| April 24, 2009 |
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Ambassador's Corner WEEKLY MESSAGE FROM AMBASSADOR JOHN BRUTON April 24, 2009 Transatlantic Legislators Dialogue Last weekend I attended the 66th meeting of the Transatlantic Legislators Dialogue between members of the US Congress and of the European Parliament. It took place in the Chamber of Deputies of the Czech Republic in the beautiful city of Prague and it was co-chaired by Congresswoman Shelley Berkley of the United States House and Jonathan Evans, MEP [Member of the European Parliament]. It was addressed by the Foreign Ministry of the Czech Republic, Karel Schwartzenberg and the Speaker of the Chamber of Deputies, Miloslav Vlcek.
It had intense discussions on difficult issues such as Afghanistan/Pakistan, Israel/Palestine, relations with Russia, climate change and the world economy.
On Afghanistan/Pakistan, the importance of improving Pakistan’s relations with India was stressed so that the Pakistan military could devote all their resources and attention to ensuring order within their own territory and the ending of incursions into Afghanistan. On Israel/Palestine, considerable hope was expressed that the appointment of George Mitchell would bring new urgency to the process of bringing into being a Palestinian state, that could live in peace with its neighbour Israel. An EU Statement of 27 February on the EU contribution to the Middle East Peace Process noted that accelerated Israeli settlement activity in the West Bank:
The EU also expressed its concern about the threat of demolition of approximately 90 houses in an area adjacent to the Old City in East Jerusalem and about threatened house evictions in East Jerusalem.
On Russia there was a lively discussion on the problems associated with Russia’s seemingly new aggressive use of energy as a foreign policy tool. At the same time it was recognized that some internal improvements in religious freedom were welcome, Cimate change was also discussed. A recent statement by Javier Solana [left] on "Climate Change and Security" noted that climate change will exacerbate political instability and may lead to disputes over trade routes, maritime zones and resources. Javier Solana’s statement singled out the climate change-related threats of:
What to do about the world economy As one might expect, the most intense discussion of all among the EU and US lawmakers centred on the world economic situation. A very interesting paper was presented to them by Carmine Di Noia, an Italian economist.
The evidence in his paper suggests that the present crisis was both predictable, and predicted. Three well-known factors foreshadowed the problem – global financial imbalances, unduly high stock values relative to earnings and high levels of debt. The current problem was caused, in part, by global financial imbalances, under which some countries spent more abroad than they were earning, while others built up huge pools of surplus savings. These imbalances became a factor of instability in global finance. They have been known and written about for years. The surplus savings had to find a home and they contributed to bubbles in both the stock and housing markets in the countries that were willing to borrow the surplus funds. The sale value of assets should reflect the income those assets can produce. The price/earnings ratio measures this. If prices are very high relative to earnings, as they were in recent years, that is a clear sign that a bubble economy is in the making. In December 1999, the Standard & Poor's shares index showed that the shares quoted in that index were selling at 44 times their yearly earnings, the highest-ever price that shares were making relative to earnings. There has been a decline in share values since 1999 but Carmine Di Noia added that, notwithstanding the recent fall in the market, share values are still now as high relative to earnings as the value of shares were prior to the 1929 crash. Meanwhile, personal and corporate indebtedness grew to unprecedentedly high levels in some countries. For example, US debts (mainly private) surpassed 350% of GDP, and UK debts (also mainly private) topped 450% of GDP. So, as Di Noia put it, the decision to let Lehman Brothers go bankrupt “detonated a banking crisis that had in all likelihood become inevitable.” A herd instinct, generated by conventional wisdom, had prevented most people from seeing the evidence that was in front of their eyes. As far as banks were concerned, he said that: “There is plenty of evidence that the dangers of excessive risk-taking were often spotted perfectly well by risk-control managers, but their opinion was promptly swept under the carpet.” And he went on to claim that national (banking supervision) authorities “closed both eyes” to the accumulated imbalances in their own banks, in order to let them compete successfully on the world stage. Increasing market share became more important than anything else. My own sense is that the present readjustment of borrowing and consumption patterns in the western world is both necessary and inevitable. Painful as it is, it is actually better that it is happening now, rather than in five years' time, and it would have been much less painful if we had made the adjustment three or four years ago! Dr. Di Noia was skeptical about the need to have detailed Government regulation of every type of financial activity. The essential thing, in his view, was to ensure that banks, that are deemed to be “too big to fail” or that enjoy actual or implicit state guarantees of their deposits, are prevented from using their depositors’ money to take capital risks on the markets, and are encouraged instead to use it to make what he called “boring, but safer, commercial loans.” In other words, bankers should get back to basics, and let others do the speculative activity on the markets. He also dealt with the best way to regulate the pay and bonuses of the top people in banks. In recent times it is that high bonuses were earned by top bankers, on a short-term basis, on high-risk deals. These bonuses were capable of being cashed in before the full risks became apparent. The solution he advocated was to require any employee getting this type of reward to hold the shares received as a bonus for a minimum of five to seven years or until his or her retirement, so as to allow time to ensure the investments made were genuinely sound ones.
