1. Introduction
1. At its meeting in Barcelona on 9 January 2009, the
Assembly Bureau endorsed the request by the leaders of the political
groups that the Assembly should hold a debate under urgent procedure
on the consequences of the global financial crisis during the first
part of its 2009 Ordinary Session, and decided to refer this matter
to the Committee on Economic Affairs and Development for report.
The committee appointed the rapporteur at its meeting in London
on 23 January 2009. The Assembly having decided on 26 January 2009 to
hold this debate, the committee approved this report at its meeting
on Tuesday 27 January.
2. Overview of the financial crisis
2. This report, which makes no claim to being exhaustive,
will not go in detail into the origins of the financial crisis that
began in the United States in 2007. Afloat in excess liquidity derived
largely from huge Asian savings, United States banks and home-loan
institutions had, for some time, stepped up their practice of providing mortgage
loans to borrowers at high risk of being unable to repay them (so-called
“sub-prime” mortgages). By mid-2007, it was realised that this growing
practice was running into difficulty, with declining house prices
and home foreclosures up by 93% on the previous year.
3. The banks and home-loan institutions involved had often sold
on these risky debts to other financial institutions, which bundled
or packaged (“securitised”) them into “mortgage-backed securities”
and other more complex financial instruments for sale to investors,
often through the intermediary of other financial institutions. These
sometimes did not look too closely at what they were buying and
selling, lured by the temptation of higher yields in a low interest-rate
environment, the prospect of mammoth bonuses and falsely reassuring ratings
from the credit agencies. The power of United States regulatory
agencies to intervene had, in the meantime, been curtailed by a
free-market philosophy resulting in deregulation.
4. The extent to which this “toxic debt” had penetrated the financial
world became apparent as the crisis unfolded throughout the rest
of 2007 and 2008. Major banks, home-loan institutions and insurance
companies ran into trouble. Several filed for bankruptcy, were taken
over or nationalised, mainly in the United States and Europe. Trust
was undermined between financial institutions, which lost faith
in the system, and banks virtually stopped lending – the so-called
credit crunch – with predictable effects on consumption and investment.
Stock markets plummeted as the crisis deepened in September-October
2008. Global financial markets were affected. The entire financial
system was threatened with collapse, and governments and central
banks soon stepped up their efforts to prevent it.
3. General assessment
5. The financial crisis has affected not only financial
institutions but also governments at all levels, companies and consumers
throughout the world. Its impact will be universal – not only economic,
but also political, social, and environmental and in every field
from health to education. One of the most damaging consequences
of the crisis has been the loss of public confidence in the financial
system that underlies the economy, and this must be restored. What
is essential is that the effects of the crisis are wisely managed,
that governments and central banks respond to the crisis by doing
everything possible in a co-ordinated fashion to alleviate its effects.
This has already highlighted difficult dilemmas: how far should
governments go to save companies that threaten to go bankrupt, using
taxpayers’ money and indebting future generations? What should governments
do to safeguard the interests of their citizens who have invested
in failing, foreign-owned companies operating under their jurisdiction?
Is there a danger that the rescue plans themselves will weaken the
financial system and the economy further?
6. It is, of course, also essential that governments as well
as the relevant international organisations see to it, again in
a co-ordinated fashion, that all the appropriate lessons are learned
from this financial crisis, and that measures are designed and adopted
that will reduce the likelihood of such disasters in the future.
4. Economic outlook for 2009-2010
7. The economic effects of the 2007-2008 financial crisis
will be felt throughout 2009 and beyond. Both the International
Monetary Fund (IMF) and the Organisation for Economic Co-operation
and Development (OECD) have predicted global recession in 2009.
Of course, the financial crisis is not, strictly speaking, solely responsible
for the downturn, coming at what might anyway have been the end
of a boom cycle marked by a period of highly inflated commodity
and energy prices.
8. The expected economic impact of the financial crisis for the
OECD area of interest, largely representative of the Council of
Europe area, is described in the latest
OECD
Economic Outlook (25 November 2008).
