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| Central Banks Criticize Europe for Political Gridlock on Economy | Central Banks Criticize Europe for Political Gridlock on Economy |
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| FRANKFURT — For European officials, it may have been an especially untimely – and embarrassing – example of political gridlock. | FRANKFURT — For European officials, it may have been an especially untimely – and embarrassing – example of political gridlock. |
| Their failure early Saturday to agree on a crucial pillar of the euro zone’s new banking architecture, despite 18 hours of haggling, came just as the world’s central bankers were about to blast politicians for exactly that kind of dithering. | Their failure early Saturday to agree on a crucial pillar of the euro zone’s new banking architecture, despite 18 hours of haggling, came just as the world’s central bankers were about to blast politicians for exactly that kind of dithering. |
| The Bank for International Settlements, a group representing central banks including the Federal Reserve and the European Central Bank, on Sunday warned political leaders that they should not expect central banks’ cheap-money policy to hold the global economy together forever. The organization, based in Basel, Switzerland, said in its annual report that politicians should finally do their share of “the hard but essential work of adjustment.” | The Bank for International Settlements, a group representing central banks including the Federal Reserve and the European Central Bank, on Sunday warned political leaders that they should not expect central banks’ cheap-money policy to hold the global economy together forever. The organization, based in Basel, Switzerland, said in its annual report that politicians should finally do their share of “the hard but essential work of adjustment.” |
| The report’s publication came a day after political leaders meeting in Luxembourg had just provided a vivid example of what the central bankers were complaining about. Despite debating well into the early morning hours Saturday, European Union finance ministers could not agree on new rules to lessen the chances that taxpayers will bear the burden if commercial banks collapse. | The report’s publication came a day after political leaders meeting in Luxembourg had just provided a vivid example of what the central bankers were complaining about. Despite debating well into the early morning hours Saturday, European Union finance ministers could not agree on new rules to lessen the chances that taxpayers will bear the burden if commercial banks collapse. |
| “We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting at about 4 a.m. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.” | “We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting at about 4 a.m. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.” |
| The message from the group in Basel was that central banks cannot enable such lack of action indefinitely. “The balance between costs and benefits is deteriorating,” Stephen Cecchetti, head of the monetary and economic department of the B.I.S., said in an interview, referring to central bank policies that have flooded the world with cheap money since the financial crisis began in 2008. | The message from the group in Basel was that central banks cannot enable such lack of action indefinitely. “The balance between costs and benefits is deteriorating,” Stephen Cecchetti, head of the monetary and economic department of the B.I.S., said in an interview, referring to central bank policies that have flooded the world with cheap money since the financial crisis began in 2008. |
| In fact, there are already clear signs of central bank retrenchment. Fed Chairman Ben S. Bernanke indicated last week that the American central bank was likely to wind down the purchases of bonds it has used to push down market interest rates. The European Central Bank seems to be running out of ways to stimulate the euro zone, and there is doubt about whether the Bank of Japan can maintain an ambitious policy to flood the economy with money and achieve a target of 2 percent inflation. | In fact, there are already clear signs of central bank retrenchment. Fed Chairman Ben S. Bernanke indicated last week that the American central bank was likely to wind down the purchases of bonds it has used to push down market interest rates. The European Central Bank seems to be running out of ways to stimulate the euro zone, and there is doubt about whether the Bank of Japan can maintain an ambitious policy to flood the economy with money and achieve a target of 2 percent inflation. |
| As long ago as last summer, the Europan bank president, Mario Draghi, was publicly lamenting the limits of the central bank’s ability to address the broader problems of the European economy and calling upon political leaders to pursue structural solutions. | As long ago as last summer, the Europan bank president, Mario Draghi, was publicly lamenting the limits of the central bank’s ability to address the broader problems of the European economy and calling upon political leaders to pursue structural solutions. |
| Jörg Asmussen, a member of the policy-making executive board of the central bank, reiterated the point in a speech Sunday in Kiel, Germany. “The global reform agenda has lost momentum, as the sense of urgency imposed by the crisis has vanished,” he said. | Jörg Asmussen, a member of the policy-making executive board of the central bank, reiterated the point in a speech Sunday in Kiel, Germany. “The global reform agenda has lost momentum, as the sense of urgency imposed by the crisis has vanished,” he said. |
