Economics Blog

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IIEA8th October 20209min

Author: Alexander Conway

Introduction

Commissioner-Designate for Financial Services, Financial Stability and Capital Markets Union.

Mairead McGuinness, a member of Fine Gael (EPP), has been the Vice-President of the European Parliament from 2017-2020 and has been an MEP for Ireland’s Midland’s North-West constituency since 2004.

As the Irish candidate to replace Phil Hogan following his resignation after the so-called “Golfgate” scandal, she received a very positive cross-party response at her hearing in the European Parliament’s Economic and Monetary Affairs Committee (ECON) Committee on 2 October 2020 and was confirmed as the Commissioner for Financial Services, Financial Stability and Capital Markets Union on 7 October 2020 by 583 votes to 75 against, with 37 abstentions.1 She now needs to be formally confirmed via written procedure by a qualified majority in the European Council.2

Her hearing as Commissioner-Designate was held in the context of ongoing financial and economic responses to the COVID-19 pandemic and an increasingly uncertain outcome for future EU-UK relations on 31 December 2020. Commissioner McGuinness will be responsible for preserving and ensuring financial stability in the EU, protecting savers and investors and ensuring the free flow of capital within the Single Market.3 She will work with Valdis Dombrovskis, the Executive Vice-President for an Economy that Works for People, who was formerly responsible for financial services and will lead the Directorate-General for Financial Stability, Financial Services and the Capital Markets Union (DG FISMA) with John Berrigan, Director General, DG FISMA.

Key Priorities

  1. Completing the Banking Union

In her mission letter, President von der Leyen asked Ms. McGuinness to focus on completing the Banking Union, in particular finalising a common backstop to the Single Resolution Fund and reaching agreement on a European Deposit Insurance Scheme (EDIS).

During her hearing last week at the ECON Committee, Mairead McGuinness stressed the symbiosis between completing Banking Union and Capital Markets Union and their importance in protecting and supporting small and medium enterprises (SMEs). She also promised to “inject fresh energy”, with the backing of the European Parliament, into overcoming the existing barriers to completing Banking Union, noting that COVID-19 had shifted some Member States’ positions on the issue, which indicates there may be an opportunity for progress.

Responding to concerns about non-performing loans and the dangers they pose for lending facilities, Ms. McGuinness attempted to strike a balance between tackling these loans while also protecting investors and lenders, and refused to answer questions about potentially establishing an EU “bad bank” to handle these non-performing loans.

  1. Capital Markets Union & SME Funding

As outlined by President von der Leyen in her mission letter, Commissioner McGuinness is tasked with speeding up work on the Capital Markets Union and easing the flow of capital for cross-border investments in the EU. In her hearing, Ms. McGuinness noted that the Capital Markets Union was a long-term project and that she would attempt to break the current impasse and make “brave choices” now possible as a result of the COVID-19 response, with particular reference to a European Deposit Insurance Scheme (EDIS).

Ms. McGuinness is in favour of better matching domestic savings of EU citizens and investors, which have built up due to COVID-19, and investment opportunities in SMEs and start-ups through fostering closer links with national supervisors as an incremental step towards deeper Capital Markets Union.  She expressed her support for this as part of the Capital Markets Union Action Plan. She also stated that she would cooperate with Commissioner Vestager to address blockages in cross-border financial services provision and possible uncompetitive market behaviour on mortgage interest rates in certain Members States, such as Ireland, Malta and Latvia.

  1. Green Finance

Commissioner McGuinness confirmed her support for the EU Green Bond standards and the need for private investment if the EU is to achieve its European Green Deal and Digital Decade ambitions. She demurred on the specific legislative instruments needed to achieve and enforce this until the Commission has investigated further and received stakeholder feedback. Ms. McGuinness also noted the need to link these standards to the Taxonomy Regulation, if the EU is to be a global leader in sustainable finance and supply credible verification of investments’ green credentials. In response to a question Ms. McGuinness also hinted at the possible expansion of the Green Bond criteria to include biodiversity and climate risks, though she bowed to the expertise of the ENVI Committee in this regard, as well as future application to the public sector and private investments.

