English
• Interview with Mr. Daniel Dăianu, first vice-president of the ASF, former finance minister and member of the EU parliament
Reporter: Does the global economic system need more regulation, or, quite the opposite, does it need deregulation? What would be the situation in Romania on that matter?
Daniel Dăianu: In my opinion, we need a new Bretton Woods, which would ensure a regime of "order", rules, like it has happened after WW2. G20 is trying to do something like that, but it has yet to be successful. In economic literature, there is the so-called "impossible trinity", which says that you can't simultaneously ensure the stability of currencies, the independence of monetary policy and the free movement of capital. I think that if the volatility of currencies and the destabilizing capital movements aren't kept in check, the break-up of the international system, the separation into blocks, will be unstoppable. It has already happened in history. The functioning of the global economy must be connected to the operation of the financial industry.
When it comes to finance, we shouldn't be the prisoners of a dispute which sometimes becomes almost metaphysical. Let's see reality for what it is. The current financial crisis has not been caused by what some people call the tendencies of the human nature, as if there is nothing that can be done about it. Even if the unavoidability of the cyclical moves of the economy is a given, we have a major deviation of finance from what is supposed to be a good behavior of companies, from what offsets the systemic risks. Dropping the wave of deregulations of the last few decades (the Big Bang of 1986 in the City in London, the repeal of Glass-Steagall in the US, etc) on the financial industry doesn't make any sense. Is it natural to have no limits to leverage, to use risk evaluation models that allow banks and insurance companies to calculate their equity just as they want, depending on the commitments made, for synthetic products to be accepted when they are incomprehensible even for those doing the trading, to have insurance companies that act more like high-risk funds (the case of AIG), to have commercial banks that have become more like trading platforms, etc?
Not a week goes by that there aren't any flagrant cases of ill practices uncovered in the market; the manipulation of some benchmarks such as Libor, the currency markets and the basic products show the major irregularities. As a result, the common sense answer to your question is only one: regulation is needed. Those who are pleading for deregulation are either living in a dream world, on a different planet, or they are completely hypocritical. My opinion is that the direction we are going to is the right one, indicated by the Vickers and Tyrie reports in Great Britain, the Larosiere and Liikanen reports for the European Commission, the Dodd-Franck legislation in the US. Even though we need to note the response of the financial industry through a powerful lobby and using "financial" and political means. And problems such as "too big to fail", remain, for which an adequate response has not been found. Basel III also has its own flaws, when we think of the ability to manipulate the calculation of the VaR (value at risk) by banks. The conservative British MP Andrew Tyrie is right to stress the irresponsibility of many in the financial industry, especially if we consider the cost of the bailouts for society. When the economy/society works according to the logic like winners take all, when what we call justice/fairness is unequally distributed, this endangers the very operation of market economy, democracy itself! The ethical matter goes deep. Because the rule of the law involves rules that are symmetrical when it comes to the severity of the punishment when it comes to breaking laws. And the laws, the rules need to be in line with the crimes. But if high finance enjoys a privileged status due to light touch regulation and the motivations concerning systemic risks, doesn't that mean that we have a flawed rule of law, "unfair" in its relationship between the financial industry and the rest of the economy?
As for the situation in Romania, it needs to be studied based on a European legislation (of the EU) which is changing based on reforms and which also must be implemented here - Basel III, Solvency II, directives concerning the capital market (MIFID) and the infrastructure for the trading etc. the need for regulation in Romania also concerns delays which have been postponed for a long time, such as the clarification of the status of the Rasdaq market, the situation of the forex market. In these areas, there will be concrete measures very soon, as announced by colleagues from the Board of the ASF.
Reporter: Several economists said that Romania shouldn't conclude a new agreement with the IMF. In your opinion what are the concrete benefits of such an agreement?
Daniel Dăianu: Fiscal consolidation, Romania's exit from the excessive deficit procedure is making some people doubt the benefits of a new agreement. But there are reasons which support the idea of a new cautionary agreement with the IMF. The crisis isn't over in the world, and there will be other shocks when the Fed's liquidity injections end; we will see a long-lasting shockwave, on all the markets. And it's a good thing to protect ourselves for more difficult times. We see the unusual statements made last week by Mario Draghi and Mark Carney (the new governor of the Bank of England) concerning the practicing of very low monetary policy rates for a very long time; they are therefore looking to reassure the markets when it comes to the shift in gears in the US. We have restructuring programs, in various areas, together with the international institutions, which should be supported; there are foreign experts that know the problems and that can't be easily replaced. Such an arrangement also gives a certain safety to the business sectors abroad that there will be no slip-ups, no unsolvable problems in Romania. There is, indeed, the European semester, the Fiscal Treaty in the EU, but I don't think that they are an adequate replacement, now. We still need arrangements that would create discipline in the domestic policies, which would help the state owned companies, reforms in other sectors, the fight against wasteful spending and corruption in the public sector, against cronyism. We also have important amounts to repay in the coming years to service the debt taken on account through the stand-by agreement in 2009. All in all, a new arrangement with the IMF would be useful. And I am making this statement, even though I have criticized, when I deemed it necessary, the "catechism" from the IMF and the World Bank in certain regards. For example, the premature liberalization of the capital account, some industrial restructuring programs.