Although
uncertainties surround its forecasts, depending on how quickly the
financial crisis is overcome, the OECD sees the overall outcome
“as the most serious recession since the early 1980s”. Economic
activity in the OECD area is expected to fall by an average of 0.4%
in 2009, before rising slowly to 1.5% in 2010. Nevertheless, there
are sometimes significant variations between countries, with a 9.3%
drop in real GDP for Iceland in 2009 against 2008, for example,
to a 4% rise for the Slovak Republic.
9. According to the European Commission’s advanced interim forecast
published on 19 January 2009,
world GDP growth is projected to
slow down to 0.5% for 2009 as a whole (from 3.3% in 2008 and the exceptionally
strong 5% average in 2004-2007). Starting in the second half of
2009, global growth is expected to rise gradually but moderately
as the financial market situation improves and the impact of the macroeconomic
policy easing (not least in the United States) gains traction. Overall,
global GDP growth is expected to be around 2.75% in 2010.
10. With regard to unemployment, the OECD estimates that the number
of jobless people in OECD countries will rise by some 8 million
over the years 2009-2010, from 34 million (November 2008) to 42
million.
According to
the EU Commission’s interim forecast, the labour market situation
started to worsen in most member states in 2008. Reacting with a
certain lag to changes in GDP growth, employment growth is expected
to turn negative this year, with EU employment falling by 3.5 million
jobs. As a result, the unemployment rate is expected to increase
to 8.75% in the EU in 2009 (and 9.25% in the euro area), with a
further increase in 2010.
11. Above all, in personal terms, unemployment is likely to be
the biggest cost of the financial crisis, and deserves to be vigorously
offset by a robust government response. The social and political
consequences of the 1929 Crash and the Great Depression that followed,
with its masses of unemployed, should not be forgotten. However,
given the already massive interventions by governments and central
banks in injecting capital into the financial system and in launching
or planning to launch vast economic stimulus plans, this catastrophic
scenario is unlikely to be repeated.
12. According to the OECD, inflation is set to fall in all OECD
countries, from an average of 3.3% in 2008, to 1.7% in 2009 and
1.5% in 2010, reflecting reduced demand and sharply lower commodity
prices, including oil. This will, of course, give a slight boost
to household incomes. According to the EU Commission’s 19 January
forecast, a rapid weakening in growth prospects for the EU and the
global economy, as well as deteriorating labour markets, set the
stage for a significant downward revision to the inflation outlook
compared to the autumn projection. Consumer-price inflation is now
expected to fall from 3.7% in 2008 in the EU (3.3% in the euro area)
to 1.2% in 2009 (1.0% in the euro area) and just below 2% in 2010
in both regions.
13. The OECD Economic Outlook sees
United States output falling during the first half of 2009, then gradually
reviving as the effects of the credit crunch wear off, the fall
in the housing market begins to level out and the effect of lower
interest rates is felt. However, the strength of the recovery will
be dampened because of weak spending by households which have incurred
large losses in their wealth. United States GDP is forecast to decline
by 0.9% in 2009, before rising by 1.6% in 2010.
14. The euro area will see a similar pattern, according to the
OECD, with activity expected to fall over the first six months of
2009, as consumption and investment decline in the wake of tighter
lending and the negative wealth effects of stock market losses and
depressed housing prices. However, interest rate cuts
and
the calming of financial market turmoil should then induce a gradual
recovery. According to the interim forecast released by the EU Commission
on 19 January, in 2009, real GDP is expected to fall sharply, by
1.8% in the EU and 1.9% in the euro area, before recovering by about
0.5% in 2010.
15. In the OECD’s view, the recession is expected to be relatively
harsh in economies most vulnerable to the financial crisis or to
sharp declines in house prices. These include Hungary, Iceland,
Ireland, Luxembourg, Spain, Turkey and the United Kingdom.
16. As for Japan, less affected by the financial crisis, a government
budget stimulus should produce a short burst of growth in early
2009, but output is likely to stall over the second semester on
account of weak external demand and a stronger yen. The OECD even
warns of a risk that deflation may return. Japan’s GDP is predicted
to fall by 0.1% in 2009 then rise by 0.6% in 2010.
