Economic Recovery Watch 12 October 2009

Centre For European Studies
ECONOMIC RECOVERY WATCH

Last updated on 12/10/2009 To view full articles click on hyperlinks.

CONTENTS
WATCHTOWER

EU MEMBER STATES

WORLDWIDE

INSTITUTIONS

EPP VIEWS

OUR COMPETITORS' VIEWS

FROM THE BLOGOSPHERE…

UPCOMING EVENTS

ANNEX

www.thinkingeurope.eu



“Watchtower”
Bridging the Gap – Economics and the Future of Europe’s Centre
Right
Foreword by CES Head of Research

All across the EPP, the German election of Sept 27 was received with enthusiasm. Angela Merkel,
after all, is now getting the coalition with the liberal FDP that she always wanted, instead of the
unloved and cumbersome Grand Coalition with the Social Democrats. The stratagem she used to
achieve this victory, however, was interesting and merits further analysis: With the onset of the
financial and economic crisis in September 2008, the CDU moved further towards the political centre
of German politics, with bailouts not only of banks, stimulus, deficits, and even minimum wages in
certain sectors of the economy. That made her hugely popular with the general public, and gained the
CDU a good deal of votes from swing voters who otherwise might have opted for the Social
Democrats. But this move, in turn, caused considerable frustration among the CDU’s own
“Wirtschaftsflügel” (business wing) composed of the self-employed upper middle class, other high
earners and owners of small and medium businesses. And that resulted in an unprecedented
defection of over 1 million classical CDU voters to the FDP which had a record result at 15 per cent–
compared to the CDU/CSU’s 34 per cent, the lowest share of the vote since 1949. In a way, it may
seem ironic that in the middle of the worst crisis since the Depression, and in Germany which has
never been all that keen on unfettered capitalism, the most economically liberal party scores the best
election result in its history.

But Chancellor Merkel’s manoeuvre worked: This division of labour, according to pollsters, got the
black-yellow coalition the 1 or 2 percentage points that were needed for a parliamentary majority. But
there is a price to be paid: anyone who thinks that a successful coalition over the next 4 years will
enable the CDU and CSU to recover their lost votes soon, may be in for a surprise. That is because this
coalition will quickly develop its own internal dynamics – in fact, in the 2 weeks since the election, it
has already begun to do so. In the jostling before and during coalition negotiations, parties are quickly
developing the roles they will play over the next 4 years. Whenever the FDP talks of lowering taxes
now, reforming the labour market (i.e. making it easier to fire end therefore also to hire) and cutting
social welfare benefits, the CDU and CSU balk or dither. Whether they want it or not, they are pushing
themselves into the role of the structural conservative. And not without reason: That may be the only
way to keep the now devastated SPD from winning the very important Länder election in North Rhine
Westphalia in May 2010 on a ticket of social protest, on the backdrop of the predicted rise in
unemployment ahead of us. A victory of the united Left (possibly SPD, Greens and Linkspartei) there



would cost the new government its majority in the Bundesrat, the Second Chamber of Parliament, and
would meanan ominous psychological breakthrough of a newly resurgent, more left-wing SPD. The
FDP, on the other hand, will have a vested interest in not giving up its position as the advocate

of economic freedom and fast growth. Hence, the roles are already written for the coalition stage in
Berlin.

But what are the deeper consequences of all this for the Centre Right, in Germany and the whole
of Europe? – German Christian Democracy has always managed to combine economic liberalism with
Christian social teachings, under the unifying banner of the Social Market Economy. In fact, that was
one of the reasons for its lasting success as the leading “Volkspartei” (catch-all people’s party) in
postwar Germany. To give up this advantage, and leave many centre right economic liberals to
another party, would in the long run put into question the character of the CDU/CSU as Volksparteien.
The same is true on the European level as well. There is no easy way out of this dilemma. But it is
obvious that, sooner or later, Christian Democrats and Conservatives in Germany and elsewhere may
want to focus less on defending the status quo in business and welfare, and be bolder in reforming
labour markets and the structures of our economies. Ultimately, we will be measured not only by our
reaction to the onsetting crisis in 2008 and 2009 (which worked well) but by our ability to bring Europe
back to a fast and sustainable recovery (which is by no means assured yet).




