The executive vice president of the European Commission, Valdis Dombrovskis, sees little chance of increasing the debt threshold of 60% of gross domestic product as part of the process of overhauling the Stability and Growth Pact.
In an interview granted to a small number of European news media, including Kathimerini, Dombrovskis notes that the changes being examined “are within the framework of the existing treaties,” an approach which rules out the possibility of amending the debt threshold.
Asked by Kathimerini how countries already overindebted before the pandemic, and with debt levels currently double or triple that threshold, can hope to return to it without extreme and extended austerity, he replies: “We must look for more realistic and growth-friendly debt-adjustment pathways. For example, we need to look at the so-called 1/20th rule [mandating annual reductions by 1/20th of the gap between actual debt levels and the 60% limit], because, indeed, many countries are emerging from the crisis with significantly higher debt levels, and this is something we need to take into account.”
Dombrovskis recognizes that during the process of consultation relaunched by himself and Economy Commissioner Paolo Gentiloni on October 19, the conversation will extend beyond the narrow confines of the existing treaties. The view of the Commission, however, is that amendments requiring treaty changes are very hard to push through, given the need for unanimity among the member-states. The high-ranking Latvian official notes that “we must ensure that fiscal policy is counter-cyclical not only during crises, like now, when we provided stimulus to the economy, but also in periods of growth, when countries can rebuild ‘fiscal buffers.’”
On the adoption of the Basel III rules for bank supervision, the Commission’s proposal regarding which was published on Wednesday, the executive vice president highlights the fact that the EU is moving to turn them into law before either the US or the UK. The proposed legislation is the “last stage” of the implementation of Basel III, focusing on risk management (curtailing the banks’ ability to define it in such a way as to reduce their capital requirements). The Commission, he points out, retains the necessary flexibility in the application of the rules (for example when it comes to the banks’ trading books), so as to prevent a situation in which European credit institutions find themselves at a competitive disadvantage vis-a-vis non-EU competitors.
Asked whether he is concerned that the new rules are an instance of fighting the last battle (the excessive leverage and easy lending that caused the financial crisis) and that, at the current juncture, they may hamper the banks’ ability to lend to the real economy and to finance the green and digital transitions, he responds: “One of the important elements when we were preparing these proposals was to make sure that they did not lead to a significant overall increase in the capital requirements of EU banks. And indeed, once all the measures are fully implemented, we expect this increase to be around 8-9%; in the short run it will be between 3-5%.” The proposals, he adds, take into account certain particular features of the European environment, mentioning specifically the need to maintain funding for small and medium-sized businesses and for “strategic industries” like infrastructure and aircraft manufacturing.
Dombrovskis does not fail to mention that the reforms of the banking sector implemented during the euro-crisis resulted in the banks being in much better shape today, “better equipped to weather the current crisis.” They are, in fact, “this time not part of the problem, but part of the solution,” he adds.
The proposals include new obligations for banks to manage climate and ESG-related risks. “The banks will have to identify, measure and monitor such risks in accordance with the harmonized approach currently being developed by the European Banking Authority,” the EVP of the Commission says.
There are moves toward partial harmonization in the provisions related to bank governance. The thinking, according to Dombrovskis, is that “the framework must take into account existing national rules and requirements, which can be quite complex. But at the same time we want to push for greater consistency at the EU level and to increase the robustness of the banking sector by promoting common EU standards regarding the suitability of board members and influential managers. This is also very relevant in the context of the banking union.”
The new framework also includes tighter regulation of non-banks that are active in member-states via branches. “We are giving supervisors new tools to ensure financial stability, especially in cases when the branches are systemically significant in the banking sector [of a member-state],” he explains.
Asked about the two-year delay in the implementation of the new regulatory regime, the executive VP speaks of a “realistic timetable” which will allow the completion of the EU legislative process and will give banks and supervisors the time they need to integrate it into their procedures. The Basel Committee itself, he recalls, decided to delay implementation by one year because of the pandemic.