Know. All right.
Let me just stand up for a moment to welcome you all here. This is the second seminar of the PFI Michaelmas term series.
It's also the birthday of the financial market program because it was signed on the 17th of October.
So happy birthday to the program. Welcome to Klaus Wrangling.
You've probably seen from the poster his curriculum vitae.
But just for any who haven't before, he became managing director of the ESM and CEO of its predecessor, the FSF.
Klaus had held a number of public positions and he was at the European Commission as director general of economics and finance.
He was in Germany as a very senior level in the Ministry of Finance,
where I think it's fair to say he was one of I was going to say the midwives, perhaps I should say the godfathers of the euro project.
And he was before that he was at the International Monetary Fund.
And there was a time 25 years ago, in 1988, when when 2000,
Russell Kincaid and I were travelling around Europe to try to discuss balance of payments imbalances and the role of financial markets.
I recall this very well and I went back and looked at this document. I found the issues haven't changed very much.
Certainly the market participants haven't changed very much, and I'm not sure the governments have changed very much.
But so he has a long track record. He also was in the private sector.
He was a managing director of the hedge fund, more capital.
And this may account for the fact that his first bond issue at the ESM was, I think, three times oversubscribed.
And it is the birthday also of the of the two.
Two weeks ago. Over two weeks ago. So welcome. And Klaus, it's your second time here.
You were here three years ago, just as Ireland was beginning to look for your help at the time.
In fact, we thought we might not have a seminar due to this. It's a real pleasure to have you again.
Russell Kincaid spent his career at the International Monetary Fund, and he recently left the fund and came here for a year to Oxford.
He was he worked on Asia, the Middle East, and on Europe being in charge of the division handling Germany, being mission chief for Bulgaria,
and later was deputy director of policy at the IMF and then was the director for risk management and Audit of the IMF.
So it's Kraus, Klaus.
His job is to solve crises, and Russell's job was to warn the fund not to lend to countries that could anyway pose difficulties, I think.
So this was a fine, fine prospect.
Now, just a quick word of housekeeping. As you can see, this is being podcast.
And that means that you can't unfortunately ask questions during Klaus's presentation.
You can't interrupt him. You really shouldn't heckle him because you have not you are not consenting adults.
You have not signed the consent form for the podcast. The podcast will be cut off too, after Klaus has spoken.
And that means that Russell's Russell's questions and Klaus his answers will be under
the Chatham House Rule and the discussion will be under the shadow mouth rule.
So that's when everybody can let their hair down, so to speak.
Can I just also say it is not yet confirmed whether there will be a seminar next Monday evening
because there is a remaining question mark when Paul Tucker will fly to spend his year at Harvard.
And judging by this morning, the flight, the flight have not yet been settled.
And so we will send out a notice in due course saying whether there'll be a seminar next Monday.
If not, then we will resume into week's time with the seminar with a speaker from the European Central Bank.
With that, I'll hand over to Clowes. Okay.
Thank you very much, Max. First, congratulations on the first anniversary of the program.
Um, nice to be here and nice to be your second time.
Thanks for inviting me. Particularly nice to sit here with Max and Russell because as Max said, we have a common past.
He was too modest. Of course he was the boss. When I arrived in that division in 1985, Russell was his deputy, so I had to catch up.
Um, a few years later, and Russell moved to the IMF and I could take his position.
So but we had very three and a half, very intensive years together.
People forget that those were the days of the Latin American debt crisis.
Um, and, um, we had to work on that.
That was the task of the division. And sometimes it's useful to think back of what happened then.
What were the solutions? It's probably a sign that we are getting to, oh, it's that many of the actors today don't remember.
Maybe I shouldn't have said that because it's online, so. Okay.
Um, let me go from. My presentation. And I'm sorry that Max didn't allow you to interrupt me, but you can do it all afterwards.
Um, yes. And I hope everybody can read this also in the back.
So obviously, policymakers today who deal with the European crisis and European issues have two, two issues to deal with.