EU Member States
Belgium
The government in Belgium is set to demand at least a symbolic amount of 500 million euros from its
rescued banks in a bid to claw back money handed out at the peak of the financial crisis, ministers
announced on 9 October. Banks in the country have already started a painful process of reform in
order to overcome the losses caused by their troubled assets. ING, for instance, is in advanced talks
with HSBC to divest its assets in Asia. The bank based in London is in the front-run to acquire separate
Asian divisions of the troubled Dutch-Belgian bank. This operation will provide a breath of fresh
liquidity to ING that exactly last year was forced to seek government support due to concerns over the
quality of US mortgage-backed securities that it held. On the other hand, the car manufacturing
industry in Belgium risks to suffer OPEL’s change of property. Magna International already announced
a plan to cut some 10.500 employees throughout Europe. The Belgian government is seriously
concerned that the OPEL factory near Antwerp might particularly be affected by this decision.

Bulgaria
Bulgaria is increasingly unlikely to seek an emergency loan from the International Monetary Fund and
may seek to launch a Eurobond early next year to meet its external financing needs. Bulgaria's tourism
sector is going to register a decline of 20-25 per cent in its revenue in 2009 compared to the 2008
levels. The global economic crisis has forced Bulgaria’s tourism companies to reduce their prices by
10-30 per cent. At the same time, Bulgaria’s domestic trade shrank by 19,1 per cent in August 2009
compared to its levels in the same month of 2008 and the industrial output declined by nearly 16 per
cent compared to its levels in August 2008. Moreover, Bulgaria's Minister of Regional Development,
Rosen Plevneliev, announced that 10 per cent of the building firms in the country are likely to go
bankrupt in the next few months. Unemployment is rising and forecast to surge later this year. In
September 2009, the unemployment rate reached 8 per cent, which is the highest unemployment rate
since April 2007, and is set to exceed 10 per cent by the end of this year. But thanks to the real estate
and steel industry booms propelled by foreign capital, the economy has avoided the double-digit
economic contractions seen in Latvia, Lithuania and Estonia. Still, GDP in the second quarter
contracted 4.9 per cent, sharply reversing last year's 7 per cent expansion. But Bulgaria's 2010 draft
budget envisages a small deficit at the end of next year, or about 0,7 per cent of the GDP. A balanced
budget will guarantee the unblocking of the rest of the European Union funds.

Czech Republic
On 29 September, the Czech government approved the draft budget for 2010 with a deficit of some
163 billion crowns, which is 5.2 per cent of GDP, after the Chamber of Deputies passed the
government-sponsored package of anti-crisis austerity measures aimed at cutting the projected
record-high 230-billion-crown. The package does not contain the originally proposed lowering of
family benefits, benefits for the disabled and a new tax rate for people with higher incomes. The




package raises, among others, taxes on cigarettes, alcohol and petrol as well as VAT on all goods and
services and doubles the real estate tax. On the other hand, it cuts salaries in the public sector by 4 per
cent, among other things. Czech Finance Minister Eduard Janota will in spring submit another
austerity package for 2011 and following years, including cuts in mandatory welfare expenditures and
the state contribution to home-building savings. However, according to the daily Hospodarske Noviny,
the Czech state budget deficit for 2010 will be at least 10 billion crowns higher than projected in the
government draft since the Finance Ministry calculated it on the basis of old data. The final vote on
the bill could take place in the period from 9 December.

Denmark
High solvency requirements from the Danish Financial Supervisory Authority are threatening the
future of crisis-rocked Copenhagen-based bank, Amagerbanken. This troubled financial institution has
been given 27 days to raise enough money to continue its operations. The authority believes the bank
needs considerably more money to keep it operating, and the requirement means that Amagerbanken
may not get access to funds in the government’s Bank Package II. If Amagerbanken, which has
suffered heavy losses on the real estate market, cannot provide the necessary capital quickly enough,
the bank may be forced to close. Amagerbanken has long been awaiting a decision on its application
for a share of funds from the bank package. It recently announced it would attempt to issue stocks to
secure a capital injection of around 600 million kroner by the end of the year. Other bad news brings a
new analysis from the Association of Danish Industry which shows that green energy producers are
planning further lay-offs this autumn. Pharmaceutical company Lundbeck has also announced it will
fire a tenth of its workforce in Denmark as part of a restructuring plan.

Estonia
The Tallinn city government has invited the worst hit low-income wage-earners to submit applications
for wood and potato rations to help them survive the winter. According to municipal officials, initially
200 families will be given two cubic meters of wood and around 2,000 families will receive 40
kilograms of potatoes. Those who earn less than the minimum wage in Estonia, which is about 4,350
kroons (278 euros) per month, will be allowed to apply for the program.

