The best way to guarantee peace among nations is by strengthening the economic and commercial ties between them. European integration is the most tangible example of this idea, which has been at the center of the prevailing economic consensus since the end of World War II. And the globalization of trade, driven by technology and the internationalization of finance, represents the universal crystallization of this consensus. There is no better path to preserve peace, foster coexistence, and promote economic and social progress than the preservation of free and fair trade relations.
However, this consensus is being revised today with unprecedented virulence, just as we are leaving behind the international financial crisis that began in 2007. These are moments in which we are witnessing, in all their breadth, the political and economic consequences of this crisis, known as the Great Recession. One of those consequences, and not the least significant, is the total challenge currently facing the idea of international economic cooperation.
In Europe, Brexit is probably the clearest expression of this disconcerting change in attitudes, which has moved from “better together” to “better apart.” On the international level, however, it is the revision of the principle of free trade that causes the greatest astonishment. And it is logical that it should, as it is evident that economic globalization has not only made it possible to improve the living standards of vast layers of the world’s population in underdeveloped countries, but has also had clear benefits for consumers based in advanced countries.
We only have to look around us to be aware of the extent to which globalization and technological development have changed our lives. For this reason, and despite the doubts and challenges that globalization entails, the social and political consensus today remains favorable to this process, which does not prevent the identification of areas where further improvement is necessary. For example, in the protection of those segments of the population that have been negatively affected by the side effects of globalization.
The consensus on financial globalization is weaker and elicits a more critical and widespread view than that manifested against free trade.
If we think about the international financial crisis that began in 2007, its rapid transmission through financial contagion channels, and the brutal effects on the real economy, this hostile reaction against financial globalization seems logical. But let us reflect briefly on this issue. There are four aspects I would like to highlight:
Regarding the first aspect mentioned, the relevant question we can ask ourselves is whether trade globalization can exist without corresponding financial globalization.
The answer, in my opinion, is no. Large international banks have been, are, and will be the ideal companions for non-financial companies wishing to establish new commercial ties in third countries. Finance has been inseparable from trade since the very origin of commercial relations. Therefore, we must be careful when judging financial globalization negatively in itself, as calling it into question could jeopardize the development of trade globalization.
This assessment, of course, does not refer to all international financial activity. There is, as we have seen, a financial operation of a speculative nature, with little or no social value, which was at the root of the 2007 financial crisis and which, precisely because of its international character, spread the crisis with unusual speed and virulence among the major Western economies until it reached, in one way or another, the farthest corner of the planet.
But we must be able to differentiate this type of activity from that which responds to the real needs of society, to certain customer demands, and which has been a necessary, irreplaceable complement to trade globalization over the last seventy years. Not all international financing, therefore, is pernicious, nor is all financial globalization dispensable.
Spanish banking, in its international dimension, is a good example of this. Our entities are commercial banks, linked to the needs of their customers—families, SMEs, and companies in general—and are far removed from speculative activities with little social interest. Our banks have made, and continue to make, a valuable contribution to the economic and social progress of the countries in which they have established themselves. They have contributed their experience and know-how to improve the financing of companies and families, and also to offer good products and services at competitive prices that encourage saving. They have also brought their knowledge and technology in the field of payment methods to those societies and, as a result of all this, those economies are now more prosperous and advanced.
Special mention should be made of the value this way of banking has for facilitating social integration through financial inclusion, as it allows citizens more widespread access to financial services that greatly facilitate their lives and boost their businesses. Financial inclusion, on the other hand, is key to fighting social inequality and is essential for financing growth and generating employment.
It is this model of financial internationalization that we must preserve because of its immense economic and social value.
But let us move on to the second issue, regarding the role of foreign banking in Spain.
Indeed, in referring to Spanish banks, my speech might seem chauvinistic, but nothing could be further from the truth. Spain also benefited immensely from the work and knowledge provided by foreign banking when entities such as Barclays, Citi, or BNP, to name a few, established themselves in our country in the early 1980s. Those banks provided extraordinary collaboration in resolving the banking crisis of that time, taking over some troubled Spanish entities.
But above all, foreign banks played a revitalizing role in our financial industry, in which they introduced competition (breaking sectoral discipline in the regulated deposit market), provided new products and services—such as commercial paper—and broke the status quo in the hiring of bank executives. They were also very active participants in the incipient interbank market and came to provide 10% of the credit that our companies needed at that time.