They have to stabilise and stabilise the current situation and they have to think about the future,
how to complete monetary union, how to make sure that either there is no crisis.
Although one should be very careful with such a statement, we know there will always be a crisis somewhere.
It's part of our economic system, but that crisis doesn't happen too quickly.
The next one. And that's not too serious. Um.
We are working on that.
I know the impression around the world, inside Europe and outside Europe, I'm sure also in Oxford is that we have not done a very good job,
that things are very much ad hoc, no comprehensive strategy, often acting too late.
I think that is the predominant perception. Some of that is true, but still looking backwards, what happens the last three years or so?
One can discover that there is a consistent, comprehensive strategy,
and I admit it's not easy to discover, but that's why I want to guide you through that a little bit.
Several things have contributed to the current stabilisation in the euro area.
It's not only monetary policy, as the Financial Times writes every week.
It's not only OMT, although it has. That played a very important role to switch expectations of markets in August last year.
But for me, there are four inter-related developments, four elements of our crisis strategy,
where we have made progress in parallel on each one of them. That explains quite easily why the situation today is better than 18 months ago.
And you find some here on the screen the. No, this was I'm jumping ahead to the next slide.
I think this was just still talking about the origins of the crisis.
But I think I would skip that and I would go to these elements of our strategy, um, for elements first.
And for me, the most important one is what's happening at the national level in the periphery, in the countries that had a problem.
And I will show you in a moment that there is substantial adjustment.
I think it's widely accepted now also in markets, but it's good to look at some of the facts.
For me, that is the key thing, because only if the countries that need to adjust actually do adjust, we will be able to see an end of the crisis.
But the second point is also important better economic policy coordination.
The euro area, as you know, many academics, particularly in this country, in the US,
have often said monetary union cannot work because there's a centralised monetary policy and you
do fiscal policy and structural reform in a decentralised way at the national level doesn't work.
And some, Martin Feldstein, Krugman, others still say it doesn't work.
I think it can work, but of course, it can only work if there are rules to coordinate policies.
And these rules are not good enough in the past and we have to change that.
I will also explain that a little bit. The third point is that we closed institutional gaps in the initial design of monetary union.
When monetary union was prepared in the late eighties and then throughout the nineties, there was no plan to have financial backstops.
Um, we thought and I include myself that it wouldn't be needed, that the, that capital flows inside EMU would always evened out.
Um, we did not foresee a crisis like the one we have seen in the last four years.
Um, so that was a mistake. We have closed that institution, that gap.
We created the EFSF and ESM as financial backstops.
And here I would also add, um, all the things the ECB does today, which were also not foreseen in the initial design of monetary union like OMT.
So that's the institutional side. And then the last point, and I will spend a bit more time on that, given the focus of the, the seminar program,
is what's happening to the banking system because that's there is a fourth element in this strategy,
which I therefore call a comprehensive strategy to stabilise the euro area.
Um, first of all, national adjustment and second better quality policy coordination.
Third, closing institutional gaps. And fourth is to strengthen the banking system.
We know economies don't work well when the banking system doesn't work.
The crisis has led to a renationalisation of European banking market and fragmentation
with high costs for the countries in southern Europe and the periphery.
We are trying to fix that by moving to the banking union.
So that's the fourth point in in the strategy.
And for me, that all together explains quite well why is the situation in Europe,
in the euro area is better today than last time I came here three years ago.
So let's look at each of these four points a bit. And in particular, that's the last one.
That's the banking union. So first point adjustment, that's the national level.
Here you'll see, um, what's happening on the fiscal side.
Fiscal deficits are coming down rapidly. There's always a debate whether it's too fast, too slow.
But but the direction is very clear.
I also don't think it's particularly fruitful to talk much about fiscal multipliers when you have a fiscal deficit of 15.6% like in Greece in 2009.
Whatever the fiscal multipliers are, one has to act when that happens and you have to bring it into line with some financing possibilities.
Every EU country has a plan how to bring down the deficits.
We look at now it's a structured effort. So we we take out the the problems that come from the cycle so the nominal targets can be postponed.