  1. Fighting Money Laundering

Ms. McGuinness did not support demands from ECON Committee members for a single EU anti-money laundering supervisor, instead favouring EU coordination of national anti-money laundering supervisors, noting the former would likely be opposed by Member States. She also linked the issue of money laundering to European values and the rule of law. She hinted at the expansion of anti-money laundering enforcement legislation towards other sectors which are deemed to facilitate money laundering, such as some legal firms, and a tougher approach towards infringement procedures against Member States at fault. Ms. McGuinness left the question of the appropriate legislative instruments, such as regulations or directives, open until updated proposals on the issue are published in 2021.

  1. Fintech and Cryptocurrencies

With respect to cryptocurrency regulation, Commissioner McGuinness underlined the need for effective supervision and regulation of these currencies, in the context of several references to the Wirecard supervision scandal in MEPs’ questions.

In her opening remarks, Ms. McGuinness confirmed her support for the recently published Digital Finance Package as well as the Digital Payments Strategy and European Strategy for Data as key tools in addressing the fragmentation of EU financial markets and upholding the EU single market for the free movement of services and capital.

Ms. McGuinness also proposed expanding the scope of financial supervision to tech firms moving into the fintech and payments services sector, for example Facebook’s “Libra” currency, and adverted to the risk of an unregulated shadow banking sector emerging. More active and effective supervision to avoid situations like Wirecard emerging was identified by Ms. McGuinness as a key priority, alongside better informing and protecting citizens about financial products through Country by Country reporting, which faces opposition from Member States.

  1. EU Resilience to Extraterritorial Sanctions

In the broader framework of the EU’s “open strategic autonomy”, which she defined in her written answers as the ability to reap the benefits of international trade while protecting against unfair actions by third-parties, Ms. McGuinness identified three interlinked priorities: Strengthening Economic and Monetary Union by completing Banking Union and Capital Markets Union, raising the international profile of the euro currency and developing an effective sanctions policy. Beyond stated support for the aims of a “Geopolitical Commission” and the rules-based multilateral order, there was little in terms of concrete proposals on how this could be achieved in her remarks. In response to a question on Basel III bank capital requirements and the competitiveness of EU banks versus their American counterparts, Ms. McGuinness pushed back and said these prudential measures had actually strengthened the EU’s ability to weather the COVID-19 pandemic and that these regulations were part of the EU’s multilateral commitments.

Possible Irish Impacts

While Brexit was not mentioned by name in President von der Leyen’s mission letter, the full and timely implementation of the Withdrawal Agreement and securing an ambitious and strategic future partnership between the EU and the UK did feature. Given the considerable size and influence of the City of London for financial services, Ms. McGuinness’ proposed Commission brief touches directly on this key issue of financial services for the future EU-UK relationship. She noted the European Commission’s agreement to an 18-month extension to allow financial market actors to reduce their dependence on London-based central counterparties (CCPs) and to build up financial services infrastructure in the EU. Ms. McGuinness framed this as key to maintaining financial stability as a prudential measure in the face of uncertainty over potential UK regulatory divergence, as well as feeding into the Commission’s broader policy of “strategic autonomy”.  As Ireland could be one of the beneficiaries of any financial services’ exodus from London into the EU, this could prove to be an economic windfall for the Irish exchequer.

On the issue of Ms. McGuinness’ impartiality as Commissioner for financial services, and the number of Irish nationals in key EU finance roles – including the Eurogroup President, Paschal Donohoe, and the ECB Chief Economist, Phillip Lane – she dismissed the notion of an Irish “conspiracy”. If elected, Ms. McGuinness stressed that she would be a “European” Commissioner first and foremost and would “strongly support” the European Commission’s effort for “a community approach to taxation”. Taxation does not fall under Ms. McGuinness’ proposed portfolio, but any changes to how financial services and transactions are taxed, including activities by tech firms moving into digital payments services and a proposed financial transaction tax, would have serious implications for Ireland’s current economic model.