Finland
The percentage of people seeing the climate change as a very big problem has declined since 2008,
according to a poll commissioned by Helsingin Sanomat and conducted by Suomen Gallup.
Experts see the recession as the first reason for the decline in a readiness to make sacrifices. Other
bad news is that the steep slide in demand for the flights of national carrier Finnair continued in
September. The airline reported that passenger demand was down from September 2008 by almost
14 per cent, and the passengers carried in the first three quarters of 2009 fell by 8.9 per cent on the
previous year. The numbers are grim, but no longer quite as bleak as in the early part of the year.




France
Christine Lagarde, French Finance Minister, is pushing forward a governmental drive to attract
investment from Islamic countries, in a bid to turn Paris into the European capital of Islamic finance
and help France tackle the credit crisis. Also France’s globally renowned luxury goods industry looks
forward to new paths to overcome the economic crisis that hammered sales in the past three
semesters. The industry is repositioning itself on accessories, drastically cutting the production of most
affected products such as design evening dresses and haute-couture. In the second quarter of this
year, sales at the leather goods and saddlery division at Hermes (HRMS.PA) rose by 21 per cent on a
like-for-like basis to 228 million euros ($336 million), accounting for more than half of total revenue.

Germany
German Chancellor Angela Merkel and her Christian Democrats (CDU/CSU) won a second term on 27
September 2009 elections, in coalition with the centrist and economically liberal Free Democrats.
Some further economic reforms like labour market modernisation and tax cuts may be expected, but it
is by no means clear when and to what extent. Germany's economy may be growing again, but it also
saw a sharper contraction than many other countries, and economic growth does not immediately
translate into more jobs or higher tax revenues. The state of Germany's public finances is dire.
Already CDU politicians are warning their liberal partners-to-be that tax cuts are unaffordable right
now. Government spending is the other tough issue. Unemployment has been kept artificially low,
with 1.4 million workers put on "Kurzarbeit" - where they work shorter hours while the government
makes up some of the lost salary. The European Commission is on a collision course with the newly
elected German government over its rescue plan for the carmaker Opel. Neelie Kroes, the European
Commissioner for Competition, has urged the government to submit details of its rescue plan as soon
as possible so that she can assess whether the plan complies with EU state aid rules. She said that
German plans to provide loan guarantees to General Motors Co.’s Opel unit must respect EU rules that
outlaw making aid conditional on protecting jobs. In fact, the forced sale of Opel to Magna is backed
by 4.5 billion euros of German taxpayers’ money, to sell 55 per cent of the European arm of General
Motors to a consortium consisting of Magna, an Austro-Canadian auto-parts firm, and Sberbank,
Russia’s largest retail bank.

Greece
The new Socialist PASOK government may be willing to hand out some money to thousands of low-
income individuals and cut taxes for those earning up to 30,000 euros per year but should also be
prepared to provide the EU with a list of new measures to bring in a lot more tax revenues to plug the
big budget gap. An increase in indirect taxes in the form of a higher special consumption tax on
gasoline and/or value-added tax (VAT) rates should be among them.




Hungary
Hungary's main centre-right opposition party FIDESZ-MPSZ will push for the earliest possible adoption
of the euro if it is voted back to power in the next year's general elections. The 2008 crisis has shown
that the country is defenseless, and countries already inside the euro zone are much more protected
from the currency and exchange rate risks. Hungary has no official euro adoption target date and
Prime Minister Gordon Bajnai said setting an EMU goal would be the task of the next government.
Bajnai said maintaining fiscal discipline would ensure Hungary's economy will be able to grow well
above 3 per cent after 2011. The cabinet expects GDP to contract by 6.7 per cent this year and by 0.9
per cent in 2010. He added an extension of the existing IMF/EU loan until October 2010 will provide
security. Hungary's Parliament is scheduled to vote on the 2010 budget on 30 November. The
measures planned for next year include further spending cuts to keep the budget deficit under 3.8 per
cent of GDP.

Ireland
Financial stocks all made gains on the Irish LSEQ on 9 October, shaking off any uncertainty posed by
the Green Party’s vote on the National Asset Management Agency (Nama). José Almunia, the
European Commissioner for Economic and Monetary Affairs, said on 9 October that he wants to see
progress in setting up the National Asset Management Agency (Nama) passed as soon as possible.
Nama was an instrument designed to address the problems across the Irish banks affected by the
crisis, and to organise an orderly restructuring and consolidation of the banking sector here in Ireland.
Mr Almunia sees the implementation of Nama as a crucial step in Ireland’s economic strategy and
declared that he wanted the Government to continue to tackle the budget deficit, and for the
Paliament to pass a budget to restructure the public finances.