But in structured terms, the plans are being followed.
Overall, it's actually quite good.
You see on the right hand side that in the aggregate the deficit of the euro area is only about half what you see in the UK, US and Japan.
So it's working, it's moving in the right direction. Competitiveness.
The other big macroeconomic problems that you saw in the euro area accumulating during the first decade of monetary union there,
we also see significant progress. You see on the left hand side how the unit labour costs developed in southern European countries and in Ireland.
They moved up strongly since 2000 or 1999, the beginning of monetary union.
The bottom lines are thick blue line. That's Germany, just as a reference point.
And so you could also say northern Europe.
And you see that in the peak in in the nine in 1998, the gap between southern Europe and northern Europe was 45%.
That was a result cumulative of the first decade of monetary union that was not sustainable.
You saw the result. When you look at the right hand side, the current account deficits, they reached them in some cases, ten, 15, 18% of GDP.
Again, not sustainable. Had to change. Interesting.
The turning point came in the first quarter of 2008 in southern countries.
Um, so well before Lehman. And that was a result of work from the bodies that are in charge of supervising, monitoring the economies, the commission.
But also IMF and OECD. Um. Max was at that time with me in the commission, and we saw this happening.
Of course, we were not totally blind.
But it was the time of the Great Moderation and some of our famous colleagues thought cycles had disappeared from economics and all these things.
So it's all a bit weird today, but those were the days.
Um, so the turning point was there already in 2008.
And since then there's a lot of progress.
Not only today, by the way, which is the yellow line, but clearly the countries that borrow from EFSF and ESM are making progress.
Conditionality works. People who come from the IMF and there are several here, knows that very well.
Conditionality works. Um, um. It takes a while to see it, but it always works.
And you see it certainly now in Greece, Portugal, Ireland, Spain.
And we will also see it in Cyprus soon. Very clearly here on the competitiveness side, improving, card account, deficits disappearing.
Several countries are back in surplus also for cyclical reasons, obviously, because imports are collapsing, but exports are also growing.
Like Spain, exports are up 11% year over year.
So these economies are rebalancing. So we see a rebalancing inside each country towards the external side, and that's the only way.
And we see a rebalancing inside monetary union. So the problems are disappearing slowly.
Also these programs in Greece, Portugal, Ireland have not only the macroeconomic component of cutting deficits,
they have very strong structural components. Very painful also for people who have to give up privileges.
And it's always easy to say people should give up privileges and and rents should or should not be there.
But if you talk to a Greek truck driver who bought the license to be allowed to drive a truck two years ago for €200,000,
because the number of licenses for truck driving in Greece had not increased for 20 years.
Um, that's why it's very expensive for the economy.
It was cheaper to fly something from Frankfurt to Athens than trucking it from southern Turkey to Athens.
So the truck driver who bought this was in the old system. He put all his savings in there.
And if you tell that truck driver today, no, no, there are no more licenses, the guy will not be happy.
So structural reforms are painful, just like fiscal adjustment is painful.
But it means that civil servants and pensioners have to give up 30 or 40% of their income.
But it is working. It's painful, but it's working. So that was the first part.
Markets, of course, have discovered it was a time that gets all this.
Markets had a time to act before they discovered the problems.
They also there was a time to act before they saw the progress.
Now they see it fully. Interest rates on ten year government bonds for Ireland and Spain are only half what they were 18 months ago.
Also, Portugal, Ireland, Spain have been able the last few months to issue ten year government bonds again.
They were not able to do that for the preceding two years. So things are getting a lot better.
Not yet in Greece. That's the most difficult case and Cyprus is the most recent case.
But in the other cases, there is a lot of progress. So let's move to the second part of the strategy.
Better call policy coordination. And that's a key point also in the long run.
Um, because in the past we focussed on fiscal coordination,
not totally wrong because in the monetary union I think the scope and the potential for spill-overs coming from the fiscal side are very large.
Um, and therefore it was important to focus on that.
