European economy to take 10 years to recover

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It could take more than a decade before Europe fully emerges from the financial crisis, experienced central banker Nout Wellink told RBS.

Blaming the continent’s low-growth environment, the former European Central Bank board member warned that there would be more "hiccups" and possibly more countries derailed along the way.

He said tougher regulators, decent capital buffers and a strong European banking union were vital to a stable future, but admitted it would be "a very long process".

"If you look at the current situation in Spain, Greece and Ireland, it’s clear that it will take another five to 10 years, perhaps longer, before these economies are back on track," he said.

"In the past, growth solved the problem, but this recovery is happening in very difficult circumstances and a low-growth environment, so will take time."

Comparing today’s problems to the oil crisis of 1973, when Arab oil producers imposed an embargo which damaged the economy and took years to resolve, he added: "Past experience shows that there will be more hiccups, with possibly more countries derailed and in need of help, before the economy recovers.

"I’m afraid such problems are normal in such difficult times – not pleasant, but normal."

He welcomed the recent agreement by eurozone finance ministers to cut Greek debts by EUR40 billion and release some EUR44 billion of loans. He said this "substantially reduced" the likelihood of Greece leaving the euro and should lead to more confidence in the region.

Wellink, a Dutch economist who was a governor of the International Monetary Fund and has just joined the board of the Bank of China, said that regulators should be more critical to prevent future financial crises.

"Regulators should not allow themselves to be influenced by the environment around them," he said. "In the past, when businesses were optimistic, regulators allowed themselves to be swept along with it and become less critical.

"But they need to remember their role and keep a close eye on market practices in the good times as well as the bad."

Wellink also stressed the importance of capital and liquidity buffers to ensure stability.

A former chairman of the Basel Committee on Banking Supervision, he defended the new capital requirements set out in the forthcoming Basel III regulation, criticised by some as excessive and harmful to liquidity.

He argued that current markets meant many financial institutions were already keeping more cash in reserve than the new rules required.

"We live in a world of great uncertainty," he said. "In 2009 few people forecast the crisis in Europe which started just one year later. We are now in a situation where banks don’t trust one another and more capital will help resolve that.

"Capital and liquidity buffers are one of the fundamental elements of successful markets. We need them to ensure confidence."

Wellink said research among 27 jurisdictions found that only eight of them had issued final regulations and were completely ready to meet the Basel III requirements, so those rules would not be in place by 1 January next year as initially planned. He thought 1 July would be a more realistic target.

Eurozone countries are currently considering a banking union to underpin the single currency, enabling them to underwrite one another’s debt and share risk.

Countries such as Germany and Sweden have expressed concerns over the proposed powers of such a union and the possible disenfranchisement of non-eurozone members.

Wellink welcomes such a body but does not rule out something smaller in scope than the original proposals.

He said: "Being a supervisor of all 6,000 banks in Europe is a big job and, particularly with smaller banks, it’s uncertain whether a central body could do it better than national regulators.

"I don’t exclude something smaller in scope being set up – perhaps a European supervisor for cross-border banks only, with more delegation to countries for smaller institutions. It might also only deal with guarantee schemes and crisis resolution for a limited number of banks."

But he added: "Whatever model it takes, we absolutely need a banking union in Europe and I believe it will happen in some form or another."

Wellink will be responsible for supervision in his new role at the Bank of China, which he holds for three years.

Although it’s early days for him in the new job, he said his initial sense is that the bank wants to expand globally.

"It is already the most international bank in China, but I believe it wants to grow further," he said. "Overall, there’s a good sense that China is becoming more international as its corporates expand around the world.

"It’s what the Dutch did years ago. Companies grew globally first, then the banks followed and were instrumental in introducing more national firms to the wider world. This is what China has in mind."

Wellink was speaking before an RBS Insight Dinner where he was guest of honour. 

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Disclaimer

The statements and opinions expressed in this article are solely the views of Nout Wellink speaking at an RBS Insight event on 27 November 2012 and do not necessarily represent the views of the Royal Bank of Scotland.

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