the Commission ((European Commission II/625/98, 21.10.1998.)), and the development of the world economic and financial crises in South-East Asia, South Korea, Japan, Russia and Latin America,

- having regard to Rule 148 of its Rules of Procedure,

- having regard to the report of the Committee on Economic and Monetary Affairs and Industrial Policy (A4-0441/98),

A. whereas everything possible must be done to prevent the various economic and financial crises developing into a worldwide economic and financial crisis which would have serious political and social consequences in many countries,

B. whereas the current crisis began with the devaluation of the Thai baht in June 1997, and has since spread throughout South-East Asia, South Korea, Japan, Russia and Latin America, threatening seriously to affect the economy of the European Union,

C. whereas the crisis has struck these countries also because they have carried out too few structural economic reforms to attain greater transparency of economic operations and enforcement of international accountancy standards and to introduce improved independent supervision and democracy, including separation of powers,

D. whereas this threat to the European economy comes at a crucial time in the process of Economic and Monetary Union, with the introduction of the Euro due on 1 January 1999 and the European Central Bank (ECB) due to take charge of a single monetary policy from that date,

E. whereas financial markets have been deregulated and capital markets liberated and a new financial system has been created, relying on technology driven global financial markets which allow investments to seek the highest profitability,

F. whereas the current world financial architecture has been in place for over 50 years and has been subject to criticism for its insufficient responses to the crises in emerging economies and to the current financial crisis,

G. whereas the autumn 1998 economic forecasts from the Commission contend that European GDP will increase in real terms by 2.4% in 1999 and that the international economic crisis will lead to a ½ point fall in the expected rate of growth,

H. whereas growth in the world economy, according to the IMF, is expected to be at best 2% this year compared to earlier forecasts of over 4%,

I. whereas the IMF has stated that the main risk to the world economy is that Japan would not 'address its financial-sector problems while ensuring adequate domestic demand¨,

J. whereas Article 105(6) of the EC Treaty does not automatically grant the ECB a role in the prudential supervision of credit undertakings,

Financial Markets

1. In view of the fact that the financial markets are now globalised and not subject to effective international regulation and supervision, emphasises the urgent need to secure through international cooperation the establishment of an appropriate framework to:

- ensure greater transparency of the operation of financial markets,

- adopt codes of conduct which all undertake to endorse,

- organise stricter monitoring of compliance with these rules;

2. Calls for the complete transparency of capital inflows and outflows and for financial data to be disseminated in due time, on the basis of international standards, and for an assessment of the capital adequacy ratio in banking systems as well as improvements in the regulatory standards for the control of financial markets, standards which have been judged insufficient by the BIS itself; further calls for a European framework for these reforms in the context of European financial services and the single market, in which connection complete transparency requires account also to be taken of off-shore centres; this could be discussed in the context of the code of conduct;

3. Urges the Commission, in view of the widely excessive leveraging resorted to by certain financial intermediaries, to call for a common minimum standard within the EU for guarantees, risk management criteria and procedures for banks and non-banks, including a Memorandum of Understanding for the cooperation and coordination between the different supervisory authorities and to institutionalise the provision of immediate liquidity to the markets and lender-of-last-resort functions as well as preparing for a reform of financial regulations within the context of the GATS and WTO;

4. Calls for stricter monitoring to promote greater transparency in the actions of the markets, especially concerning data dissemination standards on financial information; believes that this transparency should encompass both the advanced and emerging financial markets and must include trading in securities, especially high-risk financial instruments such as derivatives as well as data on the solvency to risk-weighted assets ratio according to the Basle agreement, which is currently not being respected;

5. Welcomes, therefore, the proposals by the international financial institutions for codes of conduct in the fields of transparency of monetary and financial policy and corporate governance as well as the IMF Code on Fiscal Transparencyand calls for the Member States to accept a regular surveillance of the application of these codes in the form of a Financial Review Mechanism, with the publication of the results of their application; argues that the aim of the Code of Good Practice on Corporate Governance must be to improve transparency in the corporate sector as crises can arise as a result of private sector imbalances and poor corporate governance;

6. Calls for private investors, in the context of transparency, to consider not only private information on the profitability of investments, but also to take into account the general prevailing economic conditions;