But first, not every country followed strict rules, including big countries like Germany and France in 2003 when they ignored the rules.
And secondly, it was too narrow, too narrowly defined.
So what has happened now during the last two years is that the roots of the stability pact have been tightened.
They have been made stricter. They have also been put into different formats.
And I will not go into all the details, because that would take too much time.
But they are clearly stricter. There is much less room for political interference.
And that's important to realise that the modalities for voting on in this process of the Stability and Growth Pact,
the voting modalities were turned around in the past, like always in the EU.
The proposal from the Commission needs the qualified majority in the Council to
become European law in the future for the different steps of the Stability Pact.
It's sufficient that of all European Commission proposals to become law.
That will happen unless there is a qualified majority in the Council against the Commission proposal,
and that's a complete change and strengthens the role of the position of the Commission very much
makes the Commission much stronger and most of the time the commission has been on the right side.
When we think about the proposals in the context of the Stability and Growth Pact and and fiscal adjustment,
so much tighter rules, less room for interference.
But also these fiscal rules are now in the context of the fiscal compact introduced into national legislation,
which means that if a country in the future were to violate the European rule on on budgetary conduct,
the country would also violate its own national legislation. So it's another hurdle in order to prevent that.
There's earlier coordination with the European Semester where countries notify the Commission in the first half of the year about the intentions.
Then there is an analysis and the Commission discussions are council and the country gets recommendations from its partners.
Complaints, maybe. But the country's national parliament remains in charge of taking the final decision on the national budgets.
So they remain responsible. But they take the decision knowing what the partners think about what they are about to vote on.
And now we have since this month, the two pack in place where the commission checks before a national parliament takes the final decision on a budget.
Whether this budget is really consistent with all the rules that have been adopted the last two or three years.
And you will read a lot more about that in the newspapers the next few days because the process is unfolding the first time we will see how it goes.
I'm sure some governments will not like it when the commission speaks out.
I hope and I expect the commission will speak out. Its their role.
They were given this task. So a lot is happening in this fiscal side.
Then in addition, also important as one of the lessons from the crisis, surveillance has been broadened significantly.
That's now something called the Excessive Imbalance Procedure.
Sounds terrible for most people, but it describes pretty well what it's meant avoiding excessive imbalances.
There will always be imbalances in the monetary union.
You also have imbalances between the regions and the US, so the not to speak of regions of China.
Um, but they shouldn't become excessive. Um, um.
And this procedure. Now very systematically the commission, the ECB, the ministers, finance ministers will look at other areas beyond fiscal.
Um that can also lead to problems if they get out of control like credit bubbles.
Real estate bubbles. Excessive deviations in competitiveness.
Um. Com. Account imbalances and all these things.
Um. So much more systematic way of these broader macroeconomic variables are being monitored.
Then the commission, if necessary, can make recommendations to the council.
So the Council has to vote on that. Give it to the country concerned.
And if repeatedly, a country does not follow the recommendations, that can be sanctions.
So let me stop here, because one can talk forever about this and this improved framework.
But it isn't the important second element of the response to the euro euro crisis.
The third one, as I already mentioned, is closing institutional gaps.
Um. There was nothing like CEO was Evans e Azam when the crisis broke.
What we have done now, we have imported the approaches that the IMF has used successfully the last few decades globally into Europe.
Um, many people don't realise that, particularly my own country,
when I talk about these things, this is completely new and we are giving money away and um,
forgets that the IMF has done very similar operations and in all continents during the last 4050 years, quite successfully.
Never lost money. Um, so we have imported many of those approaches.
So as a mentor, Sophia was there for years and is to finance macroeconomic adjustment programs.
We can also, like the IMF, support precautionary arrangements.
We haven't done it yet, but we have the instruments. Then we can do things that the IMF cannot do.
We can do in direct bank recapitalisation. The IMF cannot support specific sectors of the economy.
We could also intervene in the primary and secondary bond market.
Um, we haven't done it, but we have the instrument and it's particularly important in the context of the ECB's OMT.
