Reflections from Buckinghamshire

May 13, 2013

I am just back from the UK, where the Chancellor of the Exchequer, George Osborne, and Bank of England Governor, Sir Mervyn King, hosted a meeting of the G7 Finance Ministers and Central Bank Governors in the beautiful and historic setting of Hartwell House in Buckinghamshire. Growth and jobs were obviously at centre stage.

It was a meeting that took the G7 back to its roots as an informal forum for advanced economies to discuss common approaches to challenges facing the global economy. It was good to note that we share the analysis of the current economic situation. Equally important, there is broad agreement on how to jointly address key issues standing in the way of a sustainable recovery and job creation. We had a thorough discussion on how to mobilise fiscal, economic, monetary and macroprudential policies for the service of sustainable growth and job creation in a coordinated and consistent manner.

In the field of fiscal policies, a country-specific and differentiated approach is preferable. Credible medium-term fiscal consolidation plans are needed for ensuring the structural sustainability of public finances, so as to allow the necessary near-term flexibility.

The approach is well captured in the concluding sentence of a recent article by Lawrence Summers on “The lessons of Reinhart-Rogoff”: “Now is not the time for austerity, but we forget at our peril that debt-financed spending is not an alternative to cutting other spending or raising taxes, but only a way of deferring these painful acts.” It is precisely for these reasons that gradual and differentiated fiscal consolidation has to continue in the EU, even if in many countries it can now happen at a smoother pace than a year or two ago.

What is most important now is that the breathing space provided by the increased fiscal credibility and regained market confidence will be used for effectively pursuing the structural reforms that are critical for growth to return and employment to rise. We will focus on progress in such reforms when we issue our country-specific recommendations under the European Semester for economic policy coordination on 29 May.

Successful reforms will help our economies make the most of the forthcoming new trade agreements, which will be essential for stimulating global growth. I am thinking here in particular about our future negotiations for a free trade agreement with the US, which have the potential to create millions of new jobs on both sides of the Atlantic and beyond. Apart from economics, it has major potential to revitalise the EU-US strategic partnership even in a wider sense.

In the field of monetary policies, central banks have employed a broad and diverse range of tools to support demand. They have taken action of both conventional and unconventional nature to support the recovery while maintaining price stability. These actions have been important in safeguarding financial stability and supporting economic recovery. They have been and will remain oriented towards meeting domestic objectives using domestic instruments without targeting exchange rates. As such, speculation about “currency wars” is unfounded. 

But a strong recovery will only come if we take further measures to ensure that credit can flow appropriately to support the economy. A healthy banking sector with adequately capitalised banks’ balance sheets is therefore a prerequisite for growth. That is why I believe our work on establishing a banking union will be the most important single undertaking at European level over the coming months and years for creating foundations for growth and jobs.

The proposed Directive on Bank Recovery and Resolution will be a key building block of the banking union. It will establish a harmonised framework for bank resolution in the EU. It will ensure that common rules, tools and power are applied to all banks in the same manner. In short, it will establish clear rules of the game.

But the construction will not be complete without a Single Resolution Mechanism for applying the common rules. The Commission will make a proposal for such a mechanism by this summer.

However, since the financial market is increasingly global, we will need to ensure a level playing field and joint principles for bank recovery and resolution also at the global level. I believe the G7, with countries comprising the bulk of the global financial system, will be a central forum for achieving that goal.

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