7. Insists that these codes of conduct must introduce procedures which will ensure the effective implementation and related enforcement mechanisms for the transparency of financial data for both the borrower and the lender through the introduction of statutory reports which oblige the private sector to publish standardised data to allow for enforcement of these codes of conduct;

8. Demands that these codes be extended to include the qualifications of financial traders and an ethical code of conduct on their behaviour;

9. Urges that the international rating agencies be included in the preparation of these codes of conduct as they have a crucial role to play in ensuring transparency and bringing credibility to the procedures;

10. Calls for the standardisation of prudential supervision practices in Europe, regardless of which Member State a financial organisation is based in; believes that there should be a Statement of Intent for the harmonisation of prudential supervision, based on Article 105 (6) of the Treaty of Maastricht; believes that such prudential supervision should be inclusive not only of credit institutions and other financial institutions, but also private enterprises which act, through their activities on financial markets, as defacto financial institutions;

11. Considers that the current crisis has revealed that the imprudence of many private investors was based on the assumption that the public authorities and international organisations would ultimately intervene to prevent general disorder;

12. Demands that in order to avoid this moral hazard problem, a new approach be introduced which will 'bail-in¨ the private sector, with its active financial participation in preventing as well as solving crises, as has already been undertaken within the framework of the South Korea-IMF Agreement; considers, therefore, that credible regional consultation mechanisms (including the pooling of private and public funds for emergency packages) should be introduced which would bring together the IMF and private institutions as joint lenders to crisis-hit countries;

13. Considers that, because capital controls do not offer a long-term solution for the outflow of capital from crisis-hit countries, as they encourage domestic evasion and capital flight and discourage foreign investors, a time-framed 'financial safeguard clause¨ should be introduced as quickly as possible, which can be achieved at international level on the basis of the IMF Statute; wishes to add, however, that not only the solution of the crisis but also crisis prevention must be debated in the future reform plans of the IMF;

14. Calls for this 'financial safeguard clause¨ to be implemented in conjunction with a standstill procedure on debt servicing for countries hit by a liquidity or solvency crisis, as allowed for under Article VII of the IMF's Articles of Association, which would give the country enough time to design a debt reorganisation plan;

15. Calls for all IMF member countries to put in place a close monetary surveillance on short-term capital inflows in order to avoid excessive debts and to allow for short-term capital controls on outflows;

The global financial system

16. Calls for a substantial and adequate reform of the 50 year old international financial institutions, which should be considered as a matter of priority by the European Union, including increasing the political accountability of the International Monetary Fund by transforming its Interim Committee into a political 'Council¨ with decision-making, rather than consultative, powers, as foreseen in Article XII, Section I of the Articles of Agreement;

17. Urges the Council and the Commission to press ahead with proposals aimed at improving the functioning of the international economic and financial system so as to prevent a recurrence of the current crisis while recognising the risks of protectionist measures on capital movements or trade as a general rule to solve the economic and financial problems; underlines that these proposals should include:

a) the creation of an 'Economic Security Council¨ under the auspices of the UN, which would provide a more balanced approach between the interests of developed nations and the poorer nations, taking into account the interlinkage and interdependence of the advanced and emerging economies and their responsibility for the world as a whole;

b) the integration of financial trade within any new WTO trade round, so that agreement can be reached globally on reform in order to avoid distortions in world trade;

18. Calls on the IMF authorities not to make the granting of credit subject to conditions which cannot possibly be fulfilled in emerging countries which have not attained economic, social or institutional maturity;

19. Emphasises that the EU has already made large-scale contributions to IMF loans in Asia and elsewhere and can continue to play an important role; believes that the preparations for the introduction of the euro may have been a factor in preventing currency instability so far in the euro-area;

20. Supports the G7 in calling for an increase in the funds available to the IMF to act in emergencies and in this context, approves of the guidelines of the G7 Finance Ministers of 30 October 1998 to the World Bank to earmark funds for supporting social programmes in developing countries;

21. Calls on the Member States of the Club de Paris to bring the debt crisis in HIPC countries to a speedy resolution, without which there will not be a conclusion to the current world economic crisis; insists that the reduction of debt payments should be concentrated in those countries committed to economic, social and political reforms and believes that such a debt reduction would release funds in HIPC countries for domestic purposes, such as infrastructure investment, education and social policy;