Um, the instruments available. So it goes beyond what the IMF can do.
But the core business and most of our programs are very much like IMF programs where we provide the financing.
The conditionality, as you know, is negotiated by the troika, which includes the European Commission, the ECB and the IMF.
Where we also different from the IMF and that's why we are clearly not a European
Monetary Fund is that we have to organise the money first before we can lend.
The IMF when when they agree on a program, they push the button and gets the money automatically from the member states.
So they have a very quiet job compared to the MSF and the Azem. We have to go to the market, raise the funds.
That's why Max talked about bond issues, which have been quite successful so far.
And on the next slide, you can see what MSF and DSM have done during the last two and a half years.
Um, we have, uh, lending capacity together of €700 billion.
Um. We have used so far. Um.
Less than a third of that. We have committed to more than 36 billion of which to run it, and it changes every week.
So I have to look at the numbers. We have disbursed €215 billion.
All this happened during the last two and a half years. So 250 billion, 15 billion.
That's about 280 billion USD.
The IMF has told the claims outstanding of about 240 billion USD are only half of what we have done and two and a half years.
So much for the criticisms that we often heard in Europe that we are not doing enough.
I think we have done quite a bit. The good news is also that fallen €50 billion uncommitted.
Most of the firepower of the US is not committed, is available for future cases.
Hopefully they don't come, but it's good to have this available in case of need.
Um, so the 215 billion that we have lent went to five countries.
Ireland, Portugal and Greece are financed by the EFSF, which was the first temporary institution which will take no new programs.
But they continue to finance these three countries and they are still about 15 billion in the pipeline.
Why is the ESM is doing all the new programs that started with the Spanish bank restructuring and the Cypriot program earlier this year?
That also means that both institutions. I have to say that for the market people,
those institutions will be in the market for the next 25 years because we have EFSF bonds outstanding was 25 maturity.
That's the longest one. All the others are shorter and the EFSF will exist as long as it takes to unwind all these operations.
Then the others have closed down. ESM is the permanent institution.
You may ask, why are the two institutions? The reason is that the EFSF was had to be put together very quickly.
There was nothing. We had to start from scratch and therefore one had to use some strange legal vehicle operates on the Luxembourg law.
ESM as a real international financial institution, operates under international law.
But to do that, it takes some time to create international law, have it ratified, and all member states took a while.
That's why we have these two institutions.
But the division of labour is now very clear as F continues to finance the first three countries, either in Greece and Portugal.
ESM does everything else. Um, so last point, looking at these institutional innovations that happened in the last few years is the role of the ECB.
Particular OMT. Um, which has already said was very important to switch the perception on the market last August.
It's important to have it.
I think it's a very efficient use of of the two institutions and the efficient cooperation between us at the ESM and the ECB,
because it provides, on the one hand, the conditionalities that the ECB cannot provide.
We can provided with ESM programmes, and we can combine it then with the unlimited firepower that only a central bank can provide.
Our firepower is not unlimited. So it's a very efficient combination.
We know exactly what to do. I signed an IOU with Mario Draghi.
So if it's activated, we know who does what. It is available.
It can be activated quickly, but ideally it will never be used like our remaining firepower.
Best is to have its people know about it and not use it.
So that was the third element of the comprehensive crisis response, national adjustment, better policy coordination, the new institutions.
Let's move to the fourth element of the crisis response.
Um, strengthening and helping the banking sector.
And here, of course, dramatic things happened during the last four or five years.
This may be a bit dense, but on the left hand side, you see how in the earlier years, in 2006, 2007, it's a light blue.
Private flows financed all the deficits.
And in the countries of the periphery. Um.
Those were the easy days before the crisis. Financial flows.
No problem. Financing current account deficits, fiscal deficits, deficits of the private sector.
All of that was financed by this light blue. Then starting in 2008 with the global crisis.
Although I prefer to say it was really the moment when the.
Homemade problems of a mule which had accumulated the first decade of a mule, came together with the global financial crisis.