Italy
After months of increasingly negative predictions, the industry is hopeful that a few shafts of light
shining through the gloom could yet herald a brighter future. In August, Italians were net buyers of
mutual funds for the second month, putting 2.83 billion euros to work, a three-and-a-half year high.
Even onshore funds joined in, accounting for half of the flows, largely into long-term savings plans.
Experts believe that Italy’s investments in mutual funds helped major companies return to growth,
improve market conditions and stabilise the economic outlook.

Latvia
In recent weeks, the news from Latvia seemed mildly encouraging, after a year during which the
country has been kept afloat thanks to an $11.1 billion international bail-out. The decline has slowed:
the economy is expected to contract by 17.5 per cent this year, but by only 3 per cent in 2010 and to
return to growth in 2011. The current account, which showed a yawning deficit of 1.42 billion lats ($3
billion) in the first seven months of last year has been transformed to show a 581 million lats surplus in
the same period of 2009. However, now the main problem is next year’s budget deficit. International
lenders softened the target to a mere 8.5 per cent of GDP, but the government still has to push




through spending cuts of 500 million lats to meet this. Prime Minister Valdis Dombrovskis says that
Latvia faces a choice of economic scenarios: bad, and really bad. The bad scenario is slashing spending
to restrain next year’s budget deficit and ensure it receives the next tranche of a 7.5 billion euros
rescue package from the International Monetary Fund and other lenders. The really bad one is failing
to make the cuts, so torpedoing the loan. Mr Dombrovskis has called for legislation that could hurt
mainly Swedish banks that are severely exposed to Latvia’s mortgage market. The mortgage proposals
remove the biggest obstacle to a devaluation of Latvia’s currency. With three weeks left to agree a
2010 budget, the risk of devaluation seems bigger than ever.

ThefNetherlands
On 6 October the European Commission warned the Netherlands for breaching the stability pact
together with eight other Member States. EUROSTAT, the European Union statistics agency, revised
down its measure of eurozone gross domestic product for the second quarter to a 0.2 per cent
contraction from the first three months of the year and a 4.8 per cent contraction from the second
quarter of 2008. The next day the Dutch Foreign Ministry announced that the negotiations with
Iceland to solve the Icesave issue with the government of Iceland are moving forward. Iceland and the
Netherlands are now closer to agreeing to loan terms for Iceland to repay the massive losses by Dutch
depositors in the collapsed Icesave Internet bank. This decision is also considered crucial to the
potential accession of the Nordic island in the European Union.

Poland
The economic slowdown in Poland looks likely to push public debt even higher next year, but the 2010
budget gap should still fall short of 55 per cent of GDP. Finance Minister Jacek Rostowski declared that
the increased level of the budget deficit in 2010 is one of the delayed effects of the crisis and said that
next year's budget gap target of zł.52.2 billion is “safe” and the government plans to start narrowing
the deficit in 2011. Mr Rostowski also said that Poland is ready to participate in the costs related to
increasing the capital of the IMF. He and his Icelandic counterpart signed an agreement authorising a
zł.630 million loan to Iceland on 4 October. Also the złoty's current level against the euro is
“satisfactory,” because it helps support exports according to the Economy Minister Waldemar Pawlak.
But the worrisome news for Poland is that a growing number of analysts warn that the unemployment
rate could grow to 14 per cent next year. According to Jakub Borowski, chief economist with Invest-
Bank, this year will close with 13 per cent unemployment.

Portugal
A narrow Socialist win in Portugal may make for an unstable government. The fear of business leaders
is that a weak Socialist government will be unable to tackle Portugal’s pressing economic problems.
GDP is expected to contract by over 3 per cent this year. The unemployment rate is 9 per cent and
rising. In 2010 the public debt and the budget deficit are likely to hit 80 per cent and 7 per cent of
GDP, respectively. The worst outcome would be for Portugal’s Prime Minister Sócrates to go for
populist measures with the aim of seeking a bigger majority in an early election, says Francisco
Sarsfield Cabral, an economic analyst.