17. The global slowdown in growth will also affect the major emerging-market
economies such as Brazil, China, India and Russia. Tighter international
credit conditions, budgetary restrictions, lower commodity prices and
reduced demand in global trade will all play a part. However, given
the high growth levels characteristic of these economies in recent
years, the downturn will still leave them in a relatively strong
growth position (China, for example, from a peak of nearly 12% in
2006 to a forecast of 8% in 2009).
18. The developing countries are likely to be particularly vulnerable
to the effects of the financial crisis. On 9 December 2008 the World
Bank forecast that world trade was set to contract in 2009 for the
first time since 1982. Capital flows to the developing countries
were projected to fall by 50%. The recession could cause crisis conditions
in many developing countries and set back recent gains in fighting
poverty, jeopardising progress towards the realisation of the Millennium
Development Goals.
19. The United Nations Chief Executives Board, in an earlier statement,
warned that the most serious repercussions of the crisis “will be
felt most by those who are least responsible – the poor in developing countries.”
The Board called on all
states “to reaffirm and strengthen their commitments and pledges
for development and humanitarian assistance. In the face of the
current crisis, official development assistance (ODA) has become
even more centrally important to the poor developing countries that
are faced with financial constraints, declining liquidity and seriously
worsening balance of payments positions.”
20. Moreover, the Board called on all states “to re-engage in
efforts to conclude the Doha Trade Negotiations. A healthy, open
and rule-based trading system is essential to maintaining long-term
economic growth to the benefit of all. At a time of strain on economic
and social systems, we must resist protectionism and promote openness
and inclusiveness.”
5. Policy reactions
21. Governments and central banks have increased their
level of intervention as the situation deteriorated. They have rescued
systemically important financial institutions in order to avoid
a total meltdown of financial markets; they have eased monetary
policy, reducing interest rates in order to counter the recessionary
effects of the credit crunch; and they have adopted fiscal measures
designed to boost demand and employment, including government spending
programmes and tax cuts, in a significant return to Keynesian policies.
In addition, they have launched a more or less co-ordinated reform
of the international financial system.
22. Throughout 2007 and 2008, the United States Federal Reserve
Board responded to the growing crisis with several reductions in
interest rates and major injections of capital into the ailing financial
system, including banks and non-bank financial institutions. In
October 2008, the United States Government adopted, after finally winning
over a reluctant Congress, a US$700 billion bail-out plan (the “Troubled
Assets Relief Program” – TARP), the largest in United States history.
Half of this has been used, with many questions as to exactly how. The
new United States Administration wants to use the other half, but
is running into some opposition, even from its supporters, who want
more transparency and a clear understanding as to conditions of
use.
23. But the new United States Administration also plans a major
economic recovery package, a sort of fiscal new deal combining government
spending and tax cuts. On 15 January 2009, the Democrats in the
House of Representatives proposed a bill amounting to some US$825
billion, consisting of about 60% new spending (mainly on Medicaid,
education, infrastructure and renewable energy) and 40% tax cuts,
that has been worked out in consultation with the incoming president
and which, following passage through Congress, should be adopted
by mid-February.
24. To finance its response to the crisis, the United States Treasury
is expected to borrow US$1.5 trillion in 2009, in addition to current
debt that is carried over. The question may be asked whether this
can be absorbed and, if not, whether Treasury bond prices might
be in danger of collapse. Similar questions can be asked about the
creditworthiness of European countries – the sovereign debt of Greece,
Portugal and Spain has been downgraded, not to mention the vexed
case of Iceland.
25. In Europe, the European Central Bank (ECB) and other central
banks have lent massively to banks faced with the evaporation of
inter-bank lending in order to provide them with necessary liquidity.
These exceptional measures enhanced the ability of banks to refinance
themselves and eased liquidity tensions in the money markets. Meanwhile,
as concern about inflation in 2007-2008 has given way to recession
and even worries about deflation, the central banks have lowered
their benchmark interest rates in order to stimulate demand. Governments
have also been involved in saving financial institutions in trouble,
beginning with the nationalisation of Northern Rock in the United
Kingdom and continuing with the United Kingdom Government’s £100
billion plan to help banks limit their losses from distressed assets
that was announced on 19 January 2009 – this on top of a similar
£37 billion plan announced in October 2008.
