European Institute

Rhetoric about the debt threats sounds similar on both sides of the Atlantic, focusing on political leaders’ apparent inability to cope with the crises. In fact, the resemblances and comparisons are superficial, argues prominent economist Simon Johnson in a trenchant article entitled: “Who Is In Worse Shape – The United States or Europe?”

Poland has taken over the rotating presidency of the EU for the first time since it joined the bloc in 2004. Poles are largely "pro-Europe" and are enjoying an economic growth rate of about 3.5%.  So even though the country is not part of the eurozone, Poland has indicated that it will use its six months in the EU guidance role both to strengthen the single market and help set up the next EU budgets with more sources of revenue. The group, Cicero Consulting, says that Warsaw will also pursue reforms in economic governance, including the implementation of new regulatory authority for improved EU-wide oversight in banking and broader financial services. There are also new taxation issues for the EU to be tackled by the Polish presidency. Cicero has produced a clear outline of these challenges in a report to be read here.

Cicero Consulting is a member of The European Institute.

Perspectives is an occasional forum of The European Institute reflecting member views on topical issues.

The recent events in the eurozone have raised questions about the appropriate role of independent credit ratings in the financial system and prompted a flurry of suggestions from European policymakers, from intervening in ratings methodologies to suspending certain sovereign ratings.

The bigger question for the financial system is how ratings are used by regulators and policymakers. Their reliance on ratings in determining regulatory and policy decisions may be encouraging excessive focus on rating agency opinions.

Deven Sharma – president of Standards & Poor’s – explores the right way to use the agencies in a July 25. Financial Times article that you can read here (or here). What is needed, according to Sharma, is a more thoughtful way to reduce what some perceive as the excessive influence of ratings in financial markets and the financial policy process.

He says that rating agencies do not claim to be the sole voice expressing reasoned views about the future. (The Federal Reserve appears to agree as it said on Monday (25 July) that the U.S. government is trying to reduce any undue reliance on credit ratings.)

The head of S&P believes that a better approach is to drop regulatory mandates to use ratings and avoid making ratings the sole criteria for policy decisions. That would reduce their impact on markets and on public policy. And it would free rating firms to compete entirely on quality. Investors, in turn, would have the discretion to choose which are useful and which are not, without being compelled to refer to particular benchmarks by regulatory or policy measures.

Standard & Poor’s is a subsidiary of McGraw-Hill Companies – a corporate member of the European Institute.

Perspectives is an occasional forum of The European Institute reflecting member views on topical issues.

Leaders of the eurozone countries have agreed a new bailout package for Greece worth 109bn euros ($155bn). It includes, for the first time, support from private lenders, including banks, which will give Greece easier repayment terms.