In an interview with business weekly WirtschaftsWoche, a sister publication of Handelsblatt, E.U. Commissioner Valdi Dombrovskis talked about southern Europe’s economic and budget challenges.
Mr. Dombrovskis, this summer the European Commission waived fines over excessive deficit. Does the E.U. Stability Pact still have any credibility?
It’s true we canceled the fines against Spain and Portugal. But it shouldn’t be forgotten that there are two types of sanctions. One is penalty payments; the other is the suspension of E.U. structural funds. And the final word hasn’t been spoken concerning the latter. The discussions between the European Commission and the European Parliament are still in progress.
Do you seriously believe these funds can be cut?
It is true there is no precedent for penalty payments. But we have already suspended structural funds once, specifically in 2012 for Hungary. Back then the Hungarian government promptly corrected its budget and made the necessary adjustments – whereupon we released the structural funds. So this instrument does work.
The Commission has been notoriously indulgent with large members in the past. France has to cut its deficit to below three percent in 2017. Is that realistic with a presidential election coming at the end of April?
We hold the view that in 2016 Greece will meet its budget target – a primary surplus of 0.5 percent of its gross domestic product.
The French finance minister Michel Sapin has assured me that he will correct the excessive deficit.
But the French government’s estimate is based on a far too optimistic growth assumption.
Should the budget plan of a member state happen to deviate too far from the Stability Pact, we will send back the plan and demand corrective changes. But the signals I am getting from France hopefully indicate that this won’t be necessary.
The Internal Monetary Fund recently issued a devastating report on the Greek economy. Will the country stay a basket case forever?
I’m worried about Greece because it is the only country in the euro zone with a financial assistance program and because it hasn’t completed the second financial assistance program successfully. But there is good news. Greece’s economy grew again in the second quarter. This could go on next year if the reforms continue to be implemented. We hold the view that in 2016 Greece will meet its budget target – a primary surplus of 0.5 percent of its gross domestic product.
But the structural problems remain. The IMF has pointed out that only 25 percent of Greece’s payable taxes are being collected. Back in 2010 it was 50 percent.
Tax collection is one of the problems. We are providing technical assistance in that area.
Is the IMF implying that it will no longer participate in the third bail-out program for Greece?
We are working on keeping the IMF on board. We will know more once we’ve completed the second review of the current program. This is due to happen this fall. But predicting is difficult. The previous review was supposed to be completed in November of last year and dragged on until June.
The euro remains work in progress. What are you planning to strengthen the common currency?
We want to finalize the banking union. The two initial pillars are already standing, banking supervision and bank liquidation. We have already suggested the third pillar, the common deposit guarantee, providing that we lower the risks in the banking sector if we want to communitize it. That is why we will submit a proposal for capital requirements on banks by the end of the year.
But the euro zone is still poorly equipped to cope with shocks in individual countries.
The European Commission will issue a white paper in March on the further steps to complete the economic and monetary union. One discussion is regarding a stability mechanism. It is also known as fiscal capacity. One option would be something like granting loans to crisis-hit countries to support investments. This would prevent credit squeezes that further dampen growth. Investments would instead be strengthened – and constant tax transfers between E.U. member states avoided. Another variant is the E.U.-wide unemployment insurance…
… which Berlin opposes. Do you disagree?
The discussions are still ongoing and some finance ministers favor a common unemployment insurance scheme. Others have diverging opinions. I personally advocate for the investment option.
This article first appeared in the business weekly, WirtschaftsWoche, as sister publication of Handelsblatt. To contact the author: email@example.com