26. On 11 and 12 December 2008, the Council of the European Union
approved a European Economic Recovery Plan, a framework for stimulus
measures to be taken by the member states and by EU institutions totalling
a target amount of €200 billion, equivalent to some 1.5% of EU GDP.
Most of this consists of national stimulus packages already adopted
or in the pipeline, but which do not always comprise new spending:
for example €20 billion in France, €32 billion in Germany, €80 billion
in Italy, €31 billion in Poland, €11 billion in Spain, and €20 billion
in the United Kingdom. Aware that such measures would temporarily
deepen budget deficits beyond the 3% of GDP allowed under the Stability
and Growth Pact, the European Council “reaffirms its full commitment
to sustainable public finances and calls on the member states to
return as soon as possible … to their medium-term budgetary targets”.
27. Both Japan and China have adopted sizeable economic stimulus
plans (amounting, respectively, to US$276 billion in October 2008,
and US$588 billion in November 2008).
28. The global scale of the financial crisis underlines the necessity
for international co-operation to avoid measures that distort competition
or effectively shift the problem to other countries. Unfortunately,
this sort of solidarity has not been consistently exercised, and
decisions have been taken unilaterally when they should have involved
consultation. For example, when Ireland decided to guarantee bank
deposits without limit, it attracted funds from countries without
such generous guarantees. When the United Kingdom froze deposits
in the British branch of Iceland’s Landsbanki and put that country’s
Kaupthing Bank under the administration of the British Financial
Services Authority (FSA), it turned a financial crisis into a complete
collapse, requiring an international rescue operation involving
the Nordic and other European countries and the IMF.
In
this time of crisis, it is vital that international solidarity,
co-ordination and co-operation should be exercised, not only between
members of the European Union, but also vis-à-vis the more vulnerable
Council of Europe member states and other countries in the EU’s
“neighbourhood”.
6. Reform of the international financial architecture
29. One of the major consequences of the financial crisis
should be a reform of the global financial architecture.
On
15 November 2008 the G20 met for a “Summit on Financial Markets
and the World Economy”, a so-called “Bretton Woods II” Conference
in expectation of a thoroughgoing reform of the global financial
system. It did, in fact, initiate that process. In the words of
the White House summary of the results, the summit leaders “reached
a common understanding of the root causes of the global crisis;
reviewed actions countries have taken and will take to address the
immediate crisis and strengthen growth; agreed on common principles
for reforming our financial markets; launched an action plan to
implement those principles and asked ministers to develop further
specific recommendations that will be reviewed by leaders at a subsequent
summit; and reaffirmed their commitment to free market principles.”
30. It was agreed that “immediate steps could be taken or considered
to restore growth and support emerging market economies by: continuing
to take whatever further actions are necessary to stabilise the financial
system; recognising the importance of monetary policy support and
using fiscal measures, as appropriate; providing liquidity to help
unfreeze credit markets; and ensuring that the International Monetary Fund
(IMF), World Bank and other multilateral development banks (MDBs)
have sufficient resources to assist developing countries affected
by the crisis, as well as provide trade and infrastructure financing.”
31. The summit leaders “agreed on common principles to guide financial
market reform”, including “strengthening transparency and accountability”;
“enhancing sound regulation”; “promoting integrity in financial markets”;
“reinforcing international co-operation”; and “reforming international
financial institutions”.
32. The leaders “approved an action plan that sets forth a comprehensive
work plan to implement these principles, and asked finance ministers
to work to ensure that the action plan is fully and vigorously implemented.”
33. Progress will be reviewed at the next G20, to be held in London
on 2 April 2009.
34. This work will run parallel to that of the Commission of Experts
of the President of the UN General Assembly on Reforms of the International
Monetary and Financial System, chaired by former World Bank Chief Economist
and United States Presidential Adviser Joseph Stiglitz.
