I have a backlog of matters to talk about in this blog, but have been very busy these last two weeks. I will be writing more on what has happened in these weeks during the next few days.
 
However I attended a special Committee on the Financial, Economic and Social Crisis (CRIS) hearing  held on Thursday 14 January in the Parliament which I thought was enlightening about where we really stand on the crisis and I want to share my notes with you without further delay.
 
It was a meeting of two panels. The first panel was addressed by Michel Aglietta, (Professor of Economic Science, Paris), Philippe de Buck (Business Europe), Stefan Schneider (Chief International Economist, Deutsche Bank) and Antonello Pezzini (European Economic and Social Committee).
 
According to Aglietta, financial debt remains high and is rising. Inflation is unlikely for now and deflation is generally expected. Households are paying off their loans but don't expect any increase in pay. Rather they anticipate job losses. Business's liabilities are increasing and borrowing is flat (and possibly will decrease). This year the eurozone can expect a 1% percent increase in growth, mainly through exports to emerging markets and help from fiscal policy. Growth is held back by overcapacity and weak balance sheets. The end of  cash for clunkers is affecting the car industry.
 
De Buck, a Belgian, pointed out that it is easy to increase borrowing but hard to improve the balance sheets afterwards according to the experience of his country.
Schneider expected that according to the figures we will be back to a pre-crisis GDP level by 2012. This means a 9% drop in GDP and a medium term welfare losses. World trade has dropped by 12% but is worse in the Eurozone at 14%. Companies' balance sheets have deteriorated and have restricted  access to capital and credit. He echoed Aglietta saying that credit growth is flat especially because of banks' balance sheet problems. Countries that did not have a housing bubble but suffered a financial shock have already started to turn around. Meanwhile countries such as Ireland, Spain and the UK (which had housing bubbles) are taking much longer to come out of the crisis. In fact the bad news at their banks will continue for awhile.
 
Overall the first panel showed that worldwide trade, employment, spending and credit has been affected by the crisis, while worldwide sentiment has been improving since early 2009. But it is too early to tell how optimistic we should be, since we are still in unchartered territory.
 
The second panel on the effect of the crisis on public finances consisted of Marco Buti (DG Economic and Financial Affairs, European Commission), Klaas Knot (Dutch Ministry of Finance), and Casper de Vries (Monetary Economics, Erasmus University, Rotterdam). The panel addressed the question of how long the fiscal stimulus can last and when to exit from it.
 
Buti showed that EU public debt has roughly increased from 60% to 80% of  GDP in a few years. Without consolidation, he said, it will be at 120% by the year 2020. In the best case scenario it will not drop below 90% by 2017. This depends on self-sustaining recovery which limits job loss and promotes growth. Fiscal policy is important in limiting the crisis but at a price in public finances. We should begin consolidating by the year 2011. He also said that the effect of aging populations will have a far greater consequence than the crisis. We need, he said, to consider reforming pensions, healthcare and increasing the retirement age.
 
Knot made it clear that the credibility of public institutions is critical at times of crisis and that the two most important factors affecting the room for maneuver of the state was the size and importance of the banks relative to the country's GDP and the state of public finances. He illustrated this point by saying that in 1990 only 1 of the 25 largest banks in the world had a balance sheet bigger than 25% of the host country's GDP. In 2007, 11 in 25 had a balance of larger that 75% of the host country's GDP. In addition, whereas 10% of the working population worked in financial services in 1990 today it is 15%. Stimulation of the private sector is important, but public money has to spent wisely. He said that we had to get through the crisis first by stimulating the economy.  Then we can move on to cleaning up the balance sheets and fixing the national budget. In the future banks cannot be allowed to grow to be too big to fail. The markets are demanding that banks have a 10% of core equity which is considerably higher than Basel requires. Light touch supervision of banks will not work and they need to be regulated closely. On a personal note he was outraged that the subordinated debt holders suffered nothing in the banking crisis. He said that the Dutch banks had already started repaying the government with an interest rate of 20% and that they were unhappy about that.
 
The panel pointed out that the USA after the second World War had a national deficit of 250% but the Fed kept the interest rates low and, through economic growth over time were able to pay it down. They underlined that the US economy has greater flexibility to restructure itself than Europe does because of the mobility of its labour force and its more accommodating labour climate and large, homogenous nation. Europe on the other hand has barriers to mobility such as language, pension laws (especially for older workers), and stricter labour laws.