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Economic diversity on both sides of the Atlantic




Speech by Jean-Claude Trichet, President of the ECB,
at the
US Sciences Po Foundation Annual Benefit
in New York

It is a great pleasure for me to speak to you here tonight.
The past few years have been a testing time for the economies of both the United States and Europe. We were faced with the worst financial and economic crisis since the Second World War. Still today – on both sides of the Atlantic – we are dealing with the consequences of the crisis – for economic growth, for employment and for government finances.
The crisis has also exposed the United States and Europe to a number of asymmetric shocks – in which different parts of our economies have had a wide diversity of experience. Some countries within the euro area are the particular focus of market attention at the moment as a result of their sovereign debt issues.
Some observers have been wondering how diversity can be dealt with in Europe’s Economic and Monetary Union (EMU), what it means for monetary policy and whether the variations in economic conditions are aggravated by product and labour market rigidities. It has often been argued that economic diversity or heterogeneity is very significantly larger in Europe than in the United States.
We at the European Central Bank (ECB) have been looking closely at the degree of diversity in the two large, continental advanced economies on either side of the Atlantic. And some of the findings from this comparison are quite interesting. Because they show that economic diversity within the two currency areas is very similar in many ways. The analysis also shows that, in fact, in a large number of respects the two economies are similarly diverse.
I would like to share some of the key insights of this analysis with you tonight.

I. Economic diversity in the euro area and the United States
The United States and Europe are often compared. This is quite natural. Americans and Europeans share a common cultural legacy. But our two economies, and I am speaking here of the economy of the euro area on our side, are also similar. Both are of similar size, in terms of population and in terms of economic output. Both have closely integrated financial and product markets. And both have a single currency.
Let me begin my comparison with an economic indicator that is particularly close to a central banker’s heart: inflation. In historical terms, overall inflation has been low and stable in both the United States and the euro area since the late 1990s.
The ECB aims at an inflation rate of below, but close to, 2% over the medium term. Since the inception of the euro, the ECB has achieved that objective. Annual inflation in the euro area has been 1.97% on average over the first 12 years.
Importantly, the standard deviation in inflation across the members of the euro area has been around 1%. And it has remained broadly stable at similar levels to those observed in the US Metropolitan Statistical Areas. From that standpoint prices in the euro area are broadly homogenous and similar to those in the United States.
My second point of comparison is how diverse the United States and the euro area are in terms of economic growth. The results here are similar to that for inflation. First of all, the overall growth rates over the first twelve years of the euro were actually quite similar in the euro area to those in the US, once you adjust for differences in population growth. In both the euro area and the US, per capita growth was about 1% during 1999-2010. As concerns dispersion within the economies, before the crisis, the standard deviation of growth rates was around 2% in both the euro area and the United States. Dispersion rose somewhat during the crisis in both currency areas but remained broadly in line with pre-crisis patterns. [1]
Allow me to go one step further and compare the sources of this growth dispersion in the United States and the euro area. Both currency areas include regions that experienced a significant boom-and-bust cycle over the past decade. Both also contain regions that are facing significant structural challenges of a more long-term nature.
Let me start off with the United States. Here, several states experienced increases in house prices that outpaced the national average by a wide margin. The steep house price increases probably contributed to above average growth in these states, owing to strong positive contributions from real estate, construction and financial services.
Nevada, Arizona, Florida and California are good examples, where average growth between 1998 and 2006 exceeded that of most other states. The sharp fall in house prices in recent years turned boom into bust. These states experienced the harshest recession among the US states.
At the same time, some other US states have seen a long period of below average growth, particularly the former manufacturing powerhouses in the ”Great Lakes” region. Structural shifts in the US economy towards services have gradually reduced the value added of manufacturing relative to GDP. In the decade before the financial crisis, growth rates in states with a high concentration of companies in manufacturing industries other than information and communications technology, such as Michigan and Ohio, were lower than in most other US states. Unsurprisingly, GDP growth in these regions remained below average during the crisis.
The euro area also contains examples of these two types of regions. On the one hand, some countries experienced asymmetric boom-and-bust cycles. Several euro area countries had higher than average growth in the pre-crisis years. For example, up to 2006, growth in Ireland was higher than in most other euro area economies, owing much to large increases in house prices.
On the other hand, a few euro area countries – Portugal for example – experienced growth below the euro area average in the decade preceding the crisis. This was typically a consequence of structural issues that could have been tackled earlier and with more determination.
Just a few years ago, this group of countries included Germany, then labelled completely wrongly the “sick man of Europe”. Yet Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.
In short, the effects of the crisis on the different economies in the euro area follow a similar pattern to those in the United States. The countries in the euro area that have been hit hardest are those in which either large asset-bubble driven imbalances unwound or structural problems were left unaddressed before the crisis. More specifically, Ireland and Greece, in particular, remained in recession in 2010.
Those countries that have yet to implement more far reaching structural reforms also have relatively low growth prospects after the crisis. These relatively low growth rates are linked to a deterioration of competitiveness, driven by persistent losses in relative competitiveness, for example by above average increases in relative labour costs.
Again, this problem is not isolated to the euro area. Disregarding the most recent countries to join the euro area, dispersion of unit labour costs is similar in the euro area and the United States, both before and during the crisis.
It is worth noting that both currency areas include regions with persistently above or below average unit labour cost growth. Again leaving aside the most recent countries to join the euro area, Greece, Portugal and Ireland, in particular, have lost competitiveness vis-à-vis their main trading partners in the euro area. Germany, in contrast, has been able to lower relative unit labour costs.
There have been similar persistent losses and gains in competitiveness in the United States. Some states have experienced large or persistent increases in unit labour costs, currently exceeding the national average by as much as 20%. Other states have been gaining competitiveness vis-à-vis the national average over the past decade.
In summary, economic heterogeneity in the euro area and the United States has been broadly similar on a number of measures over the past 12 years.