Thanks to the presence of foreign banking, but also to the efforts of national entities, the sector took a U-turn in those years. Before 1980, almost no one in Spain had a bank account. Payrolls were collected in cash in an envelope and utility bills were paid to companies at the counter or through door-to-door collectors. It was in the eighties when an accelerated process of banking the country took place with the creation of a very flexible system of credits and direct debits for the payment of payrolls, services, and taxes, the value of which for the economy in terms of time savings and improved efficiency of production processes is incalculable.
It is only fair, therefore, to recognize, in this moment of post-crisis financial renationalization, the revitalizing role that the presence of foreign banking had on Spanish banks more than forty years ago. That competition, tough and difficult, with more sophisticated players and more advanced management systems, made our banks better, even though the process was not without friction for some entities that could not survive exposure to that competition.
Currently, foreign banks in Spain have lost weight in the Spanish banking landscape as a result of the 2007 financial crisis. But Spain has been, is, and will be a country open to all those foreign companies that want to settle in our country, in the financial industry or in another sector. This is consistent with our spirit and vocation—after all, we receive nearly 80 million tourists every year—but we are also aware that this openness has made us better in all areas: better as an economy, as a sector, and as a society in general.
Allow me to move on to the third issue I wish to highlight, regarding the positive aspects of geographical diversification. As we have already mentioned, skepticism toward the positive contributions of financial globalization is a logical consequence of the 2007 crisis. International diversification, which should have increased resilience against real or financial turbulence, created the contagion channels that multiplied the negative impact of the US subprime crisis.
In other words, the problems of a specific sector in a local market became the trigger for a major global financial crisis. We must not, therefore, forget this lesson from the crisis. What should have been international diversification ended in contagion, and a small market like that of subprime mortgages ended up generating the largest international financial crisis we have experienced since the Second World War.
The concept of international diversification, however, remains valid, not only in a theoretical sphere but, above all, in a practical one. Because, just as these negative aspects occurred in financial diversification prior to the crisis, we have other examples in which the internationalization of banking activity has worked as expected. Specifically, and as I never tire of repeating, the international presence of Spanish banking has made it possible to cushion the effects that the crisis in general, and more clearly the sovereign debt crisis in the eurozone, had on the Spanish financial system. It worked so well that our international banks were, at many times, able to finance themselves better than the Spanish State.
This fact allowed, and should not be forgotten, a large part of our banks to continue financing themselves in international markets even in the most acute phase of the credit crunch, which in turn allowed them to continue financing the viable consumption and investment projects of their customers, even in the worst moments of the crisis. Our entities thus helped many companies and families who were suffering the effects of this devastating crisis to stay afloat.
Without the international diversification of our banks, the credit restriction, the credit crunch, would have been even more serious and damaging. The history, not only of Spain but probably of the entire euro area, would have been different without the strong international component of Spanish banks. It is enough to ask what would have happened to the Spanish and European economies if one of our large banks had failed due to the lack of that strong international component in its balance sheets. The catastrophe is easy to imagine. For this reason, I insist that internationalization has contributed in an essential way, at least in our case, to maintaining financial stability gravely threatened by the crisis.
Much of this success is due to the organizational structure based on independent subsidiaries. This organization avoided costs for the countries in which Spanish banking operated. It is paradoxical that a model that was viewed favorably by the home supervisor, because it protected Spanish banking from the volatility of Latin America, ended up protecting Latin America from the turbulence of the euro area. But it is perhaps this paradox that best reflects that this model of independent subsidiaries works well.
It still amazes me, after the experience lived, that the European and G20 supervisory and resolution authorities do not see the advantages of this model and continue to bet on other approaches, such as the Single Point of Entry. These approaches require a degree of support and mutual trust between authorities that, in the context of today’s world, are, I fear, unattainable. On the contrary, the Multiple Point of Entry system requires less effort from the authorities, as it is closer to a coordinated and orderly ring fencing.
To conclude, I would like to refer to the fourth issue mentioned, regarding the financial integration of the eurozone. Recent reports from the Bank for International Settlements (BIS) and the European Central Bank (ECB) have raised the alarm about the serious setback suffered by financial integration in the euro area since the 2007 crisis. Throughout my speech, I have insisted on the idea that it is necessary to maintain positive financial globalization, the kind that finances free trade and allows for a healthy diversification of risks. When we talk about the euro area, what is at stake is even more: without full financial integration in the eurozone, the uniqueness of the euro has its days numbered in the medium term.
