The financial crisis: Someone has to lead the way

If anyone had suggested last summer that many of the world’s largest banks and financial institutions were about to go under, be nationalised or receive massive government bailouts in order to stay afloat, they would have been brushed aside as a prophet of doom.

Now, hardly a day goes by without new dramatic developments. The authorities in most countries are implementing political measures to limit the damage to the real economy. Nevertheless, there is a danger that the world economy will slide into recession.

Many people are anxious about their jobs, their savings and their private economy. Our most important task is to combat unemployment and prevent an economic crisis. As we know from experience, the people who are hit hardest by such problems are those who are already in a financially vulnerable situation.

The financial crisis has brought about another change. There is now general agreement on the need for better regulation of the international financial markets. Eighteen months ago, when the Party of European Socialists initiated a debate on reforming the regulation of the financial markets, there were many who could see no good reason for government interference in the market. Few people would dare to maintain this position today. Events have triggered a clearer common understanding of the fact that a sound social-democratic compromise between market forces and government regulation provides the best solutions for both individuals and businesses.

The causes of the current crisis will be the subject of economic research for many years ahead. But we believe that the key factors, for example in the US, include too rapid growth in high-risk lending** and the development and growth of new financial instruments that have not been adequately regulated. Lack of transparency and oversight has increased uncertainty with regard to the quality of  bank loans. Lack of confidence has created a climate of fear and a snowballing financial crisis that no country can fully protect itself against.

Norway, however, is better equipped than most countries. We have robust banks with low losses, a well-regulated financial sector and a supervisory body, the Financial Supervisory Authority of Norway, which is responsible for all forms of financial instruments. The Government is a major shareholder in Norway’s largest bank, and the Norwegian Banks’ Guarantee Fund provides a generous deposit insurance scheme and safety net. The budget proposal that was presented on 7 October provides a sound basis to counter the economic downturn. And one week later, the Government and Norges Bank presented measures for ensuring long-term access to funds for Norwegian banks. We have also emphasised that we are willing to assist Iceland in what is perhaps the most serious economic crisis the country has faced in modern** times.

The crisis originated outside the Nordic region, and therefore the long-term political solution must be to establish a stronger international regime that can prevent a recurrence in the future. We do not have time to wait for a perfect set of global rules to be drawn up. Someone has to lead the way. This is why Norway has responded positively to political initiatives that are a step in the right direction. The EU, as the largest economy in the world, can play a key role and be a driving force in cooperation with countries outside the EU, and not least vis-à-vis and together with the US.

It was with this in mind that the Party of European Socialists (PES) started talks with representatives of the Democratic Party in the US one year ago, which led to the establishment of the Financial Market Reform Network in June this year. The network is made up of PES, the Norwegian Labour Party, representatives of the Democrats in the US and representatives of the Democratic Party of Japan.

Key measures will be:

1. Universal legislation covering all financial players. Many of the world’s largest investment banks, hedge funds and private equity funds have been exempt from the requirements for transparency and disclosure that apply to the rest of the market. Since these players are responsible for much of the increase in debt worldwide, they must also be subject to rules to prevent new debt crises in the future. Likewise, supervisory bodies must be responsible for monitoring the whole range of products and actors in the financial markets.

2. Requirements for transparency and disclosure must also extend to areas such as debt and equity, identification of large stakeholders, executive pay and bonus schemes.

3. Capital requirements for banks and financial institutions should include all players involved in similar activities.

4. Executive remuneration and bonus arrangements that encourage short-termism that focuses on the upside potential and ignores downside risk should be restricted.

5. In many countries, stronger protection of workers’ interests is needed in connection with company acquisitions, especially in connection with leveraged buy-outs. It is also important that pension funds comply with principles of transparency concerning investments, in the way that – for example – the Government Pension Fund Global** in Norway does, so that employees have insight into how their money is being invested.

Many of these proposals were adopted by the EU Parliament this summer following the initiative taken by the Socialist Group, and as a result of a compromise between this group and the conservative and liberal party groups. The social democrats in both the EU and Norway want further steps to be taken, for example regulation of credit rating agencies, which play an important role in evaluating the risk and quality of financial instruments and companies. Following the decision in the EU Parliament, the European Commission must take the first steps in this direction.

Governments all over Europe are working to resolve the acute financial crisis and to ensure that that the financial system can start to function normally again. Our most important task is to pursue an economic policy that keeps the wheels in motion and prevents unemployment. This will require a firm government hand in the regulation of the economy, both within each country and across national borders in our increasingly global economy. The foundation for a joint approach has already been laid in the work started by PES and democrats from the US and Japan a long time before the current acute financial crisis arose.