Dr. Di Noia also urged that the risk management people in a bank (the people whose job it is to say “No” to certain high-risk deals) should be made completely independent of the rest of the top management in the bank. Other bank executives should in no way be allowed to influence the pay and career of risk managers, who should report directly to the board. These issues are also covered in the Global Financial Stability Report issued by the International Monetary Fund this week. It expresses the fear that Governments may be reluctant to allocate enough resources to putting their banking system back on a sound footing because of political resistance to “bailing out bankers.” And uncertainty about political reactions may in turn make private investors reluctant to put their money in. The IMF calls for early action to distinguish viable from non-viable banks, with a view to enabling the non-viable banks to be merged or wound down in an orderly way. If non-viable banks continue to absorb resources without resolving their basic problems, that will postpone the economic recovery. I believe that close attention should be paid to what the IMF now says. It has been willing, in the past, to say the things that people did not want to hear. For example, I looked up their August 2003 report on Ireland, a country that now has difficulties arising from a housing bubble. Almost six years ago, the IMF was warning Ireland that “the spectacular increase in house prices and credit to households inevitably raises the risk that prices may unwind, possibly abruptly.” It drew attention to the fact that house prices were outstripping rents. The IMF thus foresaw, five years ago, what unfolded last year.
Prague Prague, where the Transatlantic Legislators met, is a truly remarkable city. It was my first visit there and I hope to return. St. Vitus Cathedral [right], which overlooks the Czech capital, is a beautiful and majestic building. Work started on it in 1346, and was not completed until 1929! The devastating Thirty Years War began in Prague in 1618 and a third of Europe’s population died in the subsequent hostilities, something that contributed to many of the survivors wishing to cross the Atlantic to find peace and toleration in the New World. But Prague survived World War Two largely undamaged and contains many buildings dating back to the seventeenth century. A visit to the Supreme Court This week, I accepted an invitation to go the United States Supreme Court to hear oral argument in a case. As usual, the parties to the case there had already submitted a great deal of written material and the time-limited oral discussion focused in on subjects where the Justices wanted to tease out crucial issues. It was very impressive to watch sharp legal minds at work, but also to note how questions were put by the Justices in plain language, so that non-lawyers could understand what was at stake. The Supreme Court Building, which dates from the 1930s, is well worth a visit. Until then Court actually sat in rooms in the buildings of the US Congress, which was anomalous in light of the clear separation of powers in the US Constitution between the legislative and judicial branches of Government. Unlike Supreme Courts of some other countries, the Supreme Court of the United States does not take up every case which is appealed to it and in which it has jurisdiction. There were so many cases being appealed to it that, in the 1920s, it decided to introduce a screening process. One of the criteria in use in selecting a case for hearing is avoiding the risk that divergent interpretations of Federal Law may be emerging in similar cases in different parts of the country.
Please send me your comments about this or any of my weekly messages or other EU matters. I look forward to hearing from you! |
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while there are worrying signs for democracy and freedom of the press. There was recognition--if only reluctant agreement--that Russia will continue to play an important rôle in the effort to prevent 
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