It's this combination that made it so difficult. So when that happened in 2008 with Lehman, you see the blue block.
It's still positive. There was still private flow to these countries.
Um, but it was already, um, supported by Eurosystem flows, which includes the target balances.
So more and more money was channelled through, through the ECB.
Then the blue shrank in 2009 and became negative in 2010, 11 and 12.
So withdrawal of private capital from these economies substituted it, and there was no other way to substitute it in the short run by public money.
IMF money was F ESM and ECB money and that took over.
Otherwise there would have been a total collapse. Unfortunately,
we only have numbers at the moment up to the third quarter of last year and will be very interesting to see the 2013 numbers when they come out.
I think it will indicate a slow normalisation of the situation.
Um, and then we will move back to normal. Although my view is the new normal will not look like 2006 and 2007.
Um, those flows were too big. They financed the huge current account deficits in these countries.
The deficits will be much smaller in the future. They should be smaller.
Um. So the normalisation will mean that there's no net new inflow coming from ESM and the IMF.
Target balances are dropping anyway now. There will be a healthy, sustainable amount of private capital flow.
Again, that will be the new normal. The right hand side shows that the banking sector of all is not back to normal yet.
It shows the ease the use of the ECB deposits facility.
We have, as you probably know, the situation that banks borrow a lot from the ECB and then they put at the end of the day,
a lot of money back to the ECB.
Um, the balance of that was hugely, um, was huge up to €900 billion, um, in October 2011, um, until the summer of last year.
Since August last year, it's dropping, but it's still around €350 billion.
Um, so that's an indication that the situation is better, much better than a year ago, but it's far from normal.
Um, because that should really be known that balance,
it should go back at these where it was in January 2008 when it was 200 billion and maybe even less than that.
So there is a problem. Another way to look at it is that the interest rates for private borrowers in
the periphery are substantially higher than in northern European countries.
These are ECB interest rates. Um. Um.
On loans to non-financial private sector borrowers.
And you see a difference of three or four percentage points, um, which is very painful of course,
for these countries because these are the countries that are going through adjustment any way they have to improve competitiveness,
given that they cannot move the exchange rate. They do it by cutting wages, cutting income, um, more in Greece and Ireland than in Italy and Spain.
But it's happening everywhere. Um, that's painful.
If now certain corporates, um, have capital costs that are significantly higher than the capital costs that their competitors have.
A few kilometres on my it's further north because there's a border in between.
Then what can they squeeze? They have to squeeze again labour costs on top of what they are already doing.
So that's not nice for the people who want to earn a decent living, but it's also bad for domestic consumption and domestic demand.
So that's a risk that GDP drops further. So this is not healthy.
Um, there can be some differentiation, but it should be based on creditworthiness, not on geographical location.
So this when you look at these two charts, that describes a problem that's more or less what politicians also discovered.
So some of last year. The first two and a half years of the crisis, they had focussed on the fiscal side, on debt levels,
on competitiveness and current accounts, and they saw to some of last year that all these things were moving in the right direction.
It was not over, but it was moving in the right direction.
Why here on the banking side, financial markets and looking at interest rates,
looking at how much money was channelled through the ECB, the problem was getting worse.
And that's why, to the surprise of some in the summer of last year,
all of a sudden the word banking union appeared in the communique of euro area summits.
Um, I can tell you it was not so easy to explain all this to top politicians because normally this is beyond their radar screen.
But they realised that there was a problem and that's why banking union is now on the top of the agenda.
It was again be there the end of the week when the next summit in Brussels.
And banking union has three objectives. First, to limit this fragmentation in the financial markets to the minimum possible.
Second, to break the sovereign bank link.
And third, to protect taxpayers.
So. What has happened in this area.
We have always, for some time, has stepped up additional new institutions for support for financial markets,
supervision for banks, insurance companies, securities markets.
We also created the ECB, European Systemic Risk Board, which is really an interesting.
Um, institutions not well known in the broad public, but you probably all know about it.