“Values-driven Finance”

In the hearing leading up to her appointment, Ms. McGuinness gave a confident and self-assured performance and displayed a robust command of her prospective portfolio. Throughout her remarks and her answers to questions from MEPs, Ms. McGuinness underscored three intertwined themes.

First, that the issue of financial stability and financial services has direct impacts on businesses, society and citizens, not just financial markets or firms, and that as Commissioner, Ms. McGuinness would “put people front and centre”.

Second, the need for a financial system that takes people and the environment into consideration and that is able to take advantage of the digital opportunities afforded to it.

Finally, that she would bring her parliamentary experience and perspective as an MEP with her to the European Commission. Commissioner McGuinness informed the ECON Committee that having a Parliamentarian in the European Commission would be a “bonus” and that she would involve the institution in her deliberations and work. Ms. McGuinness concluded her hearing by referring to the work of the late John Hume – not only in fighting for peace in Northern Ireland, but in his pivotal role in the credit union movement in Derry – and the importance of values-driven finance for social inclusion which she will take as her inspiration for her portfolio.

[1] https://www.europarl.europa.eu/sed/doc/news/flash/23843/Result_07-10-2020_First%20voting%20session,%2010.30-11.45-1_en.pdf

[2] https://www.politico.eu/article/lawmakers-confirm-mcguinness-and-dombrovskis-as-finance-trade-commissioners/

[3] https://ec.europa.eu/commission/commissioners/sites/comm-cwt2019/files/commissioner_mission_letters/

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Mark Dempsey24th March 20206min

Author: Cillian Rossi

Introduction

“Whatever it takes”. Three words that saved the single currency.

Mario Draghi’s iconic utterance – delivered to an audience of London investors in July 2012 — is  widely regarded as the turning point in the Eurozone crisis. At a time when government bond yields across the Eurozone were soaring, Mr Draghi’s assurance that the ECB would do everything within its mandate to save the euro instantly calmed financial markets. More than anything, it demonstrated that the ECB was — at last — prepared to utilise the firepower at its disposal to prevent the breakup of the Eurozone.

Of course, Mr Draghi’s words alone did not end the Eurozone crisis. But the confidence that his remarks restored in the euro project was immediate. They also demonstrated the profound influence that effective monetary policy communication can have on market behaviour. As the Eurozone faces yet another crisis — the expected economic and financial fallout from the COVID-19 outbreak — many have looked to Mr Draghi’s replacement as ECB president, Christine Lagarde, for an equally decisive intervention.

The ECB has responded to the COVID-19 crisis with two packages of monetary policy measures. The first package was announced on 12 March 2020 to an underwhelming market response. Disappointment quickly turned to panic, however, as a communication error by Ms Lagarde cast doubt on the ECB’s ability to drive down spiralling Italian borrowing costs. The ECB’s second, more ambitious package was delivered just under a week later and eased market turmoil. Ms Lagarde also sought to make amends for her earlier comments with clear and direct communication across different channels.

Communication Misstep

On 12 March 2020, the ECB’s Governing Council — comprised of the six members of the bank’s Executive Board and the governors of the 19 Eurozone national central banks — unanimously agreed a first course of action. The bank announced an expansion of its quantitative easing (QE) programme with an envelope of €120 billion in additional asset purchases by the end of 2020. The ECB also launched a new programme of cheap loans in a bid to safeguard commercial lending to small businesses. Many investors expected the bank to follow the Federal Reserve and the Bank of England by cutting key interest rates, but the ECB kept its rates unchanged.

Market reaction to the package was muted. Investor confidence in the ECB’s ability to fight the crisis was rattled, however, by comments made by Ms Lagarde in a subsequent press conference. In an uncharacteristic communication error, Ms Lagarde said that it was not the ECB’s role to “close the spread” in yields between the Eurozone’s core Member States and those at its periphery. Market panic ensued. Her comments sent yields soaring in Italy, the Member State worst hit by the COVID-19 outbreak. As borrowing costs rose, concerns about the sustainability of Italian debt resurfaced.