Reporter: The government has stopped announcing an official target for the adoption of the Euro. When do you think Romania will be ready for it?
Daniel Dăianu: The Eurozone crisis is the economic factor striking back against the political factor. Lithuania and Latvia want to enter a "fast track", perhaps also because they have a monetary council, which greatly diminishes their "room to maneuver". This crisis shows that in order to examine the situation of a country, the degree of indebtedness of the is also important. This is where the excessive deficit procedure imposed by the European Union resulted from. This is a lesson for Romania: it is the right thing to do to emphasize the ineffectiveness in the state owned companies and it is even more justified to request/demand their reformation, to privatize them if the case may be. But the competitiveness of an economy and the real convergence, that would prevent us from going under in the Eurozone, requires systematic productivity gains, across the entire economic system. The accession target must be credible, or else it is impossible to mobilize the efforts necessary to attain it. This also involves the Eurozone having recovered at the moment proposed for the accession, which would be a precondition. Another precondition concerns the preparation of the economy. In other words, for nominal and real convergence criteria to be met. Among the nominal criteria, the public debt, the budget deficit, would not be a problem, even though a lot of attention should be paid to the impact of regionalization, to avoid complicating the fate of the central public budget through regional extravagances. We should check whether the inflation and the interest rate differential could converge quickly towards the reference levels in the Eurozone; not even the stability of the exchange rate is a given if adequate productivity gains can be seen.
The crisis of the Eurozone also shows that the performance depends overwhelmingly on the quality of the institutions, which materialize into the ability to impose the budgetary discipline without choking off the economy, in tax receipts which the production of public goods depends on (education, healthcare, infrastructure), in the relationship between the public budget and the business environment which fights the rush for annuities, in the dialogue between the social partners, etc. Can Romania change the institutional texture, can it gain flexibility in its economy in the next 3-4 years, so that it can keep up with those setting the tone in the Eurozone? Theoretically, roadmaps for macroeconomic and structural policies can be set up. But in reality, things are a little more complicated than that. Speaking of corporate governance in the Eurozone, the head of the Bundesbank, Jens Weidmann, decries the exposure of banks to the governments. But what do we do about the exposure of public budgets to banks; are we forgetting that many banks have been bailed out through government interventions, including in Germany?
Reporter: How do you expect the "bail-in" mechanism agreed by the finance ministers in the European Union will work like on a European level and on a local level in particular? What would this decision mean for the other financial markets?
Daniel Dăianu: There is a good piece of news and a bad one. The good one would be that there will be less pressure on public budgets, in the event of bank troubles. Also worth mentioning here would be the holding of shareholders liable as well as the greater care of creditors when it comes to the financing of some banking entities. However, an issue arises when depositors which can't benefit from the guarantee scheme are concerned. At any rate, the fragmentation of the European banking system can be seen in the margins that the companies pay to finance their operations (for example: SMEs in Spain and Italy pay borrow at a cost which is several times greater than that paid by German companies). The fragmentation can be further increased by this measure, because the major depositors will seek refuge in countries perceived as safer, in countries with more solid economies. Can fragmentation in the EU be countered? It can, to the extent where major progress is made in the construction of the Banking Union. But its operation also essentially means fiscal arrangements. In other words, who will bear the cost of the bail-out or of the shutdown of a bank. We would also need a collective scheme for guaranteeing deposits. And we are far from that stage, which would also involve a deeper political/institutional integration.
The impact on Romania derives from what is happening with the European banks, because about 80% of the banking sector is controlled by foreign groups. Had the ECB, as a lender of last resort, not engaged in exceptional practices (long term re-financing for banks at ultra-low costs and acquisitions or announced acquisitions of sovereign bonds on the secondary markets) it would have been worse for everybody, including for Romania. Directly and indirectly, we benefit from the extraordinary measures taken by the ECB, by governments from other countries, to save the European banks.
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