35. What can already be said is that the International Monetary
Fund, which had been viewed as an almost redundant organisation,
has now regained its original role as international lender to countries
experiencing balance of payments difficulties. It has recently arranged
significant loans to Iceland, Hungary, Latvia, Serbia, Ukraine,
and Pakistan. Of course, this reinvigorated lending role will inevitably
lead again to questions about the loan conditions imposed by the
IMF, usually involving budget cuts, and their impact on citizens,
as was the case for example following the Asian financial crisis
in 1997.
7. Social and economic rights
36. The Committee on Economic Affairs and Development
of the Assembly, in a statement adopted at its meeting on 26 November
2008, welcomed the declaration approved by the G20, but deplored
that it made “no reference to protecting the social and economic
rights of citizens in a period of crisis”. It is this dimension
that has rightly been stressed in statements by Council of Europe
representatives, as well as the Director-General of the International
Labour Organization, Mr Juan Somavia, among others.
37. In a statement on 20 October 2008, for example, Mr Somavia
stressed that world leaders should not just focus on financial institutions
when they talk about rescue plans but, most importantly, on individuals,
especially those most exposed. He stressed the need for “prompt
and co-ordinated government action to avert a social crisis that
could be severe, long-standing and global”.
The
crisis would significantly increase unemployment, so measures should
be taken to extend social protection and unemployment benefits,
facilitate training, strengthen placement services, and provide
emergency employment schemes. The crisis had already undermined
pension funds invested in the stock market, so pension systems should
be given sufficient liquidity to avoid having to sell assets in
a collapsed market in order to pay pensions.
38. On 21 November 2008, the ILO Governing Body issued a statement
incorporating six measures “required to address the impact of the
crisis on the real economy to protect people, support productive enterprises
and safeguard jobs.”
These
were: 1. ensure the flow of credit to consumption, trade and investment
and stimulate additional demand; 2. protect those most exposed (especially
young women and men, informal and precarious workers, migrant workers,
the working poor) by extending social protection and unemployment
benefits, facilitating additional training and retraining, strengthening
placement services, introducing or strengthening emergency employment
schemes and targeted safety nets, safeguarding pension systems and
developing and enhancing social security and labour protection,
including the extension of social security to all; 3. support productive,
profitable and sustainable enterprises, together with a strong social economy
and a viable public sector so as to maximise employment and decent
work, with special measures to safeguard a supportive environment
for investment and growth, particularly for small enterprises and
co-operatives, which account for the largest share of working men
and women in all economies; 4. reaffirm the ILO Declaration on Fundamental
Principles and Rights at Work and its Follow-up (1998), recognising
the particular significance of the fundamental rights, namely: freedom
of association and the effective recognition of the right to collective
bargaining, the elimination of all forms of forced or compulsory
labour, the effective abolition of child labour, and the elimination
of discrimination in respect of employment and occupation; 5. re-emphasise
the importance of the tripartite social dialogue and co-operation
between governments and the representative organisations of workers
and employers in confronting the crisis and minimising the consequences
for people, enterprises, rights at work and decent work; and 6.
maintain development aid as a minimum at current levels and provide
additional credit lines and support to enable low-income countries
to cushion the crisis.
39. The Council of Europe Commissioner for Human Rights, Mr Thomas
Hammarberg, took up the theme of social rights in a statement on
17 November 2008.
“Enormous
sums of tax payers’ money have been poured into the banking system
in order to prevent a global financial meltdown. Ordinary people
have been forced to pay for the reckless practices of a few. On
top of this, there are already signs that it is the less wealthy who
will suffer most from the recession the world is now facing.” He
called for “concrete programmes which promote social cohesion and
prevent any watering down of the already agreed human rights standards”,
which include economic and social rights” as enshrined in the Universal
Declaration of Human Rights, the 1961 European Social Charter and
the 1996 revised European Social Charter of the Council of Europe,
which remained to be ratified by 22 member states. Mr Hammarberg
also warned that “increased unemployment will place a further burden
on state budgets and there will be less space for social assistance
at a time when needs will inevitably grow. This is likely to cause
tensions and perhaps even social unrest. There is a risk that xenophobia
and other intolerance will spread further and that minorities and
migrants may become targets. Extremists might seek to exploit and
provoke such tendencies.”