Doubts about EU solidarity — a familiar narrative during the Eurozone crisis — re-emerged. Ms Lagarde quickly walked back her comments, stating in a television interview less than an hour later that she was “fully committed to avoid any fragmentation in a difficult moment for the euro area.” She also acknowledged that “high spreads due to coronavirus hamper the transmission of monetary policy.” The damage was done, however, and Ms Lagarde is understood to have apologised to the ECB’s Governing Council for her error.

In a pointed reply to Ms Lagarde, Italian prime minister Giuseppe Conte said “the job of the central bank should not be to hinder but to help such measures by creating favourable financial conditions for them.” Philip Lane, the ECB’s Chief Economist, sought to reassure investors — and the Italian people — by publishing a blogpost on the bank’s website clarifying the analytical framework underlying the measures. Professor Lane affirmed that the ECB was “ready to do more” to address tensions in government bond markets, emphasising that the ECB would not tolerate any threat to the “smooth transmission” of ECB monetary policy throughout the Eurozone.

Sending the Right Message

On 18 March 2020, the ECB issued a rare public rebuttal of a Governing Council member after Austria’s central bank governor, Robert Holzmann, cautioned earlier in the week that monetary policy had reached its limits. That same day, and contrary to Professor Holzmann’s claims, the ECB announced a second, more comprehensive response to the COVID-19 crisis. Following a late-night emergency phone call, the bank’s Governing Council agreed a new programme of asset purchases amounting to €750 billion by the end of the year. Purchases of private and public sector assets under the Pandemic Emergency Purchase Programme (PEPP) will be conducted until the Governing Council judges the crisis to be over, meaning the programme may last beyond 2020.

In a significant move, the ECB opened the door to purchasing Greek debt for the first time. The bank will also consider removing self-imposed limits on the amount of bonds that it can purchase from each Member State. This would enable the bank’s purchases to target the most at-risk countries, like Italy. The announcement pulled yields down across the Eurozone— notably in Italy and Greece — reducing government borrowing costs and reversing in part the asset price volatility that followed Ms Lagarde’s communication error.

With echoes of Mr Draghi’s famous words, Ms Lagarde tweeted after the announcement: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” Ms Lagarde also published a blogpost on the ECB website and in The Financial Times, in which she addressed the “unbearable human tragedy” of the crisis. She also explained — in the straightforward language typical of her time as Managing Director of the IMF — how the PEPP will support “every citizen of the euro area through this extremely challenging time.” This time, the message was clear.

Conclusion

At a hearing in the European Parliament on 6 February 2020, Ms Lagarde said, “Good communication forms the bedrock of the ECB’s credibility and underpins our legitimacy in the eyes of the people we serve.” In her first major communication challenge as ECB President, Ms Lagarde stumbled. Markets have since calmed — for now — but the sharp fluctuations in Eurozone government bond values have undermined the bank’s credibility. Restoring legitimacy in the eyes of the Italian people will be an even greater challenge.

Ms Lagarde’s political skills will continue to be tested over the coming weeks amid reports of disharmony over the ECB’s approach to the COVID-19 crisis. The hawkish Dutch and German members of the Governing Council are reported to have expressed misgivings about the bank’s ultra-loose monetary policy measures. In the context of this apparent disunity, Ms Lagarde deserves credit for reconciling the views of the Governing Council’s hawks and doves to deliver the PEPP.

Combined with the bank’s existing QE programme, the ECB’s two COVID-19 packages will bring the total amount of asset purchases this year to more than €1.1 trillion. Impressive though this figure may be, monetary policy alone cannot solve the current crisis. The ECB’s actions have put Eurozone governments in a position to finance the programmes needed to protect vulnerable workers and businesses. The onus now rests with national governments to implement fiscal and health policy measures commensurate with the challenges presented by COVID-19.

The view expressed in this blog are those of the author, and not the IIEA.

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IIEA12th June 20192min

In the Brexit debate, there has been relatively little focus on the issue of services, which make up about three quarters of the UK’s economic output. How might Brexit impact on this vitally important, and growing, sector? This IIEA paper, by Gavin Barrett, Professor of Law at the Sutherland School of Law, University College Dublin, aims to address this question, and to focus attention on an issue that is, and will continue to be, of key importance in the years and decades after Brexit has taken place.