Ecofin urged to prepare for the worst

The date of the European Union’s next banking financial crisis simulation exercise should be brought forward from 2009, the date currently pencilled in, according to Mervyn King, the governor of the Bank of England.

Meeting in Helsinki last week (8-9 September), EU finance ministers discussed an assessment of the last simulation exercise which was carried out in Frankfurt in April. Speaking after the meeting, Eero Heinaluomä, Finland’s finance minister, said that the Frankfurt exercise confirmed that the existing EU crisis management systems "have the potential to work well", but he added that more work was needed to improve co-operation.

Asked whether it would be the home country or the host country that would foot the bill if an EU bank collapsed, Jean-Claude Trichet, the President of the European Central Bank, indirectly confirmed that no agreement had been reached on plans for governments to bail out troubled banks. "Our working assumption is that no taxpayer money will be involved," he said, adding that most banking crises had in the past been resolved by the private sector.

Germany and the Bundesbank have for decades had a firm policy of not disclosing government policy on bank failures on the grounds that this creates so-called moral hazard: if banks know that they will be bailed out by the government, some may take excessive risks. The UK shares this view.

But concern about how the EU would cope with a major bank crisis remains however, hence King’s call at the Ecofin meeting for an earlier-than-planned repeat of the simulation exercise.

In public at the Ecofin meeting, officials praised the developing co-operation between banking supervisors in different EU countries, as part of the Lamfalussy process of financial services regulation. But privately officials concede that co-operation and willingness to exchange information are not as well developed as they need to be. They fear that, as cross-border banking business expands (something the EU is encouraging) more must be done to encourage co-operation and the exchange of information among bank supervisors.

• There was plenty of optimism expressed at the weekend’s meeting of EU finance ministers in Helsinki about the prospects for economic growth in 2006 and 2007, but officials warned that the EU must not repeat the mistakes of the past by failing to curb government spending in ‘good times’ like the present.

Joaquín Almunia, the European commissioner for economic and monetary affairs, said: "We remain reasonably optimistic about growth prospects. Consumer confidence and behaviour are improving and investment is moving in the right direction…our main economic scenario…is a good outlook for next year and our main assumption is an improvement in our internal demand."

Echoing remarks in Canada by Rodrigo Rato, the managing director of the International Monetary Fund, Almunia highlighted high energy prices as one of the downside risks for 2007, along with political tensions, a disorderly unwinding of global imbalances and increasing protectionist sentiment following the breakdown of the Doha trade talks.

Separately, Trichet continues to hint that the ECB is poised to raise interest rates in October because of its concerns about inflation.

• Tommaso Padoa-Schioppa, a former executive board member of the European Central Bank, was warmly welcomed back into the inner circle of EU economic policymakers in Helsinki in his new job as Italy’s finance minister. "The return of Mr Padoa-Schioppa is good news for Europe. He is a man Italy needs," Eurogroup chairman Jean-Claude Juncker remarked. Italy’s plans for correcting its excessive deficit received a more cautious welcome however, with Juncker saying that it was too early to judge whether the budget consolidation was "a sign of a structural improvement" in the government’s finances.

• The plans of Peer Steinbrueck, Germany’s finance minister, to correct Berlin’s excessive budget deficit got a less equivocal welcome, not least because official forecasts now put the deficit below the crucial 3% mark this year. "We are happy to see Germany’s budget deficit improving all the time," Juncker said, adding, "but fiscal consolidation has to continue beyond 2007, 3% is a ceiling, not an objective."

• János Veres, Hungary’s finance minister, told European Voice that his recent moves to slash the budget deficit from an expected 10.1% this year to 4.3% in 2008 and 2.2% by 2011 were not aimed directly at membership of the single currency.

Hungary, he made clear, had been living beyond its means. But, he added, euro entry was important, because Hungary was a small country and even foreign exchange deals by banks worth as little as €15.75 million could trigger volatility in the level of the Forint.

• ECB President Jean-Claude Trichet said he believed that structural reforms were "elevating the speed limit for growth" in the eurozone and "augmenting its resilience to shocks".

He stressed the role of "deep, liquid and large" financial markets in "promoting productivity growth, facilitating rapid [economic] change and reallocating capital optimally from declining to rising sectors".

The date of the European Union’s next banking financial crisis simulation exercise should be brought forward from 2009, the date currently pencilled in, according to Mervyn King, the governor of the Bank of England.