KPMG

Datum: 29-10-2010

Wouter Bos over verschillen US en EU
De regeringen in de Verenigde Staten en de Europese Unie zijn druk doende om de financiële sector beter bestand te maken tegen onverwachte stormen als de kredietcrisis. De agenda's komen grotendeels overeen, maar vertonen ook verschillen. Zo ligt in de VS de nadruk op het verminderen van de complexiteit van de sector, terwijl Europese regeringen meer waarde hechten aan sterker toezicht.

Volgens Wouter Bos, partner KPMG, moet tussen beide een goede balans worden gevonden. Dat zei hij op 28 oktober jl. tijdens de Conferentie Nederlandse Vereniging van Advocaten-Belastingkundigen die in New York plaatsvond.

Onderstaand tref u de bij deze gelegenheid door Wouter Bos uitgesproken speech aan. Mocht u naar aanleiding van dit artikel vragen hebben, neemt u dan contact op met Jan-Willem Wits, (020) 656 4404 of per e-mail.

One of the most interesting features of this crisis we are in - or were in, or are going to be in for some time- is how unpredictable it has been even for those who were continuously in the midst of it.

Or like US Minister of Defence Donald Rumsfeld once said: "There are known knowns; there are things we know that we know. There are known unknowns; things that we now know we don't know. But there are also unknown unknowns; there are things we do not know we don't know."

The start of the financial crisis was definitely in the last category.

I was the Dutch Finance Minister from February 2007 till February 2010. And like every successor and predecessor, every year on the third Tuesday of September, the Dutch minister of Finance has the honour to present the budget for the following year.

To Parliament and to the nation.

So did I on September 16th 2008 when I presented the budget for 2009.

The American financial markets had been wobbly for almost a year and just the day before Lehman Brothers went bankrupt.

Yes, we did hear the flapping of a butterfly wing.

Yes, we did feel the changes in atmosphere it was causing, but at that moment we could and did not foresee the total devastating power of the following tornado.

So, in my budget speech I emphasized the healthy state of our economy and our budget. I was proud to present that the national debt would reach the lowest level since we started registrating it and we expected a budget surplus of 1,2 percent of our gross domestic product. And I believe I even said: We will not spend one euro more than we budgeted....

Famous last words....and really it was the best we knew or maybe I should say, it was our best guess.

Less than three weeks later I had spent billions of not budgeted money to buy two banks: ABN AMRO and Fortis. An almost out of body experience for a social democrat who became party leader just when we finally abolished the old Marxist urge to nationalise banks... And the Netherlands was not the only country that had to rescue and take over financial institutions. As the Luxembourg prime minister Jean-Claude Juncker said a few months later: "We are all socialists now..."

And that was only in the beginning of the financial crisis; a crisis that quickly developed into a full swing economic recession for most Western economies.

Clearly something had gone wrong.

But what?


* Was it the people whom FDR, US-president during the Great Depression, rather unflatteringly called `unscrupulous money changers', `false leaders' and `self-seekers'?
* Was it the bonuses, the perverse incentives that led to infectious greed?

* Was it the system of governance, regulation or supervision, or perhaps market organisation itself?

* Or was it all of these things?

One thing is certain: this was and is more than `just' a creditcrunch, more than `just' a financial crisis. I believe this was - at least: also- a moral crisis or a cultural crisis. A crisis caused by excessive consumerism, excessive greed, and paying too little regard for limits and risks.

And that was not just an analysis made by left wing politicians. No, it was in the heart of international capitalism, when I was with IMF and World Bank that I heard so many ministers, supervisors, bankers and economists -none of them known for radical let alone left wing opinions- speak about "infectious greed" as the main cause of the crisis.

I of course was a lot in the media explaining the crisis and the government response to whoever wanted to listen. I sometimes was fed up with dishing out the same old story and now and tried something new. This was for example the case when I was asked in a popular television show who was to blame for the crisis. My answer was for a change not "bankers" but "all of us". That really caused a lot of very negative fanmail. Why did I dare to blame ordinary people, why did I not just continue scapegoating bankers?