Slovakia
The Slovak ministers approved the state budget for 2010 which forecasts a deficit of 5.5 per cent of
GDP. The Finance Minister Počiatek said that despite the higher deficit, the proposed budget will still
mean a boost for fiscal austerity, which in 2012 should result in an annual deficit under 3 per cent of
GDP. Ivan Štefanec from the major opposition party, the Slovak Democratic and Christian Union, does
not really trust the government’s promise to push down the public finance deficit to that level.
Economists and market watchers are also reserved when estimating the prospects of this budget
being met. Mr Počiatek thinks that the Slovak economy is emerging from the crisis. The central bank
is, however, a little bit more pessimistic. Due to the significant decline in the performance of
Slovakia’s economy during the first half of 2009 it needed to significantly revise its forecast
downward, noting that the world economic crisis reduced orders for many domestic companies and
caused that thousands of Slovaks lost their jobs. But according to the central bank (NBS), the economy
has now bottomed out and it might start to gradually show growth next year. NBS upwardly revised its
prediction for 2010, expecting that foreign demand would recover and continue to be the major driver
of the Slovak economy.

Slovenia
Slovenia recorded the second highest GDP growth rate (+0.7 per cent) in Q2 among EU member
states, according to Eurostat. Slovakia was first with 2.2 per cent growth, while Poland (+0.5 per cent)
came third among EU countries for which seasonally adjusted GDP data are available. Other good
news is that by subsidising the shorter working time and forced leave programmes, the government
managed to keep 20,000 jobs. Development Minister Mitja Gaspari has recently presented plans for
structural reform in the coming two years, saying a number of adjustments will be needed to enable a
smoother bridging of the crisis and to improve the long-term functioning of the economy.

Spain
As Spain’s budget deficit soars and economic recovery remains elusive, the Socialist Prime Minister,
José Luis Zapatero, has made clear that he plans to raise taxes to restore public finances. He said the
2010 budget would aim to raise overall taxes by 1.5 per cent of GDP, which should earn the
government about 15 billion euros. Mr Zapatero did not spell out how he would do this, leaving the
matter to negotiations with parties whose support he needs to get the budget passed. Mr Zapatero is
performing a u-turn. In previous years he cut the top rate of income tax, slashed company tax and
brought in a populist 400 euros annual rebate for all Spanish taxpayers. But that was when Spain was
booming. The latest data show that GDP is shrinking by 4.2 per cent annually. Spain also has Europe’s
worst unemployment - 18 per cent. Furthermore, the Madrid research group RR de Acuña & Asociados
said the collapse of Spain's building industry will cause the economy to contract for the next three
years, with a peak to trough loss of over 11 per cent of GDP. The grim forecast is starkly at odds with
claims by Premier José Luis Zapatero, who still says Spain's recession will be milder than elsewhere in
Europe. The group said Spain's unemployment will peak at around 25 per cent, comparable to the
worst chapter of the Great Depression. Spain's parliament has rushed through a law guaranteeing 420
euros a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on.




Sweden
The engineering company Metso Corporation is to cut 400 jobs in its facilities in Sweden and Finland.
Both shop-floor workers and managerial employees will be laid off. The company has announced that
the aim of the move is to reduce the firm’s annual costs by more than 20 million euros. These
streamlining measures are not expected to come to fruition in their entirety until 2011. The greatest
number of jobs will be cut in Sweden, where 288 employees will be laid off from Metso’s Sundsvall,
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UnitedcKingdom
Figures released on 8 October confirmed that the UK trade deficit in goods fell to its lowest level since
2006 in August. This may represent a positive sign for British exporters that may be able to take
advantage of the weaker pound in view of an upturn in global trade. The deficit narrowed from £6.4
billion to £6.2 billion, compared with more than £8 billion a year earlier. However the official data on
manufacturing output still show evident signs of recession. These figures seem to contrast the
positive outlook presented by the last review of the housing market that returned to narrow but
steady growth in the last trimester.

WORLDWIDE
China
Two weeks after the US government signed an order to impose a duty of 35 per cent on Chinese tyre
imports, the US Department of Commerce is reviewing the possibility of increasing duties on the
import of steel pipes from China. This move is considered extremely risky by analysts considering the
sore reaction provoked in China by the previous decision. The Chinese Ministry of Commerce
immediately responded to the US investigation declaring that the imposition of further duties on steel
pipes from China lacks factual basis and constitutes a clear protectionist measure to shield American
producers affected by the crisis.