II. Economic governance in the euro area
But the crisis has shown us that this should be no reason for any complacency in the euro area. Persistent losses in competitiveness on the part of individual members in a currency union lead to a build-up of external and internal imbalances. When these unravel, the cost for the affected economies can be large. They can also have spillover effects on other members of the currency union.
In any union, an economic governance framework is needed to prevent developments in an individual member state endangering the smooth functioning of the union. This is particularly true in a currency union that – in contrast to the United States – does not have a large federal budget to balance severe asymmetric developments.
For EMU, the economic governance framework devised in the 1990s has not been correctly implemented and, in any case, has proved too weak during the crisis.
As I speak today, the reform debate is still in progress. Allow me to take a few more minutes to outline the reforms required to make Europe’s institutions of economic governance commensurate with monetary union.
As you may know, the ECB takes the strong view that there is the need for more speed and automaticity in the sanctioning mechanism. This is particularly true for the Stability and Growth Pact, the EU’s framework for fiscal governance. But it is also the case for the broader framework for macroeconomic policy surveillance. The experience of recent months has vividly demonstrated the importance of a timely correction of internal and external imbalances.
But faster and more automatic sanctions alone will not be enough. The enforcement tools will also need to be made more effective. The macroeconomic surveillance framework, in particular, needs to provide clear incentives for sound policies in the member states by imposing financial sanctions at an early stage. This also means that there should be no room for discretion in the implementation of the surveillance framework.
At the same time, requirements on fiscal and other macroeconomic policies should be more ambitious. To ensure that none of the euro area members are left behind, they have to bring national policies in line with membership of a currency union.
Finally, the implementation of sound fiscal and macroeconomic policies is best ensured if these are solidly anchored at the national level. An effective way of achieving this is to implement strong national budgetary frameworks in the members of the euro area.

III. Conclusion
Let me conclude. The European Union and the Euro area on one side of the Atlantic, the United States on the other side not only share the common heritage of their culture and their nature of advanced economies. They are not only of similar size. Our economies are also showing remarkable resemblance in their diversity – among the 50 states on this side of the Atlantic and among the 17 euro area members on the other side. This is true for both the euro area and the United States before the crisis and also in their reaction to the asymmetric shocks during the crisis.
Therefore we have a common challenge. That of governing, in the best fashion possible, very large and similarly diversified economies as regards the economic features of member countries and states. This is naturally done in the US through the federal institutional framework.
We Europeans need to reform our economic governance framework, as I have briefly outlined here tonight. Here, we would do well to heed the words of Alexander Hamilton, a founding father of America’s economic and political union,. Just as Hamilton once called to his fellow Americans, we Europeans should call on our leaders to “learn to think (more) continentally”.
Thank you for your attention.

