Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

The EFSF is supported by the 17 Euro area Member States who have guaranteed to repay any of its liabilities up to a maximum of Euro 726 billion with each country offering a percentage of this. Germany’s share of the guarantee is Euro 211 billion and France’s is Euro 158 billion. Because a decision was taken that the EFSF would seek an AAA rating its capacity is limited by the amount of guarantees it has from AAA rated member states which is only Euro 440 billion.

This is enough to support Greece, Ireland and Portugal which are all small but not Spain and Italy which are also now facing unsustainably high borrowing costs. There is ZERO political will amongst member states to increase the size of their support for the EFSF so the challenge is to find a way of increasing its effective firepower without increasing MS support. The only way of doing this is to increase the RISK that the EFSF takes. One way of thinking about this is that now that MS have promised Euro 440 billion which they had intended to be used as ‘debt’ which is relatively safe and turn this into ‘equity’ which is far more risky. The size done not change, but the risk goes up.

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The Green New Deal, a proposal to try and meet ambitious Green House Gas Reduction targets through a large scale Green Investment Program has been part of the political rhetoric in the European Union since the on-going financial crisis hit the European Union. However, as things stand now, it means different things to different people and is in danger of becoming just another buzzword with little tangible action having been taken in the EU. 

This latest Re-Define report, co-authored by Managing Director Sony Kapoor and two Re-Define Research Associates, reinvigorates the concept of the Green New Deal and will be downloadable from our website later this week.  It defines what a Green New Deal will need to look like, estimates how much it would cost, highlights the positive impacts on growth and employment in the European Union, and demonstrates how sufficient private and public sources of funding could be effectively mobilized in support of such a deal.

The Green New Deal will need to aim for a 30% reduction in EU GHG emissions by 2020 and a 50% reduction by 2030 and will need to reinforce the EU’s commitment to the 20% energy efficiency target for 2020. This would help save a significant amount of the nearly 3% of EU GDP that the EU spends on fossil fuel imports every year as well as ease energy security concerns and reduce the uncertainty associated with volatile energy prices.

Download the Book Conservative bankers may sound like an oxymoron now, but there was indeed a time and age when bankers were known for their prudence. Within a matter of decades, bankers went from being considered ‘pillars of society’ to being widely reviled.

‘Credit’ comes from the word for trust in Latin (accreditivus) so it is scarcely a matter of surprise that this breakdown of trust overlaps with the biggest credit crunch in a generation. Clearly, governments need to continue to make efforts to restore credit flows in the economy in the short term. However, restoring trust in financial services to the extent that credit can again flow without the help of government support will be much harder. 

Anna Gibson, Research Associate, Re-Define

Vox EU Blog: http://www.voxeu.org/index.php?q=node/4079

Taking the Next Step – Implementing a Currency Transaction Levy, Hillman, Kapoor & Spratt, Norwegian Government, 2007 : http://www.innovativefinance-oslo.no/pop.cfm?FuseAction=Doc&pAction=View...