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GLOBAL FINANCIAL SECTOR

Structural rejig for renewed confidence needed

German Finance Minister Wolfgang Schaeuble is adamant that the positive spirit of the free-market economy remains, even though the financial crisis has severely tarnished public confidence since 2008.

All stakeholders around the world must make a collaborative effort to restore confidence among investors and consumers through structural reforms, particularly in the financial sector, he said at the second "Bank of Thailand Policy Forum" on Monday evening.

"The market economy as we know it is the best [system] for competition, growth and jobs," he said in a speech titled "Asia and Europe - What We Can Learn from Each Other: Towards an Economic Policy Model for the Future".

Schaeuble asserted that as we have learned, the free-market economy needs to be improved and be subject to more rules before it destroys itself - and this can be done at the national, supranational and international levels.

"I remain convinced that we can overcome the crisis in the 21st century if we maintain the superior system of free markets, free competition and better resource allocation. Functional financial markets are indispensable for the real economy," he said.

It is true that in the era of globalisation, the world has been plagued by more crises - oil, dollar, debt, property and financial crises - than over the past 40 years, he said.

He is not surprised that costs are high, particularly in areas that have advanced the most under globalisation, that is, in the financial markets. Yet Schaeuble insisted that this is what the world should stick to. The financial architecture must, however, be reformed at a global level to overcome the current crisis and mitigate future crises.

He said the financial markets must not forget that their duty is to serve the real economy. Now, with high benefits, the most talented young people are lured to work as economists and lawyers, leaving countries without enough engineers to support the manufacturing sector.

A more solid structural framework - not the financial markets, which have advanced the European Union in the past - is needed to achieve sustainable growth, he said.

On the question of sovereign debt in advanced economies, which has increased to a level unseen since World War II - after dropping to 30 per cent of gross domestic product from more than 100 per cent right after the war - the minister said it posed a risk to sustainability.

When the debt level increases, it hampers growth and sustainability. Indebtedness must be addressed, or governments risk damaging the confidence of investors and consumers.

"From experiences in Germany and elsewhere in Europe, the most important thing for growth is confidence by investors, confidence by consumers," he said, adding that governments needed to correct the imbalances instead of spending additional public money, which is the "wrong incentive".

With central banks in a number of advanced economies having launched quantitative-easing measures, Schaeuble said those countries should limit liquidity entering the financial market, or the world would risk another crisis. They should also stick to agreements reached at the International Monetary Fund/World Bank Annual Meetings, and even at the 10th ASEM Finance Ministers Meeting in Bangkok last weekend, to ensure sustainable growth, he added.

In his view, the recent awarding of the Nobel Peace Prize to the European Union indicates the benefits of integration in Europe. In the future, the region can launch efforts conducive to global governance.

Europe can still deliver promises step by step to restore confidence in the EU and the single currency, he said. For now, major nation-states in Europe are committed to sticking to the euro, in recognition that "the euro is an indispensable part" of the area's past growth.

What all members of the European Monetary Union must do next is to adhere to fiscal limits, and avoid giving the wrong incentives for people to be lazy. Then, the banking and fiscal union would be in good shape, after the sovereign-debt issue is brought under control, he said.

Member states must help increase competitiveness in all fellow members of the union, as West Germany had done for East Germany after German unification in the early 1990s.

Schaeuble said that despite the public-debt crisis, Europe could emerge as a stronger region. "I'm optimistic that the deeper the crisis, the greater the chances." As if knowing that the world is fixing its eyes on the region's developments, he said: "Turn your face to the sun and the shadow will fall behind you."




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