[1]The 2010 data for US regions are provisional estimates published by the Bureau of Economic Analysis on 7 June 2011.

Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.


One third of money management tools face closure by the end of the year if they do not embrace open banking



One third of money management tools face closure by the end of the year if they do not embrace open banking 1
  • New research from Yolt Technology Services shows 35% of Personal Finance Managers aren’t using any open banking technology
  • Imminent screen scraping ban set to cause major disruption for consumers and businesses with just two months to go
  • 1 in 5 PFMs have never even considered using open banking
  • 28% cited data privacy as a reason for not adopting open banking technology

An international study of over 1,000 senior professionals in the banking, lending, PFM, investment, and retail sectors by leading open banking provider Yolt Technology Services has revealed that over a third (35%) of Personal Finance Management (PFM) platforms aren’t using open banking technology. These businesses will face an urgent transition when screen scraping is phased out in Europe at the end of 2020 if they are to avoid major service disruptions.

The final leg of PSD2, Stronger Customer Authentication (SCA), comes into effect in Europe on 31st December 2020 and will add an extra layer of security to log-in processes. This will force many banks to withdraw screen scraping facilities, which are currently used by PFMs to automatically extract on-screen data from the bank’s online banking page or app. This data is then used as raw text in the PFM to generate spending insights for users, but is less secure, less efficient, and creates a more cumbersome log in process.

As a result, many PFMs will have to look for alternative methods to gather customer data efficiently and securely, but despite being early pioneers of open banking, the survey showed that 35% of PFMs are not using open banking products and services such as AIS systems. In fact, nearly 1 in 5 respondents (19%) stated that they have never even considered using open banking.

More surprising still is that among those who were using open banking, only half (55%) were using Account Information Services, while over three quarters (77%) were using Payment Initiation Services (PIS). While PIS can deliver significant value for users, enabling settling between accounts or payment into regular savings accounts, its functionality is not a core part of the PFM offering in the same way as AIS.

Among those who haven’t yet adopted open banking technology, 35% of PFMs said it was too early to invest, and 28% named data privacy as the chief reason for not adopting. Despite this, PFMs do still show an above average adoption rate (68%) after being one of the first sectors to take advantage of the technology, compared with the banking and retail sectors, the next highest, on 63% and 62% respectively.

And the adoption of open banking technology is proving to be lucrative for those PFMs that do make the switch. Over 90% of PFMs who keep track of the monetary gains of open banking said that it is worth between £1m – £5m to their business each year, compared with 70% of respondents across all sectors, so there are financial gains to be had. This may be because open banking is central to service delivery for the majority of PFMs, but in other sectors it is a differentiator and its use is optional.

For all of this promise to be realised, there are clear issues to be addressed, but PFMs stand to benefit if they lead the charge.

Leon Muis, Chief Business Officer at Yolt Technology Services, comments:

“As pioneers of open banking, Personal Finance Managers have incredible potential to propel the technology even further – but only if steps are taken now to address the issues our survey reveals. That starts with more adoption – platforms which rely on manual methods of information gathering like screen scraping are not only less efficient, they deliver a worse service for users. To see a third of all PFM platforms using no open banking technology at all is a concern, and one that they will have to deal with sooner rather than later, with the upcoming ban on screen scraping.

“Data privacy concerns are a key reason behind this adoption rate, but this is built on fundamental misunderstandings not only about the technology, but the rules which govern its use. That over a quarter of PFM platforms don’t understand how open banking legislation works is a signal that we need to do better as an industry to champion the benefits of the technology, but also showcase the core safeguards and secure foundations upon which it is built.

“What is also clear is the power open banking has to differentiate platforms, and those which can most effectively implement it stand to benefit the most, both financially and in service delivery. And, with the phasing out of screen scraping coming into effect at the end of the year, PFMs need to act now to better support their customers and avoid being left behind.”

