© Peter Vanden Houte
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As a matter of fact things are getting somewhat better. If you look at the reflection of the lack of competitiveness, such indicators as the massive current account deficits in the peripheral countries have shown signs of improvement, especially in Ireland. Moreover, the current account deficit has been also decreasing in such countries like Spain, Portugal and Greece; however, it did come at a price as the level of unemployment has rocketed in those countries.
Nonetheless, I am not that pessimistic because the measures that have been taken are starting to pay off and most probably more still has to be done. Thus, we will see growth remaining quite weak over the coming years because of the need for further deleveraging and further reforms in the peripheral countries.
Moreover, the question is whether reforms alone are sufficient? I think that probably there should be some burden sharing one way or another. Considering countries like Spain and Greece with 27% unemployment, it becomes hard to reform any further without help.
Hence, the bottom line is that I see some convergence happening; however, I am afraid that some assistance will probably be needed from stronger countries to keep the reforms going further in the peripheral countries.
There are various solutions proposed to the EU crisis like euro bonds, fiscal union, banking union and even federalism. What solutions do you see to be the most feasible?
It all boils down to burden sharing and to what extent stronger countries want to risk losing or transferring money one way or another to weaker countries. Thus, basically, this is the issue at stake. I am not convinced that federalism or fiscal transfers will be implemented rapidly. Moreover, I do not think that the Eurozone is ready to have a more centralized policy with a possibility of money going from stronger to weaker countries like in the US. In my view, it looks quite improbable in the short-run, since the nation states are not ready to transfer fiscal receipts from their own population to other ones. Therefore, in my view, this is not a short term solution and we are not going to be the United States of Europe tomorrow.
As concerns the banking union, in my opinion, that is certainly going to happen. However, the only remaining question is how much potential burden sharing will the stronger countries agree with. If we are talking about a common or a Euro-wide deposit guarantee, then we need to consider how feasible this option is. Moreover, it would actually mean that, for example, German banks would have to contribute to a common pool of the deposit guarantee or resolution funds, and they are not very keen on doing that now. Thus, I neither see it happening in the short-run.
However, the banking union will be set up, and that is likely to happen in the near future. Even if it is not a highly elaborated banking union, other elements would be added later. For example, the burden sharing could be included in the initial construction, but it would still be a gradual process.
Another potential element is the common bonds, which, in my view, is more likely to happen than fiscal federalism. For example, I could see short-term Treasury bills issued by the Eurozone itself taking place in the next five years. To my mind, this would create a common financial pool, which is definitely something that is feasible.
Perhaps the last one aspect is the fiscal transfers that I do not see likely being institutionalized, but I can see it happening on ad-hoc basis. I would not be surprised if some of the peripheral countries' debt that they now owe to the EFSF or ESM will be forgiven. For instance, I expect that the creditor countries and the European stability funds will come to the conclusion in a few years' time that it would be better if Greece does not have to pay back the whole amount of the rescue funds. Thus, to some extent I can see transfers occurring, however, it certainly will not be institutionalized within the European federal framework but it will be purely on an ad-hoc basis.
At the end of the day, I would conclude that it is better to help the weak countries like it is already happening now to some extent. Ireland, Portugal and Greece have already received some improvement in the terms of the loans, i.e. the maturity has been lengthened, the interest rates paid on these loans have been lowered. Thus, implicitly there are already some transfers to these countries, but that could become more explicit for the weakest ones in the coming years.