According to BIS studies, the decline in global financial integration indicators is explained almost exclusively by the reversal recorded in the euro area. Specifically, the disappearance of the interbank market in the eurozone is the main factor in the regression of financial globalization. With an ECB exercising the functions of a clearing house for the banking system—with entities in the deposit facility and others feeding on ECB liquidity, both groups structurally—this should not surprise us.
The worst part is that it is not, as we are observing, a temporary impact that will disappear as the crisis is left behind. A recent study on financial integration in the eurozone published by the ECB shows that, far from diminishing, the problem seems to be entrenched, to the point that in 2016 financial integration suffered a further retraction.
As you can see, we are in a situation of extreme risk for the European project, threatened, on the one hand, by a process of financial renationalization and, on the other, by the populist trends in economic and political terms that are emerging worldwide and that have already crystallized in Brexit and in the political orientations announced by the new United States Administration.
Well, this situation demands an immediate relaunch of the Union project. For the moment, the European Commission presented just ten days ago a reflection document to complete the Economic and Monetary Union, which starts from the idea that the battle against Eurosceptic populism can only be won if the euro works as a tool for well-being for all its citizens, no matter what country they live in. The Commission’s proposal emphasizes the danger represented by the lack of convergence in standards of living conditions and wealth. The chronic division within the Union between rich and poor, creditor and debtor, prosperous and stagnant areas, ends up generating discontent and frustration on which Eurosceptic populisms feed.
The Commission bases its roadmap on three pillars: financial union, economic and fiscal union, and the improvement of democratic quality. The first two are fundamental to boosting growth and job creation. The third is because the new instruments and functions—such as a common Economy Minister—require greater democratic control given that intergovernmental action without control is no longer acceptable in the democratic framework in which we live. These three axes are reflected in concrete proposals such as the creation of a eurozone budget, a common Treasury, or the so-called “light” eurobonds.
Within the financial area, the proposal to clear the veto on the European Deposit Insurance Scheme (EDIS) stands out, thus completing the Banking Union. This is based on the principle that the eurozone must have a well-integrated, efficient, and stable financial system. It is not only about ensuring that companies and families receive the financing they need, but about shielding the financial system against episodes of instability such as those that occurred during the euro crisis, in which the solvency of banks ultimately depended on the solvency of the State to which they belonged.
Other elements of the Commission’s proposal are also essential. We are talking about measures such as providing a backstop for the Single Resolution Fund and taking the necessary steps to complete the Capital Markets Union. Regarding the latter, we must realize that today it is even more necessary to complete it, given the prospect of losing London as the main financial center of the Union. Other relevant measures proposed to complete the financial union refer to aspects such as establishing strategies to reduce non-performing loans of banks; measures to move toward a single European supervisor for capital markets and the issuance of European Safe Assets, that is, joint securitizations backed by sovereign debt of member states as a step prior to eurobonds.
But the essential element to perfect the financial union is the creation of a single market for retail financial services. It is urgent that we make citizens see that European projects are going to expand the range of financial products and services available to them. More transparent, more efficient products and services at better prices so that they can finance their projects and get higher returns on their savings, thus benefiting from intense competition between banks in different countries, free of regulatory barriers and national discretion.
In this direction, the formation of cross-border banks, through mergers or other corporate operations, can play a crucial role in accelerating the formation of the single financial market for retail services. For this to happen, it is not only necessary to complete the Banking Union normatively, but it is necessary for member states to truly open their borders and let free market forces decide the fate of their respective national banking sectors.
In short, the Economic and Monetary Union needs a change of mentality, governance, and methods to better defend itself in the next crisis. At a time when the European Union must face the tear caused by Brexit and the threat posed by the advance of Europhobic populisms across the continent, the community project would be seriously weakened if member states are not able to reach an agreement to move toward a better managed and more effective eurozone. The results of the recent elections in France and the Netherlands have brought calm to the markets, so it seems that a new window of opportunity is opening for Europeanism, which must be seized without further delay.
In conclusion, we must recover, preserve, and even deepen international trade relations, which have been a key piece of the enormous leap that the world economy has taken in the last thirty years. And to the same extent, we must promote international financial activity as a complement that favors and facilitates commercial transactions between the different countries and regions of the world. A non-speculative, transparent, and regulated financial activity that responds to the needs of the real economy. In short, finance and trade relations at the service of a more prosperous and just world.
José María Roldán, Chairman of the Spanish Banking Association
