Poul Thomsen works in an office at the International Monetary Fund headquarters in Washington that currently looks a little like a giant construction site. As director of the IMF’s European Department, much of his workload is also a work in progress as he focuses mainly on Greece, the Ukraine crisis and the unconventional monetary policies, including quantitative easing, taken by the European Central Bank.
Handelsblatt: Athens is about to go bankrupt. Do you still think it’s possible to reach an agreement?
Poul Thomsen: Over the last few days, talks have gained some momentum between the three institutions [the so-called troika making up Greece’s main creditors, which includes the IMF] and the Greek government. That’s good news, and we’re hopeful. We’re making progress but we’re far from reaching our goal. The negotiations need to gain a lot more steam if we want to reach an agreement in time.
How much time is there?
Athens’ government said that the financial situation is very tense. Maybe we can go on until June but then Greece will be facing very large payments. We need an agreement before that so that additional assistance loans can be paid out.
The government in Athens is rejecting many of the conditions that are attached to an aid program. Can you understand why?
We must accept that there is a new government that was asked by the voters to deal with the crisis differently. As always, there are different ways to fulfill the demands of the aid program. There is always flexibility. But the main principles of the program need to be fulfilled: We need to make sure the financial sector is stable and state finances are strong. We cannot support a program that doesn’t fulfill these criteria.
Would the euro zone be able to deal with a Grexit?
To be clear: We expect Greece to remain in the euro zone and that the Greek government is serious when they are saying that they want to do anything in their power to remain a member of the euro. Nobody should think that a Grexit is without problems. The consequences for Greece would, without any doubt, be traumatic.
When it comes to Europe, it is in a stronger position today. It has a firewall thanks to the ESM rescue package and it has a banking union. And it has a European Central Bank with better instruments. But even Europe would be exposed to risks. Those risks depend on the economic-political responses that European government would give after a Grexit.
What kind of a response would that have to be?
It is very important to avoid long-term risk. For example, the danger that people think the euro zone is like a club which you can enter or leave at any time. This would lead to doubts regarding other states. To leave no doubt about that, we would need a strong political signal that there will be more integration. In the long run, a currency union needs a stronger fiscal and political union.
What should be the priority in the continuation of the euro zone?
Europe needs a reform package: A continuation of loose money policy; continuing the strong progress we’ve already made towards a banking union; and using fiscal-political leeway as far as possible. It’s no secret that Germany would have sufficient room to increase the investment budget. Of course, saying that, we have to closely follow the rules of the stability and growth pact. The most important part of the package is extending structural reforms.
That’s what the German government keeps saying.
Structural reforms are important for several reasons: We all know that reforms are important to increase growth potential in the medium term. But they’re also important politically for the short term – here and now – to guarantee a wide support for the entire project. We want to convince German politicians to support the ECB’s monetary policy including bond buying, which is very controversial in Germany. For that, we need to make sure that German politicians can see that other European countries are introducing structural reforms. Structural reforms are also necessary within Germany, I should add.
What does that mean exactly?
Germany needs to strengthen and liberalize its service sector and increase domestic demand. That would also help to reign in Germany’s extremely high export surplus in the medium term, which is likely to rise even further thanks to the low oil price.
The surplus is also a consequence of the ECB’s deflationary policies.
The ECB is fighting against the risks that come with low inflation. Those risks are big. That’s why bond buying is the right thing to do.
At the same time, risks for financial stability are rising too…
I understand those concerns. But for now, we don’t see any significant stability risks. There’s no proof that there will be a bubble or that investors are taking unjustified risks. At that point, strong low inflation is a way bigger risk than a speculative bubble. The ECB is doing the right thing.
The interview was conducted by Jan Hildebrand who is based in Berlin and covers finance, and Moritz Koch, Handelsblatt’s Washington correspondent. To contact the authors: Hildebrand@handelsblatt.com and Koch@handelsblatt.com