Handelsblatt Exclusive

EU Official: Troika Role is Over

European Finance Ministers Attend Eurogroup Meeting
Klaus Regling sees an EU duo leading the euro zone's rescues from now on. Source: Bloomberg

The European Union’s top bailout official suggested that the days of the “troika” might be over, with an EU duo taking over management of any new euro-zone rescues. Klaus Regling, head of the European Stability Mechanism, told Handelsblatt that an expanded version of his agency could work together with the European Commission to manage future bailouts, replacing the role of the Washington-based International Monetary Fund and the European Central Bank.

The troika of the IMF, ECB and European Commission has led euro-zone rescues since the continent’s debt crisis broke in 2010. Mr. Regling’s idea of an EU duo instead of the troika goes back to a suggestion from Jeroen Dijsselbloem, the Dutchman who heads the Eurogroup of euro-zone finance ministers. “I think that a future European Monetary Fund that works together with the Commission could do this,” Mr. Regling said.

Such an arrangement could be implemented quickly because it wouldn’t require any amendment of the EU treaties, Mr. Regling, a former hedge fund manager, said. The German government has long favored turning the ESM into a European Monetary Fund and expanding its responsibilities. A German-French working group is studying ways to do this.

As part of that expansion, Mr. Regling, a German, suggested that the euro zone could set up a “rainy day fund” similar to those in the United States to provide short-term help for member countries with payment problems resulting from an economic shock. A supplementary unemployment insurance – similar to federal unemployment insurance provided in the US – could complement this aid.

“We need a limited mutual fiscal mechanism in the euro zone to be able to help individual member states in the event of sudden serious crisis.”

Klaus Regling, European Stability Mechanism

Such a fund would enable the EU to provide short-term aid without entering into a full-scale transfer union that makes members liable for the debt of other countries – something Germany has rejected. Mr. Regling estimated that a fund with 1 to 2 percent of the euro-zone’s GDP – or somewhere between €100 billion and €200 billion – would be sufficient to handle emergencies.

“We need a limited mutual fiscal mechanism in the euro zone to be able to help individual member states in the event of sudden serious crisis,” Mr. Regling said. In the U.S., he noted, such rainy day funds are financed by prepayments from individual states, while the supplemental unemployment insurance comes from the existing contributions from employees and employers.

In the Handelsblatt interview, Mr. Regling also spoke in favor of a permanent head of the Eurogroup, which is currently chaired by one of the euro-zone’s 19 finance ministers. Such an official would be good, he said, “to better represent the euro zone in international bodies like the G7 or the IMF.”

However, Mr. Regling was less optimistic about other proposals for closer integration in the euro zone. For instance, a suggestion from German Finance Minister Wolfgang Schäuble to transfer monitoring of budget policy from the European Commission to the ESM is “unrealistic” in the short term, he said, because it would require changes in the EU treaties.

Likewise, Mr. Regling said he sees “no realistic possibility in the foreseeable future” of bonds from member states being bundled together into “European Safe Bonds” because that would require mutualizing debt, a step Germany has consistently rejected.

As far as the current work of the ESM is concerned, Mr. Regling was optimistic about recovery in the euro zone. “The euro crisis is definitively overcome, and the economy is progressing everywhere better than expected,” he said.

Even Greece has made “huge progress,” Mr. Regling said, noting significant improvements in tourism, agriculture and shipbuilding. “The Piraeus harbor, for instance, handles ten times as many containers as before its privatization eight years ago,” he said.

His comments come one month after Greece was provided with another €8-billion tranche of aid, following tough negotiations with Brussels and a compromise between Germany and the International Monetary Fund, which is still pushing for euro-zone countries to forgive a portion of Greece’s debt.

If the government in Athens sticks with its reform program, there will be no need for a fourth Greek rescue, Mr. Regling said.

 

The full Q&A is below.

Handelsblatt: Mr. Regling. The eurozone economy is growing, unemployment is declining and even Greece has seen some improvement. Is the monetary union in good shape again?

Yes, things are going really well. We have finally overcome the euro crisis, and economic development is exceeding expectations. Four countries that were once crisis-ridden can independently obtain financing in the markets again, and even Greece is likely to make do without the ESM aid program by the middle of next year, provided the government sticks to the agreed reform requirements.

You have the reputation of being an incorrigible optimist…

…I can live with that, since reality has often proven me right.

Really? The OECD predicted weak growth of only 1.1 percent in Greece for this year, only half as much as the European Commission predicted. Isn’t it true that Europeans tend to whitewash the situation?

Greece’s GDP declined in the first quarter of 2017, and the OECD took that into account in its prognosis. More important, however, is the growth trend for the next decades, which the OECD sees much more positively than the European Commission.

But Greece will absolutely not require a fourth bailout program?

No, as long as the government sticks to its reforms.

That leaves Greece’s enormous mountain of debt. Government finances in other countries aren’t looking very good either. Debts continue to rise in France and Italy, and there is no turnaround in sight.

That isn’t entirely true. The new French president, Emmanuel Macron, is determined to bring the deficit ratio below the 3-percent limit.