Apart from being bored having to say the same thing everytime again
-which wouldn't go down well as an explanation, I guessed- I did have another more serious reason. And that was the thesis put up by Robert Reich in his book about Supercapitalism.

He basically said Goethe's Faust was lucky for having only two souls in his breast. He put forward the provocative idea that we all carry at least four sould in our breasts. We are all not only citizen and employee, but also consumer and investor or shareholder. The point is these souls compete for dominance and their interests conflict.

The consumer always goes for cheap and the shareholder/investor always wants high yields. Those interests always seem to win over the employee's concern about jobs and the citizen's concern about democratic influence.

So if Reich was right, and I believe he was, then the crisis was much more fundamental than about greedy bankers or failing regulators. It then also was about us, about morality and some will even say: about human nature. Which of course is a great bit of analysis for a speech in New York but quite discouraging for policy makers because it makes the solution to the crisis even harder to find....!

Let me just get back to how the crisis unfolded. All of us in the US and Europe were confronted with banks too big too fail and that's why we had to spend hundreds of billions of euro's to rescue financial institutions. In the US it was even more. Why? Because letting them go bankrupt would seriously endanger the financial markets, would seriously damage our economies. So, yes, we all risked our economic stability because our economic stability was at risk.

That was not just a national challenge but an international one: European ánd global, because logic and reality dictate that global problems call for global solutions. International cooperation blossomed. Within the European Union, G20 and IMF political leaders came together and actually agreed on global rules and regulations, capitalisation and consolidation.

We did that to address the immediate consequences of the credit crunch and - maybe even more important - to ensure that this would never happen again.

The Dutch government was and is a staunch advocate for a broad, vigorous international approach, within the EU and worldwide. More specifically, we - I - wanted to see stricter capital requirements, compulsory guidelines on remuneration, a more systemic perspective, the strengthening of financial reporting, and an all-embracing, more international system of oversight. I'm proud to say that we made a lot of progress.

The crisis made things possible that we never believed possible. Not just the type of regulation was never before possible, for example on remuneration of on hedge funds. But even at a more anecdotal level we were witnessing amazing and unheard events. Not just the big things like nationalising banks. But also the small things. I for example will never forget how I participated in the G20-meeeting in Pittsburgh and saw the Brazilian president Lula thanking the IMF profusely for their interventions...was I dreaming?.....a Brazilian president thanking the IMF....it happened! And I was there!

In a lot of ways you can say that in handling the crisis we were lucky because our toolkit was not at all up to date. Let me give you some examples. One of the things that was overwhelmingly clear was the lack of pro-active tools governments could employ to counter the effects of the crisis. For instance when the credit crunch first hit the Dutch shores, there was one important tool I sorely missed: involuntary nationalisation - nationalisation without the consent of the shareholders.

Fortis Holding was a voluntary nationalisation: the mother company voluntarily sold its shares to the Dutch government. But the Dutch legislation does not allow involuntary nationalisation. Suppose ING would have gotten into deep trouble. In the Dutch parliament some argued I should have nationalised ING. In the end that wasn't necessary but we also wouldn't have known how to do it in a swift and fair manner, not having to deal with one mothercompany like in the Fortis case but having to deal with hundreds, thousands of individual shareholders. Besides, of course I should not have wanted to do it. We always talked about banks too big to fail but this one was too big to save having a balance sheet total of twice our national income.

This brings me to two conclusions. First, it shows why the size of a bank is an issue, at least for smaller countries. Second, in some countries, such as the UK, Ireland and Austria, government created specific legal instruments to involuntary nationalise financial institutions. Of course a very radical solution because it expropriates shareholders. But I still think that radical measures are allowed in radical circumstances. Because sometimes the citizen and the employee have to win from the consumer and the shareholder.

As a result of the financial crisis, global output fell in 2009, leading to a sharp rise in unemployment and a deterioration in public finances.