22. Stresses that, with a single monetary policy, the euro countries will need to assume a major role in contributing to the solution of the financial crises affecting the world economy;

23. In this respect, stresses that the utmost importance must be attached to the adequate international representation of the euro-area and EU interests, especially with regard to international institutions; considers it vital that the question of external representation of the euro-area be resolved as soon as possible; insists that the Commission must play an integral part in any international representation of the euro-area;

24. Calls once again for an effective dialogue between Parliament, the Council, the Commission and the ECB in the coming months in order to define the EU¨s ongoing contribution to the cause of global economic and financial reform;

Global economic impact of the crises

25. Underlines that an additional 10 million people at least have been made unemployed in South-East Asia alone, as a result of the current crises, with the inherent detrimental impact that this has had on the social, political and economic agenda of these countries;

26. Observes that the Asian crises have revealed the dangers entailed by globalisation of markets when unaccompanied by any legal and political framework and when no account is taken of the social dimension of the phenomenon; calls on governments to initiate negotiations under the auspices of the WTO with a view to securing respect for the provisions of the ILO concerning labour rights;

27. Invites these countries to consider deepening their regional agreements so as to strengthen their economies against future crises; in this context believes that the European Union and the United States must take measures to maintain a balanced relationship between the rates of the dollar and of the euro;

28. Calls on the Japanese government to recognise the absolute necessity to restructure, as a matter of priority, its banking system by introducing a credible reform plan, which will, in the longer term, improve confidence in the whole economy; realises that such a dramatic restructuring will have serious short-term economic consequences ;

Effects of the global crises on the real economy of the European Union

29. Stresses that the fate of the global economy is now largely dependent on economic developments in the US and the EU and that recession in these economies would have disastrous consequences for total world output; is aware that the EU and US have a common interest in the stability of financial systems and emphasises therefore the importance of monetary policy coordination between the ESCB and the US Federal Reserve System so as to avoid any monetary policy problems which could damage current growth prospects;

30. Considers the financial sector in Brazil as a strategic point where financial contagion can be prevented from spreading further and therefore strongly approves of the recently announced IMF financial support package for the Brazilian currency, which must be extended to international measures aimed at relieving Brazil's excessive debt burden;

31. Stresses the willingness of the EU to help Russia overcome the current financial, economic and social crisis by providing technical aid and assistance and cooperating with the Russian authorities in helping them to restructure their tax collection system, set up a sound financial and banking sector, promote SMEs, modernise the public administration and bring in institutional reforms at local and federal level;

32. Is concerned by the fact that in its autumn 1998 economic forecasts, the Commission continues to believe that while the international economic environment has deteriorated, this will have only a marginal impact on the European economy; calls therefore for the preparation of an action plan by amending the Broad Economic Guidelines;

33. Is worried that there is already enough evidence, in terms of unemployment in Europe in those sectors of the economy directly affected by the global economic crises, and in the scaling down and closure of Asian inward investment projects, to consider that sustained attention needs to be devoted to maintaining overall demand within the domestic economy;

34. Underlines that any effects on the European economy may not be evenly distributed, as individual Member States have different trade exposures to different parts of the world economy; is particularly concerned about the financial exposure of Europe to emerging economies, with European bank loans to emerging economies amounting to 7% of GDP compared to 1.5% for the USA and with German banking exposure to crisis-hit Asia and Russia being particularly vulnerable while banks operating from the City of London also have a large exposure to Japan;

35. Calls for increased public-private investment in the European economy in order to stimulate sustained growth and employment and calls for government investment expenditure not to be considered as contributing to public deficits in the assessment of Member States¨ public finances;

36. With this eventuality in mind, calls on the Member States seriously to consider increasing their expenditure on investment at European level; believes that such an investment programme could counteract a short term slowdown in growth and sustain growth in the economy in the longer term; points out that such an investment programme would also constitute the first real coordination of economic policy in Europe following the introduction of the single currency;

37. Instructs its President to forward this resolution to the Commission, the Council, the General Manager of the Bank for International Settlements, the Presidents of the European Central Bank, the International Monetary Fund and the World Bank and the Director General of the World Trade Organization as well as to the United Nations.