Other countries also drew the conclusion from the crisis that macroprudential risks have been ignored or not not monitored appropriately.
Max and and Russell have written the paper on that. Um, so now people have woken up.
They know that this is potentially very important to prevent the crisis.
ECB Does it in the euro area, and I think for the euro area is even more important than for a country.
The US has created a similar body in the UK. But in the monetary union where monetary policy is not available in any country specific way, um,
supervisory tools can be particularly helpful because supervisory tools in a monetary union remain available at the national level.
They can be used to address to address national problems.
For example, five years ago when the Irish real estate bubble was getting bigger and bigger.
The Irish supervisors could have intervened if they had the instruments.
They could have said the loan value ratio should be no higher, no more than 80.
Typically in Ireland, like in this country, in the US banks financed under 10% of the purchase price of of a real estate project.
So the Irish supervisors could have used that and could have stopped that. They didn't do it.
But there was also nobody in Europe who told them to do that. And that's my expectation that the US upheaval will play that role.
We also, of course, Europe is part of what's happening globally in Basel.
The G20 or Basel three is being implemented. Um.
Um. In preparation of that, banks are increasing their capital.
Last year alone, European banks increased their capital by €250 billion.
Um, and doing that and some deleveraging the core tier one capital ratios or move to 9% or higher.
So a lot of progress with the European banks. Um.
And we continue with our regulatory framework in the European Union on the different capital adequacy directives we are discussing B,
our D, which stands. But I get to that. On the next slide, I explain a bit what all these these acronyms mean.
Um, and we are moving towards banking union, which has these different components.
Um. Banking union.
As you know, the first part has been agreed.
The Single Supervisory Mechanism as a sum will be taken over by the ECB and will be operational in about a year.
The single resolution mechanism is still under debate on the first debate, actually.
Different views on this. Not surprising when you have 17 countries on the commission and that different views.
I'm sure there will be a solution found in the next few months.
But I cannot tell you tonight which one.
Um, direct bank recap instrument is something that's directly linked to my institutions because he has the idea that on top of the instruments,
we already have ESM. I showed them on the audio slide.
We would also be authorised to give capital equity directly to just one bank.
Which would be in addition to our normal work,
I have to recruit different staff who was able to supervise and restructure banks sit on the board of a bank.
Um, but this is broadly agreed by the euro area finance ministers.
Um, however, we knows that in some countries it's hotly disputed.
Um, particular in Germany, it may well become subject of the coalition agreement between the two parties that may form the grand coalition in Germany.
And we have to see what happens there. But it is one of the elements of the, of the banking union.
Um, as you know, as part of the banking union and the ECB taking over as single supervisor, there will be asset quality reviews.
Um, and spring of next year, there will be stress tests from EBA.
Um, at the end of that, one has to know if there are gaps, who will fill those gaps as again the fierce debate ongoing.
How to do that. Um, some people think that the ESM should be authorised to act as a financial backstop in this context,
not only through direct bank recapitalisation, but also as a backstop to the single resolution mechanism and single resolution fund.
Um, all of that are in the debate and not over. Um, we will see where it goes.
What we could already do today is use the instruments that we applied in the case of Spain to help the bank
restructuring by giving a loan to the government where the money is clearly earmarked for the banking sector.
That doesn't cut the link between sovereign and banks. Um, but it provides the financing.
Um, so this is available, um, and would be used again.
So that's where we are on banking union. I'm sure you will have many questions.
I better stop here. But let me repeat. Apart from banking union, where we all are working very actively right now,
my main message is there are these four good reasons why the euro area is stabilising, why the market situation has stabilised.
It's not by coincidence. It's not because markets now focus on U.S. debt ceilings and emerging market exchange rates.
We have made good progress at the national level. The adjustment is really there.
It's not over. It must continue. But it's really the the policy coordination that's much stricter and much broader today than ever before.
Thirdly, we have new institutions that are available to react to a crisis, and we are working.
Fourthly, on the banking union, which I think is an important part and compliment to economic and monetary union.
Thank you. Thank you very much.