This has led to increased public debt levels; the IMF expects that in 2014 the average public debt in advanced economies will be 40 percent higher than the pre-crisis levels.

We all know that, overall, macroeconomic developments during the first half of 2010 confirmed expectations of a modest but steady economic recovery. But we also know that the recovery remains fragile.

Downside risks have risen amid the turbulence in the financial markets, reflecting worries about fiscal sustainability, policy responses and future growth prospects.

These significant downside risks make the economic outlook very uncertain.

There are people who think we might even be heading towards a `double dip'.

The assessments and recommendations of economic commentators are often diametrically opposed.

Some argue that the only way to avoid a double dip recession is to print more money.

Others argue with equal conviction that the only way to avoid a new crisis is by implementing radical austerity measures. In other words, budget cuts.

It is interesting to look at the different approach governments are taking in the EU and the US. There are lots of similarities, especially as a result of international agreements, but I see some interesting differences.

One difference is our approach regarding stimulating versus consolidating. In the first year of the crisis we were not only all socialists but also all Keynesians: we stimulated the economy to counter the recession. When you do that, the big questions always are: when to begin and when to stop. Joe Stiglitz said two mistakes are quickly made in dealing with economic crises: one is starting too late with stimulus programmes, the other is ending too early. And I believe he was right..

What we see now is that in the EU we started consolidating public finances in an earlier stage than here in the US. Does that mean I believe the US is wrong?

Well, not necessarily. I do believe the US has a deficit and debt problem that needs resolving and I do believe there are global imbalances in which the American economy plays a key part that need resolving too. But the main reason why Europe is exiting the stimulus programmes earlier than the US, is not because of economic theory about how to deal with a crisis, it is not only about whether you agree or disagree with Krugman.

At the beginning of 2010 there were growing sovereign debt problems in the euro area: countries had spend too much money without the income to balance the budget. Some countries like Greece, Spain and Portugal where so far in debt that the situation endangered the stability of the euro. A massive financial rescue plan countered the situation for the time being: this plan that was implemented with support from the European government leaders, the European Commission, the European Central Bank and the International Monetary Fund, makes it possible to support countries that experience acute financial difficulties. But to solve the solvency problems of EU-counties in the long term, consolidation of government funds is needed and necessary.

Even in the Netherlands, financially one of the most solid countries of the Eurozone, all political parties agreed to huge budget cuts. Of course they did not agree on the how but nevertheless, the level of consensus was impressive.

What was also necessary was a strengthening of the rules of the European Growth and Stability Pact: a few weeks ago, after a strong lobby from my successor, the EU-members voted for a new set of rules that includes non-automatic penalties for countries who don't stick to the rules. A further step to strengthen the European Monetary Union.

Another difference between the US and European approaches is about regulation.

At this moment regulation proposals on some aspects of the reform are at this moment stricter in the US than in the EU and vice versa.

For instance: in the US reform emphasises on preventing tax-funded bailouts . In the EU, where we have no common insolvency laws, we still have to come up with a comprehensive framework for dealing with systemically important financial institutions: banks that are too big to fail.

The adoption of the Volcker rule (although in a weakened version) in the US has led to banks spinning off proprietary trading desks and reducing stakes in private equity and hedge funds. Some trading in global banking groups could therefore be switched to the EU: there we did not yet address the tradition of universal banking.

I personally did favour similar approaches in the EU but did not manage then to convince my colleagues. The reason I was in favour is that I believe the power of good supervision is overestimated. I think supervison can only be effective if we reduce the complexity in the financial sector. And that is exactly what happens with the Volcker rule.

In the EU, on the other hand, stricter rules are being developed with respect to hedge fund regulation and capital requirements.

US regulators get more discretion to increase capital requirements on large financial firms as they grow or engage in riskier activities. However, the EU has been more and longer proactive in setting capital standards requirements.