India
Speaking here on the last day of campaigning for the Maharashtra assembly elections, Manmohan
Singh said a good October-February agriculture output would put India’s macro-economic inflation
scenario out of risk. The investments in irrigation already put in place by the government would
provide long-term stability to the Sub-Continent. However, on 5 October a report issued by the World
Bank warned about chronic shortage of skills in its construction industry over the next decade which
could jeopardise the government’s ability to sustain its 9 per cent growth target.




Japan
The Japanese government is expected to outline a scheme to support SMEs. It seeks a reprieve on
debt repayments of up to three years, as part of a State programme to help businesses bear the
impact of the global economic crisis. The scheme in discussion is directed to make extension of
principal and interest payments easier for borrowers to ask to their bank. The support is specifically
designed for small business a maximum of three years and individuals with mortgages who have lost
their jobs.

Russia
On 6 October Mike Moore, a former New Zealand prime minister who was director general of the
World Trade Organization from 1999 to 2002, pointed out the risks of leaving Russia out of the WTO.
Russia’s economy is the largest still outside the WTO, as well as the only member of the G20 not in the
world trade body. Mr. Moore emphasised the benefit of including Russia for both trade partners and
the country itself in terms of trade output and stability of foreign direct investments. On the other
hand he also acknowledged that Russia must prove to be ready, especially concerning the strong
public interventionism in the country’s economy. Russia’s Prime Minister Vladimir Putin demonstrated
his pro-active attitude when pronouncing an “ultimatum” to Renault to demand more investments in
the car manufacturer Avtovaz, in which it has a 25 per cent stake, subtly threatening the French
manufacturer of seeing its quota in the company reduced.

UniteddStates
World trade, which fell more sharply during this financial crisis than at any time since the Great
Depression, shows signs of recovery, showing that the global economy is healing. Although the volume
of trade remains well below pre-crisis peak levels, imports and exports appear to have touched
bottom in the second quarter. Trade volumes had fallen even further than global growth and
represented an important indicator to assess the degree of protectionism provoked by the crisis. US
stocks seem to be recovering better than expected and full recovery might be achievable sooner than
predicted. Nonetheless, the benchmark has almost 500 points to go before it recovers to its October
2007 high, making battered investors whole again. Investors grew more confident that the doomsday
scenario of the nationalization of large banks and a prolonged global recession have been avoided. But
with consumers hurting and unemployment high, one should expect the second leg of the healing
journey to take much longer, experts say.




INSTITUTIONS
Informal European Council: On 17 September at the Informal European Council, EU leaders
defined their position for the G20 summit in Pittsburgh with a list of 28 concrete demands. Agreed
demands included to continue coordinated policy measures to develop sustainable growth and
prevent a repetition of the financial crisis. Agreement to now formulate exit strategies phasing out
stimulus measures was coupled with the demand to implement them only when economic recovery
would be secured. In addition, leaders voiced their support for strengthening the International
Monetary Fund and other international financial institutions.

G-20 Finance Ministers Meeting: While the focus of the Washington and London G-20 Summits
were on preventing economic catastrophe, the Pittsburgh Summit from 24-25 September pledged to
sustain a strong policy response until "strong, sustainable, and balanced economic growth” was
secured. Leaders committed themselves to a new cooperative process of shared policy objectives to
coordinate their national policy frameworks with the assistance of the International Monetary Fund
(IMF). The first agreement to emerge from the summit was China's increased share of the voting quota
on the IMF's executive board. One other agreement was reached on the Financial Stability Board,
which will in future have a broader mandate in coordinating and monitoring financial regulations and
will send out early-warning alerts on risk-taking. The G20 agreed to reform insolvency procedures for
large banks, including a provision for "living wills", which will require large banks to say exactly how
they will be wound down in the event of insolvency. The US signed up to a commitment to adopt an
international framework on capital requirements at banks by 2011, an agreement the EU has been
seeking since the 1990s. The EU, which was represented at the summit by the UK, France, Germany,
Spain, Netherlands, Sweden, as the current holder of the EU presidency, and the European
Commission, went to Pittsburgh with, among others, proposals on financial transactions tax and bonus
caps. A financial transactions tax, also known as a Tobin tax, did not make it into the summit's final
communiqué. Leaders instead agreed that the IMF should compile a report on how banks can raise
money for budgets. European Commission President José Manuel Barroso seemed broadly satisfied
with the Summit, adding however that he did not hide his concern "at the slow rate of progress" on
regulating finance.

