Interview with Mr. Daniel Daianu
Professor of economics at the National School of Political and Administrative Studies in Bucharest, Member of the Board of the National Bank of Romania
I would like to start the interview by asking you to tell us some aspects of your work in the financial field?
My work has in its background a passion for macroeconomics. A piece of analysis which means a lot to me is a model of immiserising growth”, that I wrote in 1985; it aroused interest abroad, in countries where market based reforms were underway. After the fall of the Berlin Wall, I got a scholarship at Harvard, and later on I had research stints at institutions abroad. I was chief economist at the National Bank when I was invited by the IMF research department, by Guillermo Calvo in particular. As a matter of fact, the IMF published a piece of mine on inter-enterprise arrears seen as quasi-money in 1994. In December 1997 I was designated finance minister, at a time of enormous duress due to international circumstances (remember that the Asian crisis).
I did teaching in the US and spent some time at the UN Economic Commission for Europe (in Geneve) during 1999-2001; I did consultancy work for the OECD in Paris. For a while I was chairman of the supervisory board of the BCR, the largest Romanian commercial bank. In the European Parliament, together with the late colleague Ieke van den Burg, I worked out a report dealing with the reform of the regulation and supervision of financial markets, which was adopted by the EP in October 2008. My opinion, which is illustrated by my writings (including my book “Which way goes capitalism”, New York/Budapest, CEU Press) is that the financial crisis has been fueled by oversize finance and the light touch regulation regime.
The global economy is still highly unbalanced, with a menace of secular stagnation, which explains very low interest rates.
My work at the ASF (the financial supervision authority) and in international boards (IOSCO, ESMA, ESRB) where I sat as a Romanian member, aimed also at pushing for a better regulated financial system. And after my return at the NBR, I have tried to use my experience and insights in a period of major policy dilemmas for central banks. I do the same as a member of the Mario Monti led High Level Group, which will report to the European Parliament, the European Commission, and the Council on how to reform the funding of the EU budget.
How do you think will Brexit impact the EU financial system and Romania?
Brexit has shocked both the UK and the Union; it compounds the pressure on a European Union which has been transfixed by a myriad of crises. To “punish” now Great Britain, as some appear to be willing to do (not least as a “dissuasion” exercise) is not wise. Schadenfreude, too, is misplaced under the circumstances, for Brexit epitomizes a syndrome in the Union, in the industrialized world, which is linked with unrestrained globalization’s rising number of “losers” and the erosion of middle class. The UK and the EU have to continue to work together closely at a time when the Union is confronted with the scourge of terrorism and other unconventional threats. It is not an accident that the new British EC commissioner is in charge of counter-intelligence. The migrants crisis and the euroaria troubles have underlined the fragility of the Union. More than worrying is the pretty low response capacity of the Union to such headwinds.
Now, when it comes to the financial system, one should not overlook that the UK is not member of the euroaria. It is true that London is global financial hub, but it can continue to operate as such be the UK outside the EU. It is in the interest of the EU27 and the UK to forge a special arrangement, which should limit damage for both parties and maximize benefits from a close collaboration.
The reform of finance has to go on and more severe regulation and supervision of financial markets (including shadow banking and fintech) should be implemented; this should rely on strong capital and liquidity requirements, the taming of casino-type activities, and the introduction of a sort of Glass-Steagall legislation.
The pains in European finance are not related to Brexit in the main. The big challenges are rooted in the crisis of the euroaria, with its poor design and policy arrangements. In addition, very feeble economic growth cannot but harm banks’balance sheets (think about Italian banks) – and keep in mind that banks fund more than ¾ of economic activity (while capital markets do the main job in the US).
What should the ECB and other central banks do under the circumstances?
The Banking Union is only a partial solution to overall troubles in the euroaria. A “fiscal capacity” does make sense in order to deal with asymmetric shocks, and a collective deposit insurance scheme has to complete the Banking Union. Insistence on rules needs to be complemented by proper fiscal arrangements (not be limited to fiscal discipline) and strong policy coordination. Policy coordination in the eurorea asks for more symmetrical burden sharing when it comes to adjustment. It does not pay for some countries to run enormous external surpluses, which dampen aggregate demand and makes adjustment harder for deficit member states. Creating more safe assets, be it via securitization (see Brunnermeier et.al proposal), could help sever the sovereign risk-bank risk diabolic loop in the euroaria. But what matters in the end are better policy arrangements, which, unfortunately, is not yet the case. I think that key provisions of the Five Presidents’ Report should be introduced faster. But I must admit that real politics, an overall mood against deeper integration are impediments.