| But there did not seem to be any awareness of the limits of central bank forbearance among the 17 ministers in Luxembourg. Like students who have waited too long to get going on a term paper, the ministers pulled an all-nighter in a desperate attempt to complete their assignment — in this case, to establish a system meant to ensure that taxpayers never again have to pay so much for the mistakes of bankers. | But there did not seem to be any awareness of the limits of central bank forbearance among the 17 ministers in Luxembourg. Like students who have waited too long to get going on a term paper, the ministers pulled an all-nighter in a desperate attempt to complete their assignment — in this case, to establish a system meant to ensure that taxpayers never again have to pay so much for the mistakes of bankers. |
| The ministers have scheduled another meeting for Wednesday, a day before the leaders of the European Union’s 27 member states gather for a summit meeting in Brussels, their last scheduled meeting before the summer hiatus. The leaders have been expected to endorse the finance ministers’ decision — if there is one. | |
| The 18-hour marathon was aimed at breaking the so-called doom loop, in which struggling governments go deeper into debt to save their banking systems, only to face sky-high borrowing costs. That vicious circle was largely the reason Ireland and Cyprus required international bailouts, while Spain has struggled to avoid being sucked into a similar vortex. | The 18-hour marathon was aimed at breaking the so-called doom loop, in which struggling governments go deeper into debt to save their banking systems, only to face sky-high borrowing costs. That vicious circle was largely the reason Ireland and Cyprus required international bailouts, while Spain has struggled to avoid being sucked into a similar vortex. |
| But since agreeing in principle last year to centralize bank supervision in the euro zone and create a system to wind down terminally ill banks, the finance ministers have been snagged on various issues, including how to share the cost. | But since agreeing in principle last year to centralize bank supervision in the euro zone and create a system to wind down terminally ill banks, the finance ministers have been snagged on various issues, including how to share the cost. |
| The ministers initially agreed in Luxembourg on Thursday night to let the euro zone’s emergency fund — the European Stability Mechanism, or E.S.M. — pump money directly into failing banks, on a case-by-case basis in the latter part of 2014. But then, on Friday, the talks broke down on highly technical issues, like whether countries would have the discretion to protect some classes of bank creditors in a crisis. | The ministers initially agreed in Luxembourg on Thursday night to let the euro zone’s emergency fund — the European Stability Mechanism, or E.S.M. — pump money directly into failing banks, on a case-by-case basis in the latter part of 2014. But then, on Friday, the talks broke down on highly technical issues, like whether countries would have the discretion to protect some classes of bank creditors in a crisis. |
| The failure to reach a deal could further unsettle investors who were already jittery about the lingering recession in the euro zone, turbulence on global markets, renewed political instability in Greece and hints that Cypriot leaders are balking at their bailout agreement. | The failure to reach a deal could further unsettle investors who were already jittery about the lingering recession in the euro zone, turbulence on global markets, renewed political instability in Greece and hints that Cypriot leaders are balking at their bailout agreement. |
| The B.I.S. acts as a financial clearinghouse for most large central banks, including the Fed and the E.C.B., and also as a forum for central bankers to discuss policy issues. It uses its annual report to take stock of the global economy. | The B.I.S. acts as a financial clearinghouse for most large central banks, including the Fed and the E.C.B., and also as a forum for central bankers to discuss policy issues. It uses its annual report to take stock of the global economy. |
| Because the report was prepared well before the ministers’ meeting in Luxembourg, its publication right afterward was simply coincidence. But the message was not. | Because the report was prepared well before the ministers’ meeting in Luxembourg, its publication right afterward was simply coincidence. But the message was not. |
| While the B.I.S. has criticized politicians in the past, its verdict this year was unusually harsh, and implicitly aimed at Europe, where the E.C.B. has already cut interest rates to a record low of 0.5 percent. Mr. Draghi, reiterated last week that the central bank for the euro zone remained ‘'ready to act.'’ | While the B.I.S. has criticized politicians in the past, its verdict this year was unusually harsh, and implicitly aimed at Europe, where the E.C.B. has already cut interest rates to a record low of 0.5 percent. Mr. Draghi, reiterated last week that the central bank for the euro zone remained ‘'ready to act.'’ |
| But it is unclear what else the European central bank can do to stimulate the European economy, which has been shrinking for a year and a half. | But it is unclear what else the European central bank can do to stimulate the European economy, which has been shrinking for a year and a half. |
| The B.I.S. also had some harsh words for commercial bankers, particularly in Europe, saying they had failed to make an honest accounting of bad loans and other problems. It urged bankers to sell off damaged assets and raise fresh capital, so that they are able to resume providing credit to businesses and consumers. | The B.I.S. also had some harsh words for commercial bankers, particularly in Europe, saying they had failed to make an honest accounting of bad loans and other problems. It urged bankers to sell off damaged assets and raise fresh capital, so that they are able to resume providing credit to businesses and consumers. |
