Monday, 04 July 2011 10:18

More, not less, financial integration needed in Europe

IMF_Antonio_BorgesPolicies to promote deeper integration of Europe’s banks should be part of the solution to its financial problems, says the IMF´s Antonio Borges

El fomento de la integración de los bancos europeos debería ser parte de la solución de los actuales problemas financieros, según Antonio Borges, Director del Departamento Europeo del FMI. Para prevenir futuras crisis hay que aumentar la supervisión económica, tanto a nivel nacional como regional.

Banks are at the heart of Europe’s problems today. Yet it would be wrong to conclude that the crisis was caused by too much financial integration. In fact, the real problem may have been that there was too little financial integration.
In the run-up to the global crisis, countries in the euro area periphery, and countries in emerging Europe that had fixed their currency to the euro, had very high current account deficits. These deficits turned out to be dangerous: when the capital flows suddenly slowed, the result was a deep crisis.
European financial integration and particularly the introduction of the euro likely facilitated these high current account deficits. Interest rates in Europe converged at low levels, as foreign exchange risk was eliminated within the euro area, and as confidence in macroeconomic stability increased. The result was a big boost to investment and reduced saving in countries that previously had been living with high interest rates.
Yet it would be wrong to conclude that the crisis was caused by too much financial integration. The problem was not that capital flows were too large – it was that they were not used wisely. Capital flows boosted demand rather than supply, and imports rather than exports, and thereby contributed to large and ultimately unsustainable increases in external debt. Too many were oblivious of these risks – financial markets paid little attention until it was too late, and government policies did too little to address market failures.
The real problem may have been that there was too little financial integration. Although some elements of the financial system are highly integrated, cross-border mergers and acquisitions in the euro area are still limited. As a result, banking flows to the euro area periphery during the boom years largely took the form of debt rather than equity, which exposed banks in the periphery to rollover risk.
Europe has been integrated enough to foster large credit inflows but not enough to resolve crises quickly. The EU fostered financial integration by adopting a common currency but it did not put in place effective instruments to handle cross-border risks or mitigate the build-up of imbalances financed by cross-border financial flows.
With banking problems addressed at the national rather than EU level, banking and sovereign problems in euro area periphery countries exacerbated each other. Sovereign debt problems worsened as a result of the fiscal costs of banking problems, and concerns about the public sector increased the problems.
How would more complete financial integration, together with pan-European institutions, have made it easier to resolve the crisis? Banking problems would
have had fewer fiscal consequences. If domestic markets had been more open to foreign bank ownership, national public sector policies for supporting and recapitalising banks would not have been the only options.
Banks would have suffered less spillover from sovereign debt problems, as deposit guarantees and other implicit guarantees would not have depended on underwriting by the state. It would have been easier to consolidate the financial sector. Consolidation is now occurring slowly, if at all, and often within borders.
If a pan-EU supervisory regime had been in place, excessive exposures or expansions of banking systems might have been spotted, and ill-considered unilateral policy moves avoided. With all that said, financial integration alone is not enough to address the current crisis.
Ultimately, economic growth depends on productivity, which some countries have struggled to raise over the past decade despite access to foreign capital. To boost sustainable growth, better policies are needed at the national level, with better governance at the EU level. Further European economic integration would unlock substantial efficiency gains, in particular if it dismantled many obstacles to cross-border competition that still exist.
To prevent future crises, we need more vigilance, both nationally and across borders, better institutions to deal with financial sector problems, and more, rather than less, financial and economic integration.

Antonio Borges is Director of the IMF’s European Department. He was previously Vice Chairman and Managing Director of Goldman Sachs International, and Professor of Economics and Dean of INSEAD Business School. He also served as Deputy Governor of the Bank of Portugal.

Subscribe now to receive your copy of Iberian Lawyer

The Latin American Lawyer
N.22 • November 2021

IL98 cover SP IL94 cover EN
 

Iberian Lawyer
N.109 • November 2021

IL98 cover SP IL94 cover EN

IBLLabourAwardsPortugal 202112 300x250 Finalists

UIAMadrid 300x100

IL LatamAwards STD 300x100 1

UIAMadrid 300x100

IL LatamAwards STD 300x100 1

IL LatamAwards STD 300x100 1

IpTmtAwardsSpain 2021 300x100 finalists 1

IL LatamAwards STD 300x100 1

IPTMTAwardsPT 2021 300x250 Vincitori

This website uses cookies

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on the IberianLawyer website. However, you can change your cookie settings at any time. Learn more

I agree

What do I need to know about cookies?

A cookie is a small text file that’s stored on your computer or mobile device when you visit a website. We use them to:

  • Remember your preferences
  • Tailor our sites to your interests.

There are different types of cookies

First party cookies

These are set by the website you’re visiting. And only that website can read them.  In addition, a website might use a separate company to analyse how people are using their site. And this separate company will set their own cookie to do this.

Third party cookies

These are set by someone other than the owner of the website you’re visiting. 

Some IberianLawyer web pages may also contain content from other sites like Vimeo or Flickr, which may set their own cookies. Also, if you Share a link to a IberianLawyer page, the service you share it on (e.g. Facebook) may set a cookie on your browser.

The IberianLawyer has no control over third party cookies.

Advertising cookies

Some websites use advertising networks to show you specially targeted adverts when you visit. These networks may also be able to track your browsing across different sites.

IberianLawyer site do use advertising cookies but they won’t track your browsing outside the IberianLawyer.

Session cookies

These are stored while you’re browsing. They get deleted from your device when you close your browser e.g. Internet Explorer or Safari.

Persistent cookies

These are saved on your computer. So they don’t get deleted when you close your browser.

We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.

Other tracking technologies

Some sites use things like web beacons, clear GIFs, page tags and web bugs to understand how people are using them and target advertising at people.

They usually take the form of a small, transparent image, which is embedded in a web page or email. They work with cookies and capture data like your IP address, when you viewed the page or email, what device you were using and where you were.

How does the Iberian Lawyer use cookies?

We use different types of cookies for different things, such as:

  • Analysing how you use the IberianLawyer
  • Giving you a better, more personalised experience
  • Recognising when you’ve signed in

Strictly Necessary cookies

These cookies let you use all the different parts of Iberian Lawyer. Without them services that you have asked for cannot be provided.

Some examples of how we use these cookies are:

  • Signing into the IberianLawyer
  • Remembering previous actions such as text entered into a registration form when navigating back to a page in the same session
  • Remembering security settings which restrict access to certain content.

Performance cookies

These help us understand how people are using the IberianLawyer online, so we can make it better. And they let us try out different ideas.
We sometimes get other companies to analyse how people are using the IberianLawyer online. These companies may set their own performance cookies You can opt out of these cookies here.Some examples of how we use these cookies are:

  • To collect information about which web pages visitors go to most often so we can improve the online experience
  • Error management to make sure that the website is working properly
  • Testing designs to help improve the look and feel of the website.
Cookie nameWhat it's for
Google DoubleClick The IberianLawyer uses Google DoubleClick to measure the effectiveness of its online marketing campaigns.Opt-out of DoubleClick cookies
Google Analytics From time to time some IberianLawyer online services, including mobile apps, use Google Analytics. This is a web analytics service provided by Google, Inc. Google Analytics sets a cookie in order to evaluate use of those services and compile a report for us.Opt-out of Google Analytics cookies