crisis conditions

Stabilizing the Euro

  • Why it matters

    Why it matters

    Though Donald Trump still dominates headlines, economists remain concerned that Europe has work to do at home on the euro crisis before they can worry about the 45th president of the United States.

  • Facts


    • Lupus alpha is an independent investment company that was founded in Germany in 2000.
    • Clemens Fuest is president of the Ifo Institute for Economic Research.
    • Tomáš Sedláček is the chief macroeconomic strategist at ČSOB in the Czech Republic.
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Two economists, three opinions? Just the one. Clemens Fuest and Tomáš Sedláček agree what southern Europe needs to do is save. Source: DPA, PR [M]

Though concerns about the new U.S. President-elect Donald Trump are dominating the news, Europe still has another pressing problem: the euro.

The euro crisis isn’t over yet, nor will it be until southern Europeans reduce debt, say economists Clemens Fuest and Tomáš Sedláček. They talked with Handelsblatt about how to deal with nations in debt at a meeting of Lupus alpha, the investment management firm based in Frankfurt. Like the old adage ask two economists for an opinion and you’ll get three, they had differing suggestions for how to go beyond that, in a wide-ranging discussion about economic policy.

With growth slowed in southern Europe, Mr. Sedláček, an award-winning writer and chief economist at the Czech ČSOB bank, said it makes little sense to impose penalties on countries that then will have to pay these back with further debts.

“The problem, though, is that in the euro zone we have mutualized our monetary policy but not our fiscal policy,” he said. “I believe that governments should also not be responsible for fiscal policy if they can’t print money. Only tax policy should remain in their hands.”

“We should calmly imagine that there could be no growth in Europe for the next 20 years.”

Tomáš Sedláček, Economist

If growth were boosted, the ratio of debt to the gross domestic product would be smaller, and countries could – like Germany – grow out of debt.

Certainly this would be better than setting rules in Brussels and then not sticking to them, which Mr. Fuest called a good way of “messing things up in Europe.” Mr. Fuest, who is president of the Ifo Institute for Economic Research, argued that not imposing the penalties shows that that whole system doesn’t work and needs to be reformed. “Because the European Central Bank has largely evened out the differences in interest rates between countries, there is no incentive to reduce deficits,” he said. 

But even approaches designed to drive growth might not necessarily have the desired effect, Mr. Sedláček said. He noted that the Juncker Plan, the three-year, €315-billion European investment fund, might have no impact on growth for Europe, and added, “that’s something that people should get used to.”

“We should calmly imagine that there could be no growth in Europe for the next 20 years,” he said. “When I confront my students with this, they get up in arms and make suggestion after suggestion of how to speed up growth.” He said he responded by telling them that instead, people should find ways to live in a country that does not grow. “It isn’t written anywhere that permanent growth is a God-given right.”

Growth need not be just about having a third car and other superfluous consumption, Mr. Fuest commented. “It’s also about education, participation in cultural life, access to modern health care. Growth is the foundation of our economy.”

He said the real question to ask is why European economies aren’t growing any more? The Juncker Plan focuses on investment projects where there is a monetary return, he said. So it’s about private investment. “Here, state intervention is only useful if there is a market failure. It is not clear why this should be the case. I am convinced that we will only achieve higher growth rates once we have reduced our debt. Then the confidence of investors will return.”

Mr. Fuest had some specific advice for Italian Prime Minister Matteo Renzi. There is widespread concern about Italy’s weak economy, which failed to grow during a recent 13-year period. There is also fears about the bad debt held by Italian banks, which are seen both as too big to fail but in danger of doing so. The amount of bad loans Italian banks hold represents 40 percent of all those within the euro zone, so concerns about Italy are also concerns about Europe’s financial health.  

“The first thing he needs to do is to restructure the banks through a bail-in,” Mr. Fuest said. “He must also reduce Italy’s public debt. He should reintroduce a real estate tax. Italy has a very rich private sector. Italy still has an archaic and inflexible labor market that makes it unattractive to invest there, and an inefficient judicial system.”

All these are steps that could lose Mr. Renzi the upcoming referendum on December 4, but would be the right thing to do, he said.  Italians will vote on a set of constitutional reforms in the referendum.  Mr. Renzi has said he would resign if he loses. 

For its part, Mr. Sedláček said that Germany, with its insistence on strict savings during the recession, is not part of the problem for southern Europe.

“Otherwise Europe would be in a similar position to Japan with its ever-new economic stimulus packages, which only peter out,” he said. “Germany is the only country that behaves in a European way and looks a little beyond its national borders. I see the role of Germany very positively.”

Mr. Fuest agreed that Germany’s influence on the European Union currency has been positive.

“Germany stabilizes the euro zone,” he said. “The problem is that the euro zone is a monetary union of sovereign states. In countries with their own currency, one could print money that devalues exchange rates. We must return to a situation where the problems of one E.U. country are not the problem of all of them.”

The two economists differed on how far the loose monetary policy of the European Central Bank is helping. It is being used too freely, Mr. Sedláček argued. “Perhaps I’m being a bit too harsh here, but I think such a loose monetary policy should only exist in the most severe crises,” he said. 

Mr. Fuest disagreed, though he saw a time when conditions might change: “An expansive monetary policy is right as long as inflation is less than the ECB’s target of close to 2 percent. In the coming year, inflation is likely to return slowly because of the oil price. And I think it would be right to begin removing the extraordinary measures.”

But the euro zone and the long-lasting crisis couldn’t wholly distract the economists from President-elect Donald Trump and how his economic policies might affect other countries around the world.

“The fact is that when America coughs, Europe gets pneumonia. We saw this in the financial crisis,” Mr. Sedláček said. “Mr. Trump in the United States is in no way as dangerous as a Trump-like figure would be in Europe, Ms. Le Pen in France for example. If a nationalist, protectionist with anti-globalization tendencies came to power in Europe, it would lead to the breakup of the European Union.”

Mr. Fuest argued that Mr. Trump’s influence is already being seen from overseas. “The announcement of his investment and tax cut policies already pushed the dollar upwards,” he said. “This is good for European exporters; German companies in particular are profiting from it. If this causes interest rates to rise significantly, that would be less good for southern Europe.”

But if the president-elect acts on some of his more protectionist campaign rhetoric “then it would be the other way around,” Mr. Sedláček said. “Despite everything, we should not forget that the E.U. market is larger than the U.S. market. As Europeans we tend to downplay ourselves, but we are a market with 500 million people, versus 300 million in the U.S.”


Donata Riedel covers economic policy for Handelsblatt. To contact the author:

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