European Commission (EC): The EC's legislative proposals, known as financial supervision
package, establish the first EU wide system of supervision. Through the creation of a European
Systemic Risk Board (ESRB) and through a European System of Financial Supervisors (ESFS), the
Commission addresses the weaknesses and shortcomings of the current supervisory structure in
Europe both at macro- and micro-prudential supervision levels. At the same time, the European
Commission is seeking to set a date for exit strategies by 2011 provided its latest forecast shows a
return to positive growth. However, Eurogroup chair Jean-Claude Juncker said that discussions due to
take place in December would clarify the details and timing of exit strategies. Finally, the European




Commission launched disciplinary proceedings against nine EU members over their failure to keep
their budget deficits below the 3 per cent GDP limit set by the eurozone Stability and Growth Pact.

European Parliament (EP): MEPs agreed to set up a special committee on the financial and
economic crisis with 45 members and a 12-month mandate. It will assess the extent and impact of the
crisis on Member States and propose measures to rebuild stable financial markets. The special
committee's term of office started on 8 October 2009. Its findings will be presented in two reports: a
mid-term report and a final report containing recommendations on measures to be taken.
The committee will hold hearings with experts, social partners and representatives of industry,
governments and national parliaments, and will contribute opinions to the legislative work of
Parliament's standing committees.

European Central Bank (ECB): The ECB will continue giving loans to banks as a way to maintain
recovery in the euro zone and it said that the central bank's massive supply of liquidity would be
phased out over time but it would be premature to start this year. ECB President Trichet brushed off
concerns that the ECB's liquidity injections would fuel inflation in the 16-nation region. Economists do
not expect interest rates in the euro zone to rise before the third quarter of next year, but the ECB has
given no clear sign on whether it will mop up liquidity before hiking rates, or the vice-versa.

European Investment Banks (EIB): The EIB launched a lending facility for SMEs in the EU's
eastern neighbours. Until now, the bank has only been able to provide such loans within the EU. The
EIB's decision to expand geographic coverage follows a request made at the EU's Eastern Partnership
summit held in Prague in May, which invited the EIB, the European Bank for Reconstruction and
Development (EBRD) and other international financial institutions to establish a joint small and
medium-sized enterprise facility. Under a mandate provided by the European Parliament and Council
of Ministers, the EIB is able to undertake activities in all countries except Belarus. The mandate makes
available a total of 3.7 billion euros for lending in the period 2007-13.

International Monetary (IMF): The IMF calculates that losses of European banks as a result of
bad loans and toxic assets will increase in the coming months and could reach a total of almost 420
billion euros by 2010. European banks are in any case already acting to raise extra capital, many of
them thanks to the help of national authorities. But others, especially in Italy and France, are looking
for money from the private sector to repay previous debts or to explicitly shield public support.

EPP Views

The EPP Group in the European Parliament has welcomed the Leaders' statement issued after the
G20 Pittsburgh Summit. Commenting on the outcome of the G20 Summit, Joseph Daul, Chairman of




the EPP Group, said: "The EU has been active from the very beginning of the financial crisis in
convincing its partners to adopt new rules regarding the supervision of the financial sector. With its
500 million consumers and 22 per cent of world production, Europe is the world's biggest economy
and holds as such a strong position in the G20. The Leaders' statement proves we can convince our
partners to go along the road of ambition, to reform and adapt our global financial systems to the
needs of the 21st century to lay the foundation for strong, sustainable and balanced growth." The EPP
Group also welcomed the creation of the Special Committee on the Financial Crisis in the European
Parliament through which Parliament will monitor the process of financial reform. The Budgetary
Committee of the European Parliament discussed and voted on the first reading of the 2010 EU
budget between 28-30 September. László Surján, a Hungarian MEP and EPP Group Rapporteur of the
2010 budget in the European Parliament, explained that there are two directions concerning next
year's budget. "The Council, headed by the Swedish Presidency, believes that the budget is just
another burden in this time of crisis. However, the European Parliament is convinced that the 2010
budget could be instrumental in tackling the consequences of the financial and economic crisis.
Marian-Jean Marinescu, Vice-Chairman of the EPP Group responsible for Budget, Budgetary Control,
Regional Policy, Agriculture and Fisheries, has welcomed the outcome of the Committee vote on the
draft budget 2010 with regards to short-term aid for European agriculture including additional funds
of 600 Million euros.

