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The Fluent Functioning of Financial Markets – a Challenge for the Region

Submitted by on 27 Mar 2013 – 17:33

By Paulius Saudargas, outgoing President of the Baltic Assembly; Deputy Elder of a Parliamentary group of Homeland Union-Lithuanian Christian Democrats
On the 1st of January the organization of the Baltic Assembly from the Presidency of Lithuania will be forwarded to Latvia and from that moment it will have to play the first violin to all three Baltic parliaments to work together. Although in recent years the co-operation among Baltic countries has brought obvious benefits for each country, but there are still unresolved questions in the region.

States are closely related to one another

Little by little we cope with the consequences of the global financial crisis, however, as experience shows, we have to prepare a sledge in summer, and transportation – in winter. In other words, we cannot relax, but consistently try to improve mechanisms which possibly mitigate possible future shocks in region. One of the sensitive areas, which requires constant attention and more effective care is the financial markets.

The financial crisis originated in 2007 in the U.S. and spread around the world like an epidemic. This has clearly demonstrated to us how national finances are related to each other, and that the various problems that have arisen in one country have led to certain negative effects in other markets. Accordingly, troubles coming from one sector of the economy can easily impact on the others. And that influences our lives, so everyone should be interested in finding effective solutions to problems and stability in the financial market.

Therefore, firstly EU Member States, and other major states should use macro-economic tools, optimizing the functioning of financial markets. Secondly, we should start with ourselves –we need to strengthen co-operation among the states of Baltic region.

In the context of the European Union we can be proud that our region is represented as an example to other countries of consistent economic growth, the ability to manage the economic crisis, and the compliance with financial discipline, but to admit fairly that there are still many things to improve.

The conclusions are drawn

As already mentioned, the global financial crisis has had a decisive impact on the co-operation which has intensified seeking the smooth functioning of financial markets, in the context of EU policy and also on the level of supervising financial institutions. Talking about regional co-operation among the Nordic and Baltic countries, one of the most important documents is the Memorandum of financial stability and crisis management signed in 2010 by the eight Nordic and Baltic Countries. The aim was to strengthen co-operation among these states’ finance ministries, central banks and supervisory authorities, and also to improve the exchange of necessary information about the condition of operating financial groups in the region, and if necessary, take action as soon as possible so that the negative effects on the economy will spread slowly and as little as possible. We cannot reject one more goal – to reduce the total cost of crisis management in advance to agree on principles of burden-sharing. Although this memorandum is certainly welcome, it still has not resolved the uncertainty of division of competences between European supervisory authorities and the regional stability groups which is necessary in seeking to avoid the duplication of its functions. In addition, there still remains the need to create a balanced mechanism of cost-sharing.

What should we focus on in the future

I would agree with the Vice-President of Baltic Assembly’s Economics, Energy and Innovation Committee Sven Sester who during the 18th Baltic Council named the areas that should urgently be given special attention. There is a need for greater co-ordination of the Baltic and Nordic financial market supervisory authorities’ work because at the moment, despite the close integration of markets there still exists a variety of supervisory standards, relatively large differences in the banking system, full deposit protection is not provided and financial and regulatory institutions are not given enough leverage to prevent various problems and crises. Of course, it is possible to prevent it, but there is the need to ensure a smooth exchange of relevant information between the relevant authorities of countries in the region, which, unfortunately, does not always appear so easy.

For example, the collapse of bank “Snoras” in Lithuania and “Krājbanka” in Latvia exposed the systematic errors due to the lack of information.

Actually, trends of global economics can be foreseen but the various crises cannot be avoided completely. In such cases, care must be taken that negative effects would be minimized. And this requires preparation in advance. Let’s remember the specific example of Estonia, which was able to significantly mitigate the impacts of the economic crisis because it has stored state’s reserves for such a contingency. This cannot be said for Lithuania, where the government then squeezed the social sector in the huge debts. Talking about the accumulation of such a reserve was seriously started only in the last term of parliament. I hope the new ruling majority will not frustrate this idea, especially since we have a good example from a neighboring country.