| ‘'Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system,'’ the B.I.S. said. | ‘'Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system,'’ the B.I.S. said. |
| The organization disputed claims by some banks that they have become safer because they have increased the size of the capital they hold as a cushion against losses. Much of the improvement in the amount of capital that banks’ have reported recently was ‘'window dressing,'’ the B.I.S. said, achieved by manipulating the way that risk is measured. | The organization disputed claims by some banks that they have become safer because they have increased the size of the capital they hold as a cushion against losses. Much of the improvement in the amount of capital that banks’ have reported recently was ‘'window dressing,'’ the B.I.S. said, achieved by manipulating the way that risk is measured. |
| ‘'Uncertainty about asset quality remains a greater concern in Europe,'’ the B.I.S. said. On average, banks in Britain, France, Germany, Spain and Switzerland are barely profitable, according to B.I.S. data, while banks in Italy are losing money. It is very difficult for commercial banks to raise capital unless they are profitable, suggesting that some will either need government help or will go out of business. | ‘'Uncertainty about asset quality remains a greater concern in Europe,'’ the B.I.S. said. On average, banks in Britain, France, Germany, Spain and Switzerland are barely profitable, according to B.I.S. data, while banks in Italy are losing money. It is very difficult for commercial banks to raise capital unless they are profitable, suggesting that some will either need government help or will go out of business. |
| The B.I.S. report avoided singling out individual countries, but it was clear that much of its criticism of economic policy was aimed at leaders in Europe who have been afraid to dismantle labor regulations that make it difficult for companies to hire and fire, or eliminate rules that favor certain interest groups at the expense of economic growth. | The B.I.S. report avoided singling out individual countries, but it was clear that much of its criticism of economic policy was aimed at leaders in Europe who have been afraid to dismantle labor regulations that make it difficult for companies to hire and fire, or eliminate rules that favor certain interest groups at the expense of economic growth. |
| A chart in the report showed that some of the most troubled countries in Europe are also the ones where it is most difficult to hire and fire, or to start a business, including Greece, Portugal and Italy. France also ranked among the most highly regulated economies as did Germany, despite its reputation as a model for reform. Spain has a highly regulated labor market but is relatively friendly to entrepreneurs, according to the B.I.S. | A chart in the report showed that some of the most troubled countries in Europe are also the ones where it is most difficult to hire and fire, or to start a business, including Greece, Portugal and Italy. France also ranked among the most highly regulated economies as did Germany, despite its reputation as a model for reform. Spain has a highly regulated labor market but is relatively friendly to entrepreneurs, according to the B.I.S. |
| Mr. Cecchetti said that Europe could create more dynamic growth and cut record unemployment, currently 12.2 percent in the euro zone, if leaders finally took action. | Mr. Cecchetti said that Europe could create more dynamic growth and cut record unemployment, currently 12.2 percent in the euro zone, if leaders finally took action. |
| ‘'There is no reason why Europe should have low long-run productivity growth,'’ he said. | ‘'There is no reason why Europe should have low long-run productivity growth,'’ he said. |
| The B.I.S. also weighed in on the debate about how quickly countries should cut debt, offering support to a pair of prominent U.S. economists whose work linked excess debt to poor economic performance. | The B.I.S. also weighed in on the debate about how quickly countries should cut debt, offering support to a pair of prominent U.S. economists whose work linked excess debt to poor economic performance. |
| That research, in 2010 by Kenneth Rogoff and Carmen Reinhart of Harvard University, was used to justify policies that imposed harsh austerity in countries like Greece. But a study published in April by economists at the University of Massachusetts found flaws in the data that Mr. Rogoff and Ms. Reinhart used to arrive at their conclusions. | That research, in 2010 by Kenneth Rogoff and Carmen Reinhart of Harvard University, was used to justify policies that imposed harsh austerity in countries like Greece. But a study published in April by economists at the University of Massachusetts found flaws in the data that Mr. Rogoff and Ms. Reinhart used to arrive at their conclusions. |
| The B.I.S. said its own research supported the broad thesis that too much government debt is a brake on growth. | The B.I.S. said its own research supported the broad thesis that too much government debt is a brake on growth. |
| ‘'Several years ago when we examined this question using different techniques and different data we got the same results,'’ Mr. Cecchetti said. ‘'We are very supportive of the original Rogoff and Reinhart conclusion. | ‘'Several years ago when we examined this question using different techniques and different data we got the same results,'’ Mr. Cecchetti said. ‘'We are very supportive of the original Rogoff and Reinhart conclusion. |
Jack Ewing reported from Frankfurt and James Kanter from Luxembourg. Mark Scott contributed reporting from London. | Jack Ewing reported from Frankfurt and James Kanter from Luxembourg. Mark Scott contributed reporting from London. |