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Accountants have become critical to the survival of businesses and their reputations during Covid-19



Accountants have become critical to the survival of businesses and their reputations during Covid-19 2

The opportunity for fraudulent activity to flourish as finance departments operate remotely with less oversight in these extraordinary Covid-19 times is inevitable. Government loans and financial support have been given out with little or no accountability to businesses that are struggling with the change in their trading environment and as a consequence businesses find themselves in financial need. 

There is already evidence of corporations handing back furlough grants as HMRC offers a 90-day amnesty, but without rapid data-driven insight and risk stratification, businesses may not know the extent of their exposure. Indeed many businesses face the daunting prospect of repaying loans at the same time as paying deferred VAT early next year in a far from certain trading environment. Stuart Cobbe, Director of Growth, Europe, MindBridge explains that the role of the accountant has now become critical to businesses and their reputations. 

Unlocking transparency

The Covid-19 landscape is fluid and ever-changing, and businesses require accurate visibility of all aspects of their business in order to plan effectively for the future and to understand their financial position. As the economy continues to recover to a new ‘normal’, companies need to focus on the next 6 months. How many ‘zombie’ businesses are only operating due to deferred VAT payments? How many companies will fail when they cannot repay loans? The role of the accountant is vital in unlocking this transparency to provide data-driven, actionable insights.

After all, there are many questions around how government financing has been used, from grants to loans, furlough payments to VAT deferments. As of the 20th September, the total cost of furlough claims has reached a staggering almost £40 billion, despite 30,000 applications being rejected, with many likely to have been attempts to defraud the taxpayer. Research by economists from Cambridge, Oxford and Zurich universities found that as many as two thirds of furloughed workers continued to work.

For businesses that do not understand the extent of their exposure, they risk facing a HMRC-imposed tax charge equivalent of up to 100% of the grant to which any recipient was not entitled and was not repaid. It is, therefore, interesting to see the number of large organisations now publicly revealing plans to repay all furlough payments. For many, this is an opportunity to boost corporate reputation and demonstrate a commitment to rediscovering business as usual. However, given the huge pressures businesses have been under in recent months, many CFOs and FDs may not have the full visibility they require to effectively manage this without the power of audit.

Financial Risks

This is about far more than reputational damage, the potential misuse of furlough is far from the only financial risk. The extraordinary shift in every business’ modus operandi over the past few months has opened the door for opportunistic fraud. New sources of income; staff working from home with limited oversight; the financial pressures – both business and personal – created by the recession. The misappropriation of assets should be a very real concern for businesses of every size.

For organisations that have relied upon grants and loans to survive, an employee exploiting the lack of oversight to syphon funds for personal use could tip the company into failure. Companies must determine how – or whether – deferred VAT payments and loan repayments can be made. Is the company truly solvent or no more than a ‘zombie’ business operating with a balance sheet propped up by short term government finance?

Actionable data 

Business resilience and reputation is a priority in this era, and CFOs or FDs may be struggling to establish trust across businesses now operating under a whole new range of pressures, from slimmer margins to a disjointed, remote workforce. There is an obvious need for complete visualisation of financial risks, and accountants play a crucial role in unlocking this data.

The rapid identification of mistakes in government support applications, potential fraud and the analysis of which deferred payments and loan repayments can be made and when – whilst ensuring other risk factors do not jeopardise business stability – is essential to futureproof the business, and accountants can assess data to provide this information in a complete and actionable format to lead smarter company decisions. This is the data insight CFOs and FDs need today.

Traditional financial risk assessment models will not be adequate. At best, problems will be revealed months after the fact. Companies need rapid identification of areas of unexpected activity today. This is where accountants and finance departments using sophisticated machine learning and artificial intelligence techniques can deliver real business value by rapidly assessing financial data and surfacing unexpected activity. Armed with this information, finance teams will know where to focus activities, the questions to ask and the remedial action to take. This information will drive departments and remedial action to ensure business success and growth as the nation gets back to its feet.

In short, accountants and finance professionals can provide the answers businesses need today, whilst helping managers to plan for the future effectively, despite the changes in policies and protocols as the pandemic continues to throw curveballs. An audit can quickly identify problems including but not limited to, cash flow, fraud, misuse of grants, loan repayment issues – all whilst offering the guidance and steps to safeguard the business to promote resilience and protect the solvency and reputation.