François Hollande promised the same thing at first. Why believe Mr. Macron now?

There are two important differences. Mr. Macron announced his austerity policy during the campaign, meaning that he received a mandate from voters. This wasn’t the case with Mr. Hollande. Besides, Mr. Macron has a clear majority in the parliament, which Mr. Hollande did not.

Italy is the worst-performing country when it comes to growth and at the top of the list for government debt. Aren’t you worried that Rome might come knocking one day and ask for help?

Italy has grown at only half the rate of the rest of the euro zone for more than two decades. The country urgently needs reforms to become more competitive.

That’s the message the European Commission has been preaching for years, and Rome has consistently ignored it.

Not entirely. There were certain reforms in the labor market, but it wasn’t enough.

Germany’s center-right Christian Democratic Union wants to upgrade ESM into a European Monetary Fund. Did you expect that?

It is certainly surprising that the European Monetary Fund is becoming a campaign issue. But the subject itself is not entirely new. German Finance Minister Wolfgang Schäuble has been talking about it for some time, and so has the European Parliament.

Finance Minister Schäuble wants to transfer the task of monitoring budget policy to the ESM. This is currently the job of the European Commission. Do you intend to compete with the Commission?

No. I’m opposed to duplicate structures. If we were to shift the monitoring of economic policy from the European Commission to our agency, we would have to amend the EU treaty first. I think that’s unrealistic, at least in the short term.

Eurogroup head Jeroen Dijsselbloem, on the other hand, wants to abolish the troika in future bailouts of crisis-ridden countries, replacing it with the European Monetary Fund. Is that realistic?

The IMF will no longer be involved in future crises, and the European Central Bank probably won’t, either. But we will still need the European Commission, with its expertise on specialized issues like energy or labor market policy, to devise economic policy reform programs. So I do think that a European Monetary Fund could do this in the future, together with the Commission.

The European Commission dreams of a European treasury. Could the European Monetary Fund assume this role?

In theory, yes. But I don’t see a political consensus being reached on this issue in the foreseeable future. After all, it would involve the euro countries going into debt and being liable for it together. This requires a lot of mutual trust, which simply isn’t there at the moment.

Couldn’t the new German-French duo, consisting of Chancellor Merkel and President Macron, develop this trust? Starting at the German-French council of ministers on Thursday?

I am not taking part in those talks and therefore cannot comment on that. In general, I would say that the chances of success in German-French cooperation are better than they have been in more than a decade.

Mr. Macron is calling for a budget for the euro zone. Should Ms. Merkel grant him his wish?

I cannot and do not wish to give the chancellor any advice. However, I do believe that we need a limited, joint fiscal capacity in the euro zone so that we can help individual member states in the event of a sudden, severe crisis.

Will the euro zone finally become a transfer union?

We are not talking about permanent transfers or the communitization of debt here, but about short-term and limited crisis intervention. These so-called “rainy day funds” have existed in the United States for a long time. US states can resort to these funds when growth plummets after a severe economic shock. The United States also has complementary unemployment insurance that takes effect when unemployment exceeds a certain threshold.

Couldn’t euro countries that are unwilling to implement reforms take advantage of the situation and have their partners pay for their high unemployment?

No. A supplementary euro unemployment insurance would only pay in the event of a severe economic shock – otherwise it wouldn’t.

How big would a euro financial fund have to be?

One to two percent of the euro zone’s GDP would be sufficient.

That corresponds to a sum of €100-200 billion ($114-228 billion). Where is the money supposed to come from?

This is how it works in the United States. The individual states pay for the rainy day funds upfront. The complementary unemployment insurance is paid for with a small share of the existing employer and employee contributions, so that there is no additional financial burden.

Mr. Macron, like his predecessors Hollande and Nicolas Sarkozy, is calling for a euro economic government…

Former Presidents François Mitterand and Jacques Chirac wanted the same thing…

 

Exactly. Do we need it now?

Well, the Eurogroup already functions as a government of sorts.

Is that enough?

A permanent, full-time chairman of the Eurogroup could be a good thing, especially to better represent the euro area in international bodies like the G7 and the IMF.

The European Commission also has another idea: It wants to bundle and sell bonds of various euro countries under the appealing name European Safe Bonds. How do you feel about that?

In principle, these so-called safe assets would be a giant step forward. It would give us a market in Europe that would be as deep and liquid as the market for US Treasury bonds. But it only works if we partially communitize government debt in the euro zone, and I don’t think that’s a realistic option in the foreseeable future.

The European Commission claims that it could also work without joint liability.

It won’t work, because without joint liability these securities would not receive a triple A rating, and therefore would not be safe assets comparable to US Treasury bonds.

Mr. Regling, you will continue to run the ESM until 2022. What will the euro zone look like then?

The integration of the monetary union will accelerate now, but it won’t be complete by then. We could complete the banking union by 2022, create the European Monetary Fund and a small fiscal capacity for the euro zone, and give the Eurogroup a permanent chair. Most of the other projects require amendments to the EU treaty, which I don’t expect to happen in the next five years.

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author: berschens@handelsblatt.com

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