40. The President of the Parliamentary Assembly, Mr Lluís Maria
de Puig, in his message on the occasion of Human Rights Day on 10
December 2008, warned that history has taught us that economic crisis
generally entails a rise in prejudice and discrimination.
41. Thus, financial and economic turbulence can very easily spill
over into the political and human rights spheres. This has been
demonstrated again and again in history, and most recently in Bulgaria,
Greece, Iceland, Latvia and Lithuania, where public dissatisfaction
with deteriorating economic conditions, among other things, has
resulted in social unrest and even street violence.
____________
Reporting committee: Committee
on Economic Affairs and Development.
Reference to committee: Urgent
debate, Reference No. 3503 of 26 January 2009.
Draft resolution unanimously
adopted by the committee on 27 January 2009.
Members of the committee:MrMárton
Braun (Chairman), Mr Robert
Walter(Vice-Chairperson), Mrs Doris Barnett (Vice-Chairperson),
Mrs Antigoni Papadopoulos (Vice-Chairperson), MM. Ruhi Açikgöz (alternate: Mr Mustafa Ünal), Ulrich Adam, Pedro Agramunt Font de Mora, Roberto
Antonione, Robert Arrigo,Zigmantas Balčytis, Mrs Veronika
Bellmann, MM. Radu Mircea Berceanu, Vidar
Bjørnstad, Luuk Blom (alternate: Mr
Tuur Elzinga), Mrs Maryvonne
Blondin, MM. Pedrag Bošković, Patrick Breen, Mr Erol
Aslan Cebeci, Mrs Elvira Cortajarena
Iturrioz, MM. Valeriu Cosarciuc,
Joan Albert Farré Santuré, Relu Fenechiu, Guiorgui Gabashvili, Marco
Gatti, Paolo Giaretta, Zahari
Georgiev, Francis Grignon (alternate: Mrs
Josette Durrieu), Mrs Arlette Grosskost, Mrs Azra Hadžiahmetović, Mrs Karin
Hakl, MM.Norbert Haupert, Stanislaw Huskowski, Ivan Ivanov, Igor Ivanovski, Miloš
Jeftić, Mrs Nataša Jovanović, MM. Antti Kaikkonen, Emmanouil Kefaloyiannis, Serhiy
Klyuev (alternate: Mrs Yuliya Novikova),
Albrecht Konečný, Bronislaw Korfanty, Anatoliy Korobeynikov, Ertuğrul Kumcuoğlu, Flemming Damgaard
Larsen, Bob Laxton, Harald
Leibrecht, Mrs Anna Lilliehöök,
MM. Arthur Loepfe, Denis
MacShane (alternate: Baroness Detta
O’ Cathain), Yevhen Marmazov,
Jean-Pierre Masseret, Miloš Melčák, José Mendes Bota, Attila Mesterházy, Alejandro Muñoz Alonso, Mrs Olga Nachtmannova, Mrs Hermine Naghdalyan, Mr Gebhard Negele, Mrs Miroslawa
Nykiel, Mr Mark Oaten,
Mrs Ganira Pashayeva, Mrs Marija Pejčinović-Burić, MM. Viktor
Pleskachevskiy, Jakob Presečnik, Maximilian Reimann, Andrea Rigoni,
Mrs Maria de Belém Roseira (alternate: Mr
Maximiano Martins), MM. Giuseppe
Saro, MM. Samad Seyidov, Steingrímur J. Sigfússon, Leonid
Slutsky (alternate: Mrs Natalia Burykina),
Serhiy Sobolev, MM. Christophe Steiner, Vyacheslav Timchenko, Mrs Arenca
Trashani, Mrs Ester Tuiksoo, MM. Oldřich Vojíř (alternate: Mr Ladislav Skopal), Konstantinos Vrettos, Harm Evert
Waalkens, Paul Wille, Mrs
Maryam Yazdanfar.
NB: The names of the members who took part in the meeting
are printed in bold.
Secretariat of the committee: Mr
Newman, Mr de Buyer and Mr Chahbazian.