And of course there are also issues we address strongly on both sides of the Atlantic: macro prudential oversight, mandatory central clearing on the derivative market, supervision of credit rating agencies and securitization

And of course there is more to say. About living wills, about convertible capital, about prompt corrective action and much more. But maybe here today I should conclude with a few remarks about taxation.

Let me first share with you our observations of what happens with taxation world wide. We see at least eight trends.
1. All countries will raise effective tax levels as one element of their approach to bring their public finances in order. Sometimes the goal will be to raise revenue, sometimes the goal will be to distribute the burden in a fair manner.

2. Around the globe corporate tax rates are falling. The average rate is now approximately 25%. But the race to the bottom is slowing down and will come to an end.

3. As the tax rates go down, the basis for taxation is broadened. For example: interest deduction is being limited almost anywhere.
4. The pressure on tax havens increases.

5. The upcoming economies like China, India, Brazil, Indonesia & Korea play the tax game according to their own rules.
6. There is a worldwide shift from direct to indirect tax (VAT).
7. There is also a shift to taxation of tangible assets and natural resources, in other words: non mobile income is taxed higher (example : natural resources tax in Australia).
8. There is more emphasis on transparency: for tax payers, for governments and tax administrations.

The interesting thing of course is that many of these trends already existed. But I believe they are all becoming stronger because of the pressure governments are under in the aftermath of the crisis.

One of those pressures is of course also to make banks pay and to consider some sort of bank tax.

The Bank tax or Bank levy is a good example. By "bank levy" I mean a levy or tax on banks and other financial institutions to provide funds to mitigate the burden on taxpayers of financial sector failure. This where the confusion and the differences start. For one because some believe the revenues of the levy should be used to reduce deficits and debts whereas others believe the revenues should stay in the financial sector. In the latter case some will argue countries should have a bank levy and a Deposit Guarantee Fund as two totally independent issues whereas others believe the levy should be used to finance the fund.

The G-20 Toronto summit last June could not agree on an international solution as advocated by the US. Despite this setback, the EU Commission is working hard to coordinate national initiatives on this issue. Absolutely necessary if you look at the differences between the national rules and regulations. Most countries focus on selected liabilities for the tax base, but some countries like the US and UK do this on a consolidated basis, while countries like France and Germany proposed taxes on a stand-alone entity basis. This raises administrative problems and may also lead to real distortions, such as double taxation. A similar problem arises where different systems overlap: this may also lead to double taxation. As things stand today this cannot be resolved under the traditional mechanisms for relieving double taxation. Of course international coordination can and should play a part.

Next to the bank levy there are also proposals for a more general tax regime for the financial sector. There is - as yet - no G-20 level solution, but the European Union soldiered on and launched its own vision in October. This vision focused on the two taxes put forward in the IMF's report to the G-20: a financial transactions tax - FTT - or Tobin tax, and a tax on profit and remuneration of financial sector companies referred to as a Financial Activities Tax, or "FAT". Maybe `fat cat'-measure will make a memorable household name for this tax.

The FTT would be broadly intended to raise money to solve global problems, and to contribute to more stable and efficient financial markets. It is not clear yet how the revenue from the FAT would be used.

These two examples are - I am sure - only the tip of the financial sector tax iceberg. It will require careful navigation at both national and international level to steer a clear course towards a stable, efficient and responsible financial sector.

Ladies and Gentlemen,

Like I said in the beginning of my speech: the financial crisis was an unknown unknown. But it was also the ultimate manifestation of Gordon Gekko's motto "Greed is good" - who said again that "art imitates reality; reality imitates art"?

It is not at all surprising that Oliver Stone saw the credit crunch as a perfect reason to make a Wall Street sequel, and brought Gordon Gekko back to confront us with some new truisms. In this movie he observes: "Someone reminded me I once said `Greed is good'. Now it seems it's legal." And adds a new motto: "The mother of all evil is speculation."

Gekko seems to have learned a lesson.

I'm sure reality is ready to imitate art again. I'm sure we all learned a lesson, so we will never be taken hostage by greed and speculation again!

vrijdag 29 oktober 2010