Six years after the 2008 international economic crisis, discussion continues about economic recovery, sustainable solutions, and the meaning of the crisis for the American and European financial systems. In two panels moderated by AICGS Business & Economics Program Director Alexander Privitera, experts elaborated on the link between traditional banking and economic recovery while highlighting banking differences between the U.S. and Germany. They compared the current structure of financial markets in both countries and tried to establish whether the American and German approaches to the financial system are on a converging or increasingly diverging trajectory.
In the first panel, Jörn Quitzau, Senior Economist at Berenberg, and Randall Henning, Professor of International Economic Relations at the School of International Service at American University, argued that the euro crisis had major structural implications for the euro zone. One panelist argued that an adjusted EU economic architecture, featuring policies such as a reformed Stability and Growth Pact, can work to prevent another major crisis. In contrast, another panelist argued that there is a need for a stronger fiscal union to protect the EU from further economic disturbances. He claimed, paradoxically, that stricter regulations are needed to protect it from the member states
In the following discussion, the debate focused on problems such as insufficient funds mandated by the European Stability Mechanism (ESM), the perpetual “game of chicken” with the member states against the European Central Bank (ECB) and the EU Commission, and an unprofitable risk-adverse attitude in the banking sector. A further point of discussion was the debate about returning to a no bail-out clause, with opponents of the return arguing that investor fear could cause another European economic crash. Supporters of the clause argued it that it would have to be a long-term vision after much negotiation, but should be possible in the end. The agreement reached by the panelists was that if there would be a no bail-out clause, then there would also be the necessity of some kind of member state safety net. At its core the discussion was about whether a fiscal union should be the future architecture of the euro zone. Supporters of this union pointed out the unsustainability of the current structure in the long term and the statutory neglect practiced by the member states in regard to strict budgetary and financial regulations. In contrast, opponents pointed out that the financial “back-stop” provided by the ECB makes a fiscal union unnecessary. The panel also discussed implications of even lower interest rates recently announced by the ECB, and the effects this policy could have on the future of the European economy.
The second panel featured experts Jan Schildbach from Deutsche Bank and Robert Kahn from the Council on Foreign Relations. This panel focused on a comparative look at the condition of the banking sector in Europe and the United States and what the differences in structure and operations meant for crisis management and future regulatory reform. The discussion began with a structural comparison of EU and American banks, focusing on the key difference of the central banks’ roles in each region’s respective economy. This difference is how deeply the banks are tied to corporate growth, with European economic development tied closely to direct bank loans while growth in the United States is more fueled by private investment IPOs and the bond market. But with the revenues and health of the European banks tied directly to economic growth, the forecast of only a 1.6 percent expansion for the European economy from 2012 to 2015 does not bode well for the bottom lines of the European banks.
One banking problem addressed by the panel was that the Maastricht treaty created a monetary union without a corresponding banking union, which is unsustainable in the long run. This failure, along with many more, led to the 2008 crisis, which burdened member states with massive amounts of sovereign debt, partially due to the intimate tie that the governments shared with the banks. The panel agreed that this tie must be undone on both ends of the relationship in order to prevent excess sovereign debt accumulation and discourage bailouts. One idea presented was to limit the amount of government bonds that banks purchase, thereby limiting the incentive for banks to try and “support” governments through their actions in the financial sector.
The panel then discussed the issues of government action during crisis, size and capitalization of banks, and what reforms are needed to help fix structural issues in the banking sector. The ability of the G8 to act quickly and efficiently during the 2008 crisis was hailed as an achievement; however, panelists were skeptical that this body could efficiently act to produce reform, seeing that the G8 only seems to act with speed and efficiency in the face of global financial crisis. The U.S Congress may soon begin proposing bank reforms as well, especially in the housing sector, to try and reduce the clout of the U.S.’ “big banks.” In relation to the idea of the “big bank,” panelists noted how the American banking sector during the financial crisis became more centralized around a few large banks holding a disproportionate amount of assets. This was due to the United States’ approach to the crisis, which featured heavy initial losses by facing the financial problems early and thereby allowing U.S. banks to hold healthy asset sheets in the later recovery period. The Europeans, on the other hand, did not front the losses early, which has caused issues in recovery and perhaps has covered up critical and potentially hazardous corporate debt problems and structural deficiencies. In light of this need for structural reform, an essential area of change is in the diversification of the European economic system, which would entail strengthening bond and equity markets to make European growth not completely tied to bank lending policy. However, in the end, panelists concluded that Europe simply does not have enough growth to automatically fix its problems, and that structural reforms are needed in the banking sector in order to complete recovery and prevent future economic crisis.
When asked at the end of the workshop whether they see the U.S. and German banking systems following a path of divergence or convergence, the four panelists were split. Half believed that the two systems were becoming increasingly divergent, due to indebted nations and Europe’s current failure to completely digest the debt legacy from the euro crisis. The other half was a bit more optimistic, citing growing similarities in central bank activity and globalization forces potentially overriding the haunting legacy of 2008. Whatever the case may be, it is clear that developments and changes in the transatlantic banking relationship will be an important factor for both the United States and Germany in the years ahead.