Axel A. Weber was elected to the Board of Directors (BoD) of UBS AG in 2012 and was thereafter appointed Chairman of the BoD. Mr. Weber was president of the German Bundesbank between 2004 and 2011. From 2002 to 2004, he served as a member of the German Council of Economic Experts. Mr. Weber holds a PhD in economics from the University of Siegen, where he also received his habilitation. He graduated with a master’s degree (Diplom) in economics at the University of Constance. He also holds honorary doctorate degrees from the universities of Duisburg-Essen and Constance.
To read more on Mr. Weber, please visit http://www.ubs. com/global/en/about_ubs/ about_us/executivebodies/ boardofdirectors.html.
|UBS Chairman Axel Weber delivered a guest lecture on “Europe and Asia — An undeniable
connection” at Singapore’s Lee Kuan Yew School of Public Policy (LKYSPP) in September. In
his speech, Weber expressed optimism about Asia’s long-term prospects and spoke frankly
about his concerns on Europe’s debt crisis.
While Asia and Europe share strong trade and financial ties, the current debt crisis in Europe has pushed both regions to take measures to mitigate its impact on their respective economies. Asian policymakers recognize the need to soften the economic impact of a slowing Europe on their own countries, employing fiscal policies to strengthen their domestic economies and at the same time trying to keep inflation under control. For example, the Singaporean authorities are allowing the Singapore dollar to appreciate, China is supporting its economy by funding housing construction, and India is promoting inward capital flows by changing tax and lending laws to create a more businessfriendly environment. Region-wide, countries are attempting to shift their production towards higher value-added exports and to reduce export-dependency overall, in an attempt to rebalance growth more towards domestic demand.
Understanding Europe’s story
For Europe, there is much to be learnt from Asia. When Asia was hit by the currency crisis of the 1990s, the region’s countries responded by employing far-reaching structural reforms and oversaw a dynamic economic turnaround. In turn, in the current debt crisis the European Central Bank (ECB) is leading the efforts directed at calming global financial markets, for example, through its long term refinancing operations (LTROs) that provided banks with longer term funding against appropriate collateral. Governments’ reform ambitions, instead, have not gone as far yet as they could have.
Institutional reforms aimed at stabilizing the Eurozone banking sector are one important pillar in the overall stabilization efforts, but largely are not yet operational. Discussions over the establishment of a pan-European banking union are ongoing and its exact shape, as well as implementation timelines, are still subject to intense debate. Furthermore, banks in need are in principle supposed to be able to apply for recapitalization directly through the European Stability Mechanism (ESM). However, this avenue is not viable yet in practice, as governments are not united on which conditions need to be fulfilled prior to giving banks direct access to the ESM. Lastly, Eurozone-wide regulatory pressures also need to be taken into account as they imply additional challenges for the region’s financial institutions.
Europe’s three challenges
Three key issues need to be considered by the European leadership when trying to resolve the sovereign debt crisis and to steer Europe back onto a convergent instead of a divergent path.
First, the ECB’s actions have helped stabilize Europe’s economic situation. While there is now increasing pressure on the ECB to go even further and to step up purchases of sovereign debt of countries like Spain and Italy, the continued provision of liquidity from the ECB is not conducive to a long-term solution. Some European countries have to realize that they are facing solvency and not liquidity issues. While the ECB can buy time, it cannot solve the deeper structural problems these countries exhibit.
Second, what will happen in terms of integrating the supervision of European banking systems into a single entity? In June 2012, the European Council laid the groundwork for a single bank regulator. However, the loss of sovereignty over national banking supervision is a politically sensitive topic and a workable institutional arrangement will still require time to materialize. However, the existence of such a European supervisory scheme has been made a prerequisite for direct bank recapitalizations through European rescue mechanisms (such as the ESM, for example). With the recapitalization of Spanish banks, in particular, thus dependent on such a European funding mechanism being in place, further delays will only add to the pressure on funding costs for the Spanish sovereign.
Finally, the transfer of fiscal sovereignty from the national to the European level is at the heart of two workflows policymakers are implementing to put Europe on a more sustainable institutional footing: the growth compact and the fiscal compact. ‘Fiscal compact’, however, has a different meaning to different countries. Germany, on the one hand, argues that through spending cuts and austerity measures, deficits can be reduced in the short-term, thus improving state finances head on. Reduced borrowing costs and improved financial flexibility could then be used to fund structural reforms directed at medium-term consolidation and reductions in overall indebtedness. For many other states, however, ‘fiscal compact’ means more the issuance of Eurobonds that would make Eurozone members mutually liable, to an extent, for each other’s debt, yet not allowing for centralized control over sovereign expenditures.
While the overarching aim of the ‘growth compact’ is clear in that it is primarily supposed to boost peripheral countries’ growth, there are, again, differing views on how to achieve this. The predominantly German view is that structural reforms must be implemented to enhance flexibility and growth. Other approaches have focused more on expansionary fiscal policies, that is, short-term economic stimulus, that according to Mr. Weber, ultimately risks failing to address the underlying competitiveness issues that need to be tackled in order to achieve long-term sustainable growth.
While Europe and Asia are responding to the global challenges in different ways, both regions remain highly interconnected through trade and financial flows. Exports to Europe are an important driver of Asian growth and account for 20–30% of the region’s GDP. Any European slowdown would therefore affect a third of all Asia’s exports—not a small number.
Asia is also an extremely important destination for European investments. Nearly 20% of Europe’s annual FDI is channeled into Asia, and European investors hold substantial positions in Asian equity and debt markets. Moreover, commercial bank lending by European banking institutions supports around 5–20% of Asia’s GDP, and Europe’s banks play a key role in Asian capital markets.
Action required from all sides
To contain the impact of the Eurozone crisis, Europe must act decisively to solve its own problems. It needs to clean up its banking system, restore confidence in public finances, and promote an environment of competitiveness, particularly in Europe’s peripheral countries. Meanwhile, Asia would benefit from a rebalancing of its growth model more towards domestic demand and away from an overreliance on export-driven industries.
Both Europe and Asia must take action to ensure the future stability of the global economy.