27th Frankfurt EBC Congress: a more perfect union in Europe?

By Elisabeth Hellenbroich

“Europe into a New Era – How to seize Opportunities” was the title of this year’s 27^th European Banking Congress in Frankfurt which is bringing together every year Europe’s elite bankers, in order to discuss about the prospects of the global financial system and the future of the Eurozone. In contrast to previous years, there was a tone of optimism expressed in ECB chairman Mario Draghi’s speech, who several days later however reiterated his warning to bring the NPL (Non-Performing Loans) – which are estimated to be in the dimension of 800 to 1000 Billion Euros – under control.

The chairman of this year’s congress was Jean Lemierre, the Chairman of the Board of directors of BNP Parisbas (Paris) – a clear signal that the French factor will play a bigger role in the shaping of Europe. This was reflected in statements by several panelists: Jean Lemierre, former Italian government president Mario Monti, French economist Prof.Agnès Bénassy-Quéré (chairwoman of the French Council of Economic Analysis) as well as by Jakob von Weizsäcker (member of the Committee on Economic and Monetary Affairs European Parliament). All emphasized the “impulse” given to Europe by French President Macron. They expressed optimism and hope for a more “unified fiscal policy” in the Eurozone, the desire to create a European Capital Market and more cross corporate investments. A central topic in the Congress debate was China and to what extent Chinese investments offered new opportunities for Europe.

Essentially three items were in the focus of discussion: The most important item, as defined by the keynote of ECB chairman Mario Draghi, was to announce that the policy of purchase of assets (Asset Purchase Program) has shown its “positive” effects in the economic system. Given that the inflation rate remains “subdued”, he announced however the continuation of his asset purchasing program till at least September 2018, at significantly reduced levels, until inflation increases to 2%. One of the main impulse for this to happen, according to Draghi, is the hope for the “increase in wages” as well as much more economic investment in the Eurozone.

Mario Draghi: Optimistic outlook for Eurozone – but mission not yet completed

“The Euro area is in the midst of a solid economic expansion,” European Central Bank Chairman Mario Draghi stated. “GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is ‘robust’ and that this momentum will continue going forward.” Three reasons were given by Draghi for this recovery:

On the one side, the “headwinds” that were weighing on the recovery have “dissipated” in recent years; “for some years global growth and world trade have been a drag on recovery. Now we are seeing signs of expansion. The share of countries in which growth has been increasing relative to previous three years has risen from 20% in mid 2016 to 60% at the end of 2017. And this has fed through into a rebound of world trade, which is growing at its strongest annual rate in six years,” and may well become a tailwind. Domestically a key tailwind in the past has been the necessary “deleveraging” by firms and households.

The second factor that gives confidence in the recovery, Draghi stated, “is that the drivers of growth are increasingly endogenous” – i.e. it’s not falling oil prices and monetary policy but there are signs that growth is “feeding itself”. “Even if oil prices have risen by 30$ since the start of 2016, private consumption has remained robust and is being supported by a virtuous cycle between rising labor income and rising employment. Employment in the euro area has reached its highest level ever, while unemployment has fallen to its lowest rate since January 2009.” As consumption has strengthened, investment has also followed. “Since 2016 investment has contributed almost 45% to annual GDP growth, compared with under 30% in the two years previously.”

The third factor that signals a robust recovery is that the economy may become more resilient to new shocks as result of two ongoing trends: “For the first time since 2009, loans to firms are moving into positive territory in all major euro area economies,” Draghi stated. “And demand for loans by firms, which at this time last year was still negative in several vulnerable countries, is now positive across the whole euro area”. Another factor is the “growing resilience” of the financial sector. “The total capital ratio of significant banks has increased by more than 170 points since early 2015 (…) All banks have benefited from the upward trend in returns on assets since the start of our monetary policy easing in 2014. (…) Clearly this trend hides some variation among banks, which is largely driven by difference in their business models.”

At present Draghi sees “no systemic risks emerging at the euro area level.” His concern is that “we have not yet seen a sustained adjustment in the part of inflation” and while there is since the beginning of this year an upward momentum, the key issue is “wage growth.” A key motor of the recovery remains the very favorable financing conditions facing firms and households. Draghi briefly outlined the “monetary decision” which the ECB took last month. In order to have inflation return sustainably to our objective, “we decided to reduce the pace of our monetary asset purchases from 60 billion euro, while extending the horizon of those purchases until end of September 2018, or beyond, if necessary, and in any case until we see a sustained adjustment in the path of inflation.”

Get the NPL under control in the Euro-banking zone

In contrast to his ECB speech (Nov 17^th ), on November 22nd Mario Draghi, according to “Die Welt” warned that within the Euro zone “Non-performing loans (NPL) should be quickly reduced.” Draghi emphasized that actually within the balance sheets of surveyed banks, there are NPL worth 800 billion Euros, and according to a study by PwC (Pricewaters and Cooper) they have reached a volume above 1000 billion euros. Some banks are particularly endangered: in Italy according to the ECB, the NPL average quota is 12% – during summer the banks Veneto Banca and Banca Popolare di Vicenza had to be winded up while the Spanish Banco Popular was taken over by Santander. Also Ireland has 12,6% NPL, Portugal 19% and Greece with 47% has a very high percentage of NPL. The Bank balance sheets are so stressed that no further credits can be given, which blocks in addition the economic growth.

