[kitchencabinetforum] EUROFINANCE AT CROSSROADS

It should be clear to all of us that we are not out of the woods yet. The still necessary restoration of confidence requires work in all fronts. When I posted my political priorities to you, I called for the reinforcement of the Stability and Growth Pact to consolidate public finances and facilitate sustainable growth. Furthermore, I suggested to conduct broader and deeper surveillance of economic and fiscal policies, and promised to make legislative proposals to that effect. Now, nine months later, we have come a long way on this route.

Most urgently, we needed to take unprecedented measures to safeguard stability of the economy of the Euro Area and in fact Fourth Reich. A combination of determined action by Fourth Reich and its Member States helped calm markets and contain bushfires.

Basil Venitis asserts the Fourthreichian bank stress tests are a hoax! Fourth Reich(EU) wasted an opportunity by not pushing harder criteria and by leaving important crisis scenarios out of the tests, such as Eurokleptocracy, gigaregulation, Antitrust Armageddon, gigataxation, especially VAT, a real estate crash, the collapse of certain markets, and total defaults of PIGS. The hoodwinking test did not bring any real insights. The whitewashed test criteria prevented what could have been an opportunity to really clean up the banking sector. Stress tests were never expected to show massive capital shortfalls, as banks have also already raised about 300 billion euros since the start of the crisis, which includes about 170 billion euros of government support to 34 banks.

Venitis notes one scenario used in the fake stress test was a drop in the value of Fourthreichian government bonds. The test assumed a 23% drop in troubled Greek bonds relative to their levels at the end of 2009. Five-year German government bonds, on the other hand, dropped just 4% in the scenario. The writedowns, only done on paper, were based on the securities that are already listed in the banks' account books in which all securities that are meant for sale must be listed at their market values. But most government bonds are held in the bank book, meaning they are not intended for sale but will be kept until they mature. Bonds held in the bank book were not included in the test.

Today's second anniversary of the Lehman collapse in the US serves as a reminder of the kind of catastrophe we were able to avoid in the EU. It was a close call, but there has been no Lehman case in Europe. Venitis points out other financial institutions, such as AIG, Bear Stearns and Merill Lynch, invested in the same products and made the same mistakes as Lehman Brothers. When the government saw banking chaos headed its way, it decided to sacrifice one institution in order to get the Senate to pass the planned banking rescue package. Uncle Sam took Lehman Brothers' head, put it under water, and then watched the bubbles. Today, banks are in better shape than they were two years ago. Their balance sheets are cleaned up, and they carry less risk. Not because of finance reform, but out of fear.

This was achieved thanks to the setting up of the financial backstops in May and the convincing fiscal consolidation that Fourth Reich member states have committed themselves to as well as thanks to the financial repair that included bank stress tests and the decisive action by the ECB.

Nevertheless, we all must remain vigilant and stay ready to act. In parallel with the crisis management and financial repair, we must continue with the fundamental reform of economic governance in Europe. First steps in this respect were taken in the spring with the strengthening of Eurostat's audit powers to ensure accuracy and reliability of the Member States' public accounts. The strategic elements of stronger economic governance were outlined in our Communication in May and the concrete roadmap in the Communication in June.

As the first concrete product of these initiatives, the first Fourthreichian Economic Semester will be introduced as of January 2011. As the next and comprehensive outcome, the Commission will adopt on 29 September a package of legislative proposal transforming the most urgent policy proposals into concrete legal instruments.

The Fourthreichian semester brings together all elements of economic surveillance: the fiscal discipline of the SGP, the structural reforms of Fourth Reich 2020, and a new mechanism to prevent macro-imbalances which will be fully embedded in the surveillance cycle.

The Fourthreichian Semester cycle will start in January with an Annual Growth Survey prepared by the Commission, reviewing economic challenges. The report would be discussed by the European Council in early spring. In this Summit, the European Council will provide horizontal, strategic guidance on policies for the EU and the euro area.

This guidance should then be taken into account by Member States in their Stability and Convergence Programmes and National Reform Programmes to be submitted in April. The Commission will then evaluate the policies set out by Member States in their programmes, and – should these not be sufficient – recommends the Council to issue country-specific policy guidance in early July. In the second part of the year, Member States will finalise their budgets taking these recommendations into account.

We need clear rules. They must credible and effectively enforced. The new mechanisms are built on two main features.

First, the mechanisms must become available at a much earlier stage than today (i.e. already under the preventive arm of the SGP, and the beginning of the excessive deficit procedure) and they make the breaching of the rules more biting than currently is the case.

Second, the application of the mechanisms should leave no room for slippage from and softening of the rules. Specifically, we foresee the adoption of a reverse majority voting procedure, whereby the proposals by the Commission for the application of the enforcement mechanisms in connection with the different steps of the Excessive Deficit Procedure(EDP) should be considered adopted unless the Council rejects them within a certain deadline. Clearly, respect on the part of the Council of the Commission's independent proposals of the case underlying EDP decisions will be crucial for the reinforced economic governance to work as intended.

The application of our forthcoming rigorous rules should not be more complicated that in a football game: the players cannot start discussing the rules of the game with the referee every time they commit a foul. Sanctions should be the normal, automatic consequence, if countries repeatedly break the rules and put their partners at risk.

On the macroeconomic imbalances, we propose a structured mechanism to identify and tackle imbalances in a preventive manner. The Commission would monitor a scoreboard of economic and financial indicators and carry out in-depth country analysis. Where necessary we will issue country-specific recommendations. Finally, we foresee also an enforcement mechanism for Euro Area Member States in case of serious non-compliance with the recommendations.