OUR COMPETITORS’ VIEWS

S&D
The S&D Group in the European Parliament chaired by German social democrat Martin Schulz joined
the launch of a campaign "Regulate global finance now. On the eve of the G-20 in Pittsburgh,
representatives of NGOs, trades unions, academics and progressive politicians joined forces under the
umbrella Europeans for Financial Reform (EFFR) to lead a campaign for strong and effective reform in
the banking and financial system. The campaign will put pressure on the Swedish presidency and EU
governments to push ahead with financial reforms. The Europeans For Financial Reforms' pledges are:
1) Establish democratic governance over financial markets, 2) Transparency in the whole system, the
touchstone of accountability, 3) Protect workers and jobs from predatory practices, 4) Protect public
finances and shut down tax havens, 5) Sustainable finance for sustainable jobs, 5)Banks need to serve
customers and support businesses.

Commenting on the European Commission proposals for a European system of financial supervision,
the S&D Group in the European Parliament warns that it expects serious monitoring of financial
markets. The S&D group wants the European Parliament closely involved in the work with regular
reports in public so that European citizens can see that Europe is serious about tackling wrong-doing in
the financial sector.

.




ALDE/ ADLE
Commenting on proposals presented by the European Commission for revising the structures for
macro and micro financial supervision, Guy Verhofstadt, ALDE group leader called for a bolder
approach in presenting plans for a single financial supervisory authority

lack of political will amongst Member States to move towards a single financial authority. But
Verhofstadt maintains that the lessons of the crisis point precisely to this as a means to address the
lack of control and supervision that allowed banks and other financial institutions excessive latitude to
invest far beyond their means. "The Commission has kept its pledge to bring forward its proposals on
financial supervision at an early stage so the policy debate can get underway. A failure to react would
have increased the risk of the disintegration of the single market. However we need to tackle head on
the intransigence of some Member States to contemplate the merits of a single European financial
authority that can apply the same rules, without fear or favour, equally across the European Union,"
said Verhofstadt.

GUE/ NGL
MEP Jürgen Klute, GUE/NGL Coordinator in the Economic and Monetary Affairs Committee comments
on the publication of the IMF World Economic Outlook: "It's pleasant that even the IMF admits that
increased public spending has been able to alleviate the impact of the current economic crisis. I
welcome the fact that the fund's report advises against premature exit from stimulus programs. In
the meeting of the European Parliament's Committee for Economic and Monetary Affairs (ECON), the
President of the Eurogroup, Luxembourg's prime minister and former minister of Finance Jean-Claude
Juncker came for an exchange of views with the MEPs. ECON members from the GUE/NGL group
Miguel Portas and Jürgen Klute acknowledged that, apart from Cypriot President Dimitris Christofias,
at least one other head of government does “not accept the currently prevailing, dangerous
orthodoxy in economic and labour market policy.” Juncker rejected calls for early exit strategies from
stimulus programs against the economic crises, some of which have already been put in place. "We
welcome Mr Juncker's commitment to fight the repercussions of the crisis", declares Portuguese MEP
Miguel Portas, "it is regrettable that many other European heads of state are today preparing the
introduction of austerity policies. These are the exact opposite of what we need in the current
situation".




FROM THE BLOGOSPHERE…
Should we blame Eton for the Conservative party’s hostility to EU?: Tony Barber on British Euro-
scepticism.

Rethinking Capitalism: How Very Enterprising: Steven Pearlstein gives his view of the impact of the
financial crisis on the masses in a critique of Michael Moore’s last movie.

Should and Can the US Fast-Track Russia into the WTO?: Iana Dreyer on ECIPE’s official blog.

UPCOMING EVENTS

Event: DG ECFIN 6th Annual Research Conference: Crisis and Reform

Date: 15 – 16 October 2009, Brussels

Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff
Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Additional Assistance: Xochil Guillen, Vincenzo Confortivvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvv
Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Questions and comments: briefs@thinkingeurope.eu



Annex

Global Financial Stability Report (GFSR), October 2009

Key messages

Global financial stability has improved, but risks remain elevated.

Estimated global losses have improved to $3.4 trillion. However, further deterioration in
banks’ loans is to come—over half of their writedowns are still to be recognized.

Policymakers face considerable near-term challenges. These include ensuring sufficient credit
growth to support economic recovery; devising appropriate exit strategies; and managing the
risks arising from heavy public borrowing.

<<Source: IMF >>


Economic Recovery Watch 12 October 2009

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Economic Recovery Watch 12 October 2009