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Taking advantage of the UK’s renovation revolution



Taking advantage of the UK’s renovation revolution 3

By Paresh Raja, CEO, Market Financial Solutions

UK property is a popular asset class because of its historical resilience to withstand periods of political and economic volatility and quickly recover its value. Domestic and international investors are aware of this general observation, which no doubt explains why investment into bricks and mortar has been rising during the COVID-19 pandemic.

As a result of tax reliefs introduced by the government to encourage buyers and sellers to return to the property market, house prices have been rising at an impressive rate. According to the UK’s biggest building society – Nationwide – house prices rose in September at the fastest annual rate since the aftermath of the EU referendum vote in 2016. Nationwide recorded annual house price growth of 5% in September.

For homeowners, this is important – house prices are a useful way of measuring the capital growth of a property. If house prices are rising, it means there is strong demand for real estate which is positive news for homeowners. House price growth also allows us to assess the overall health of the property market.

Here at Market Financial Solutions, we are regularly arranging bridging loans to support the property investment intentions of UK and non-resident buyers. From our perspective, COVID-19 has not dampened the overall need for finance to complete on real estate transactions. And importantly, we are also seeing a rise in homeowners undertaking renovation and refurbishment projects amidst the pandemic.

In August, the Renovation Nation Report revealed that the typical UK homeowner had spent over £4,000 on renovation works since the introduction of lockdown measures in March 2020, ranging from garden to living room, bedroom and kitchen upgrades. This has no doubt increased in value since then.

The rise in home improvement projects is important for a number of reasons. First, it is an effective way of increasing the value of a property. Simply updating worn furnishing and fittings, adding an extension or implementing new technologies to make a home more energy efficient can significantly enhance the appeal of a home and increase its market value.

Second, the rise in renovations and refurbishments taking place drives productivity and creates new building opportunities for SME construction firms. For example, a survey that was recently published by the Federation of Master Builders showed a marked increased interest for home improvement projects. It revealed that 42% of SMEs are predicting higher workloads during the Autumn months.

Paresh Raja

Paresh Raja

In my opinion, the COVID-19 pandemic is directly responsible for this sudden hike. People are spending more time at home, either working remotely or as part of social distancing measures. Naturally, this has compelled homeowners to consider ways of upgrading their property so that they can better enjoy their office and/or living spaces. What’s more, with the UK on the brink of second lockdown, there is a general acceptance that working from home either fulltime or part-time is something that will remain the case long after the coronavirus outbreak has been contained.

Unlocking the renovation revolution

One of the biggest challenges when undertaking a home improvement project is having the necessary finance in place. The traditional method of engaging with a high street lender for a loan has become complicated. As a consequence of COVID-19, banks are treading carefully – based on reports we’ve been hearing, loans are taking longer to be approved and the range of products available is limited.

Given how important property market activity is in driving economic productivity and growth, there is a clear need to ensure that homebuyers can access finance with minimal delay and fuss. Having witnessed current trends, Market Financial Solutions has responded by offering specialist finance loans that are tailored specifically for renovation and refurbishment projects. These are structured to the specific demands of each application, which means that construction deadlines can be met without the risk of finance being delayed.

Interestingly, the government is also keen to promote home improvements, particularly when it comes to green housing. For instance, in September the government launched the Green Homes Grant to encourage energy efficient housing. Under this scheme, grants can be accessed to pay for green home improvements. This could range from the insulation of walls and floors to the installation of double and triple glazing and the addition of low-carbon heating.

I would not be surprised if the government also considers similar grant programmes to support either types of renovation projects, particularly if more people are facing the prospect of permanent remote working. Of course, a lot of research would need to be undertaken for such a proposal but there are plenty of advantages that could be on offer as part of such a scheme. For now, we will need to wait and see.

My advice for anyone considering a home improvement project is to consider all the finance options available and applying for a loan that best meets their individual circumstances. While this might seem challenging, the fact of the matter is that lenders like Market Financial Solutions are responding to demand and creating products to support such undertakings. Finding the right type of finance will only increase the chances of work being completed on time, which ultimately works in favour of the homeowner.

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