The ECB could learn from the HNB

RE-DEFINESony Kapoor, the Managing Director of advising European governments and the financial committee of the European Parliament considers that the growth program of Matolcsy is fundamentally right and should be studied – and to a certain extent, should be adapted – by other central banks, especially, by the European Central Bank. The head of the international think tank, who is also an important member of the Institute for New Economic Thinking founded by George Soros says in his interview to that that the Hungarian National Bank (HNB) is undertaking the task that would be necessary in whole Europe. The central banks – with the ECB in the lead – should directly get involved in promoting vital investments and stimulating economies.

His main message, however, is that the “otherwise false” effort that the European politicians make in order to establish a banking union is just an unnecessarily exaggerated bubble. Such a banking union would be a waste of time, of money, and of energy and would not contribute to the remedy of the problems in the least. But it might recreate the risks that lead to the financial crisis.

Zentai Péter: Great expectations lie ahead of the establishment of the European Banking Union by Brussels, by the institutions of the European Union, by the banks, and by the capital markets. In your article published by the Financial Times, you are opposing this project.

Sony Kapoor: Most of the European politicians – not to mention the giant bureaucracy of Brussels – wasted one and a half years and huge amount of money on something that would not be useful for the present crisis. This project does not make much of a difference in solving the problems Europe is currently facing.

Probably, later, a banking union might contribute to the management of future crises; however, all the efforts focusing on it in the last one and a half years seem to be unnecessary and extremely irresponsible.

In the meantime, some economies have almost burnt out, unemployment rates have increased all over Europe, and the debt level of the nation economies has not been significantly reduced. Due to the rise of eurosceptic parties after the EU Parliament elections, the political space will shrink even further. Instead of solving these issues, the leading politics has taken steps toward realizing a non-actual and potentially harming project.

Would you deny that the balance of payments has improved in Europe recently? I suppose that you recognize that every effort should be made to avoid a banking crisis that the European countries were hit by…

It is true that the exports of some troubled countries – such as Spain, Portugal, and Greece – have increased in the last months, improving their current accounts. This progress is also a result of the dramatic collapse of consumer demand and, therefore, imports. The fact that some margins of competitiveness have started improving has nothing to do with the banking union.

As regards the prevention of future crises, there is obviously a need for cross-border cooperation in form of a single European supervisor. But such supervisory institution already exists: namely, the European Banking Authority. The authority was established by the same politicians who are now pushing to the banking union. Why would we duplicate what we have already done and confuse it with overlapping powers? In fact, the existing control authority should be given more power to correct the errors of the national banking regulators.

If the establishment of the banking union really results in duplicating efforts, why are the economic-financial decision makers of national governments, the members of the European Committee trying so vehemently to realize it?

I have a cynical view about this: the political imperatives need to be seen to be doing something, to be active, to be quick to act. The political figures need to present themselves as they were non-stop working in favor of the common good and were creating something. Anything. No matter how irrelevant or even harmful it is because it is still better to be seen as this than to be seen as doing nothing.

From a professional point of view, the banking union is pushed by the exact same politicians and economists who have been praising the markets, the sacrosanct nature of the monetary union, and the free, cross-border movement of capital until September 14, 2008 – the bankruptcy of the Lehman Brothers. After the economic collapse, these people turned away from all of what they had said or had done and started to propagate the opposite of it: “we cannot let the markets function freely ever again –  it should be restrained; we cannot let German, Dutch etc. banks drive Greek, Spanish, Italian, Hungarian citizens and companies into debt in the future”.

Now, these decision makers make a turnaround the third time: they are busily working on the establishment of a banking union that might recreate an economic state we had before the crisis. They focus on making capital flow even more mobile and integrating the banking system instead of integrating the national economies. In the end, only the most powerful countries – which had already been the most powerful ones before the crisis –  will profit.

If the markets, the politicians, and the public opinion really believe that the banking union would ensure safety and would prevent big future crises, why would not they realize it? The capital markets and the stock markets have strengthened significantly in the last one and a half years. Because they trust the president of the ECB and some important politicians. That is all psychology…

History has proven that self-fulfilling prophecies and self-deception do not solve anything – they might defer the problem but will not prevent it. It is very sad that the 1-1.5 percent GDP growth (compared to the 10 or even higher percent fall during the recession) is regarded as big success, a big achievement. Sooner or later, people will see these distortions because they will have a hard time dealing with issues like high unemployment rates, record levels of public debt, and aging societies. The stock markets can crash as quickly (if not more quickly) as they can rise.

You advice governments and leaders of the EU institutions. What steps should be taken for the crisis management?

First of all, we need to stimulate investments. Both public and private investments levels are very low, in some cases, even negative.

Thus, the key players should be encouraged to promote new investment programs that would create jobs in both countries hit hard by the crisis and less affected by it, such as Germany.

In the current low-interest rate environment, it is a big mistake not to borrow to finance investments, including the improvement of the infrastructure. Such an investment program led by the public sector and supported by the private sector would be a very powerful stimulant to both short-term growth and long-term growth prospects.

Just like in the United States or in Japan, it should be the task of European central banks to stimulate economic growth. A good example of this would be the Hungarian National Bank’s Funding for Growth Scheme.

Many experts rather see the limitations of this program. They say that such a sovereign, independent easing policy in an economy that is depending so much on its external environment will only lead to high inflation and the weakening of the domestic currency.

The larger economies in the Eurozone – such as Spain or Italy – have limited national policy space. These countries can only profit from a growth program initiated by the central bank of the Eurozone. The ECB needs to take its deposit rate into negative territory, which would push commercial banks to support SMEs and would help depreciate the euro. These two steps combined would realize the political vision where we are heading, namely, the mutualisation of Eurozone debt in form of Eurobonds.

The non-Eurozone members like Hungary have more policy tools available because of their higher level of independence. However, due to their small size and vulnerability, the “money-for-growth” lending policies need to be carried out carefully. Nevertheless, it is worthwhile for the ECB to look at the growth program of Hungarian National Bank and adapt it at a Eurozone level.