When it comes to monetary policy, very low interest rates behold the eye. Demographic and productivity trends, globalization, the financial crisis, overburdening debts, income distribution, new technologies, growing uncertainties, all these have impacted strongly on investment and saving. The factors mentioned suggest that equilibrium interest rates, at which there is full resource utilization, have fallen significantly in industrial economies in the last few decades; there is relevant empirical analysis in this regard.
Two key issues emerge: a/ whether negative equilibrium interest rates are justified, and b/ whether negative policy rates are effective? If resource allocation were adequate, the equilibrium rate should not be below zero. It is economic common sense to think so. But there is a different story when resources are grossly misallocated and structural conditions are unfavorable. A massive and chronic under-use of resources, intense hysteresis may occur. Such circumstances may erode not only the value of current resources, but also potential GDP. Therefore, there are arguments for policy intervention to avoid deflation, debt-deflation. If we admit such arguments (the ECB’s stance, of other central banks’too), the issue that needs to be clarified is what kind of a policy mix should be used in the context of non-standard measures, which have entailed side effects (among which speculative bubbles and the impact on banks and non-banks’ financial balance-sheets). Going with policy rates to lowly may bring more costs than benefits from one point. Helicopter money would be a desperate measure. I hope this will be avoided.
What about the Single Market?
There is need to reconsider the Single Market logic. One has to heed the lessons of recent decades, which teach that increasing income inequality, a “winners take all” competition, harm economic growth over the longer term and are inimical to social cohesion. To the extent member states are asked to relinquish more of their sovereign prerogatives, what would be lacking in the policy mix at the national level has to be replaced by an enlarged and more diversified tool and policy kit at the supranational level. This logic could be seen as a “subsidiarity principle in reverse”. The opposite are “nationalizing” tendencies of policies. It may be that finding a common vision on reforming the Union is an impossible mission under current circumstances, and if this is the case, variable geometry will find new impetus following Brexit.
What should do the Romanian Government and Financial Institutions to attract foreign direct investment (FDI)?
There are several tracks we have to trod on in order to increase inward investment. One is to have a more robust and balanced economy, one that is not prone to running large external and budget deficits. Second, the quality of out institutions has to improve and support effective policy-making. Less rent seeking and corruption would free public resources for the production of key public goods – like education, health care, infrastructure. Developing infrastructure is a must and it is a great pity that we do not absorb EU funds in this respect accordingly; we are living on borrowed time in this regard. However much we value foreign capital, we need to rely also on domestic savings, on indigenous enterprise. Just see how the IT sector is developing in Romania. We need to spend more on education, on vocational training; if more and more young people trained abroad would get back home and drive our economy, that would be a huge plus for all. Better PR activity can also make a contribution; it has to rely on honest narratives and proper data. Romania presents attractiveness, although major institutional weaknesses persist.
Considering the actual context of the social, political and economic crisis, can Romania become a factor of stability in the region?
Sure it can. And, as a matter of fact, Romania is a factor of stability if one looks around it. With the turmoil in Ukraine, with trouble some events in Turkey, which is a pivotal country for the wider region’s balance of power and fighting major threats, with ongoing conflicts not far away from out borders, it is must for Romania to play a clairvoyant role in the Black Sea region, as a loyal partner in NATO and the EU. But the Union itself has to develop more consistent, effective policies for tackling conventional and non-conventional threats, including cyberfare and terrorism. Devising better policies for dealing with the disorder in the Arab world, with the massive flow of migrants/refugees is a must; it should not rely on ad hoc measures only, and it should tackle the roots of the problem. As Donald Tusk, the president of the European Council has emphasized, the borders of the EU must be protected. Otherwise, quite soon, we may no longer talk about protecting the Union’s frontiers, but of national borders only (this is already happening to a certain extent).