Jens Weidmann (CEO of Bundesbank): “Labor must become more productive”

The reference to “Non Performing Loans” was also an element in the keynote given by Bundesbank President Jens Weidman, who underlined that “we need to establish rules that ensure the prudent management of non performing loans in the future as well. The proposals that were recently made by the ECB in this regard strike me as a sensible way forward.”

The tone of Weidman’s speech this time was less critical than it used to be in previous years with respect to Mario Draghi’s quantitative easing policy. What Weidman emphasized was the “Euro-System’s expansive monetary policy has contributed significantly to the recovery in the euro area and that growth rates have been positive for more than four years. The unemployment rate has almost been reduced to its pre-crisis level. And economic indicators all point to a continued economic upswing. In Germany economic indicators now suggest even stronger growth than outlined in our June projection. Over the last four years, capacity utilization has steadily increased. And since 2016 the economy is even running above capacity. The duration and strength of the current recovery is impressive, especially against the background of high political uncertainty globally. Inflation however has not kept pace with the recovery.” The Bundesbank chairman argued in favor of a “less distinct loosening of monetary policy in the next year” and the need to set a clear end date for net asset purchases. He reasoned that the overall effect of Asset Purchase Programs is not so much the amount of monthly additional purchases but above all the total outstanding volume of sovereign bonds on our books. “One thing is clear in any case, as Mario Draghi pointed out, monetary policy alone cannot bring lasting prosperity for our economies. This is the task of governments and parliaments.”

While being positive about the continued German economic growth, Weidman emphasized that Germany’s economy has to become more “productive.” He mentioned the untapped potential represented by “digitalization” and that removing bottlenecks in broadband connection could raise economic growth, as this increases competition and induces innovative products and processes. “Investments in innovation and education are key,” he said, since it would boost labor productivity and enhance job security. He argued in favor of cross border corporate funding and measures to tear down the walls in the European capital markets as well as in favor of “standardizing national insolvency regimes.” The Banking Union with its Single Supervisory Mechanism bolsters the banking sector’s resilience.

The China Factor

To the panel “Raising competitiveness of the European Banking sector” participated John Cryan, CEO of Deutsche Bank, Jean Lemierre, Chairman of BNP Paribas, Martine Zielke, Chairman of Commerzbank. Cryan pointed to the ECB “calibrated” asset purchases while stating at the same time that a slow-down in purchases is needed. “We need to have a transfer into wage inflation.” At the same time he remarked that in the European banking sectors there are far too many banks and that Europe would do well having a handful of banking institutes which can compete on a global scale. All three bankers argued in favor of creating a European capital market.

In another panel “(De) Globalization from a European perspective”, the debate very much focused on the role of China in the Global Economy and particularly in Europe. Interesting observations were made by Jörg Wuttke, (Vice President of BASF [China], Beijing, advisor to the Mercator Institute for China Studies, Berlin), as well as by Guntram B.Wolff (Director, Bruegel Institute, Brussels). According to Wuttke who was asked to comment Trumps trip to China “the Chinese have figured Trump out” and they played him knowing how to appeal to him and his investments. “Trump wanted the North Korea thing solved and he wanted to leave the impression that he is the best deal maker.” Guntram Wolff stated that De- globalization is not happening. He pointed to China’s efforts in implementing the gigantic “One Belt-one Road” infrastructure program which is pushing trade massively. According to JörgWuttke, China is the “biggest investor in Europe. It’s buying into investments companies.” In China the state is supporting and subsidizing investments, opposite to Europe where private investors are competing with each other. On the other side he noted that China paradoxically is becoming the “guarantor of the open markets.” “China plays a long term game 2020-40 and by 2040 China could achieve to become reserve currency.” He pointed to the fact that for 30 years the Chinese have had double digit growth. “China gave us a road map and it is not bad if the Chinese invest in Europe.” Of course one needs to qualify which “strategic sectors” must be protected.

Before the final panel “Restoring the European Project” with French economist Agnès Bénassy-Quéré, Ivan Krastev (Institute for Human Sciences, Vienna), former Italian prime minister Mario Monti and Jacob von Weizsäcker (SPD, European Parliament) the audience was asked by moderator Linda Crane (Deutsche Welle) to give a digital vote in order to answer whether President Macron’s reforms in France are a “game changer”: 60,4% said yes while 30,6 % were not sure. According to Agnès Bénassy-Quéré, Macron’s labor reforms are only the first thing, but it’s not a “game changer for unemployment.” The real game changer will be “education reform”, she stressed. Jakob von Weizsäcker (Economic and Monetary Affairs Committee, EP) spoke almost enthusiastically about the German-French Impulse. “I think Macron is right. I hope that the next government says that Macron is right to move so much ahead. A European single market should have more public goods.” Also Mario Monti expressed enthusiasm in respect to Macron, including his proposal for tax integration: “A finance ministry for the euro zone will take years,” he said. The most essential is “we need to recreate trust among the countries.”