Jörg Asmussen: Eurozone cross-fire: the way out of economic recession
- assessment of a realist and a response to idealists and cynics
Speech by Mr Jörg Asmussen, Member of the Executive Board of the European Central
Bank, at the Bank of America/Merill Lynch Investor conference, Washington DC, 20 April
2013.
* * *
Sylvie,
Laurence,
Ladies and gentlemen,
Thank you very much for inviting me to speak at today's investor conference.
Introduction
The Eurozone can be difficult to understand. Especially when seen from this side of the
Atlantic, the complexities of the macroeconomic and financial situation and of the political
dynamics in Europe can be baffling.
To cut through the complexity and amidst fragile confidence and the "noise" of crisis
management simple answers and "once-and-for-all solutions" seem attractive.
Unfortunately, this kind of answer is an illusion. Because the crisis in the euro area is
multifaceted.
It is, at once, a crisis of public and private debt, a crisis of competitiveness and growth, and a
crisis of trust; in institutions, in politics and in decision-making. Tackling the crisis
successfully and comprehensively will require solutions for all of those.
When I read the commentary, especially over here, on the crisis in Europe, I often see two
stereotypical responses, those from what I would call "idealists" and those from "cynics".
First, the idealists: they say the euro area is too heterogeneous and divergent. They say the
euro area must integrate completely, or risk breaking up. As a solution to resolve the crisis,
they allege that only a move to a "United States of Europe" will do, with joint issuance of
debt, a transfer mechanism, and "the works".
Then there are the "cynics". They accuse Europeans of practising "medieval medicine"
- bleeding the patients in a bid to cure them. They contend the "bitter pill of austerity" will kill
the patient, and the people will not take it any longer. They say that overcoming the crisis will
need more time, less austerity; more public money, less reform. And they often call on the
ECB to do more.
I believe none of these caricatures reflect the reality of the response in Europe.
The US journalist Sydney J. Harris once wrote "an idealist believes the short run doesn't
count. A cynic believes the long run doesn't matter. A realist believes that what is done or left
undone in the short run determines the long run".
I believe it is imperative to convey, not only the short-term outlook for the euro area, but also
to dispel certain generalisations regarding the ongoing adjustment in Europe and the
longrun vision for Economic and Monetary Union.
In this context, allow me to briefly outline what I would consider, a "realist's assessment".
The on-going adjustment in EMU
The adjustment in the Eurozone is underway. There is also no doubt it is painful, especially
for the people in some countries of the periphery.
However, let me give you some evidence of what has actually been achieved.
In programme countries, we have seen a strong improvement of structural primary balances
since 2009. In Greece, for example, this is estimated to have improved by more than
14 percentage points of GDP between 2009 and 2012.
To put this into context, in this country, the "sequester" calls for cuts of 1.2 trillion dollars over
ten years. The equivalent of what Greece has done would have meant for the US an
adjustment of 1.6 trillion dollars over three years.
In EMU, this adjustment is being undertaken within a reinforced fiscal framework - a new set
of rules - which strengthens the ability to prevent and correct the accumulation of excessive
deficits. Furthermore, a new framework for the surveillance of macroeconomic imbalances
has been established.
And also on this front, a very large correction of external imbalances is visible.
In Greece, Portugal and Ireland, the current account balances have each improved by more
than 7 percentage points of GDP between 2008 and 2012.
It is true that much of the adjustment has been driven by a contraction in domestic demand.
However, in Ireland and Portugal export performance has also been strong, because
programme countries are now reaping the benefits from their significant improvement in cost
competitiveness.
This is evident from the significant reduction in unit labour costs. For Greece, Ireland and
Portugal we see about a 10 percentage point improvement relative to the euro area average.
The adjustment in Ireland has been spectacular, and translates into about an 18 percentage
point improvement between 2008 and 2012. This means that the past excesses have by and
large been undone.
Government bond spreads now fluctuate at much lower levels compared with the peak of the
crisis. This will eventually also facilitate the return to bond market access in Ireland and
Portugal.
This was also assisted by the announcement of Outright Monetary Transactions (OMTs),
which contributed significantly to removing redenomination risk in the euro area.
Some may ask: why can't the ECB do more? Why can't the ECB be more like the Federal
Reserve... or the Bank of Japan, for that matter? Why can't the ECB engage in quantitative
easing or have an employment target?
Those who make these calls must first consider the very different institutional set-up in which
we operate. The ECB can only take measures that are consistent with its mandate. Our
primary objective is price stability, we do not have the wide mandate which for example the
Federal Reserve has.
Second, the structure of the financial market in Europe is very different. In the US, for
example, a large share of financial intermediation takes place through capital markets. This
provides a broad and deep pool of assets to purchase. However, the structure of the euro
area economy is largely bank based. Thus our monetary policy strategy must be tailored
accordingly, mainly through the provision of credit to the banking system.
Third, the specific economic challenges we face differ from those in other parts of the world.
In this day and age, where many look to central banks as the ultimate problem-solvers of
many economic ills, let me also be clear that there are clear limits of what we, the ECB, can
- and cannot - do. We cannot repair unsound budgets. We cannot clean up struggling
banks. We cannot solve deep-rooted problems in the structure of Europe's economies.
Conclusion
I want to conclude with some clear messages.
To the cynics, my message is: we will not solve a debt crisis with more debt. Moreover,
simply giving more time will not resolve the underlying structural problems.
Member States who are implementing the necessary adjustments have begun to reap the
benefits. Relaxing now would mean endangering the hard-won gains of past efforts. The
foundations of future growth are fiscal sustainability coupled with structural reforms.
In a way, we have a "debt ceiling" in Europe too. It is not set by an Act of Congress, but by
the markets. Investors have clearly shown they are not willing to further finance Member
States with such high levels of debt, at a reasonable price. Therefore the adjustment must
continue.
To the idealists, my message is that the EU is, at this stage, an emerging union, built on the
basis of Member States who agree - or disagree - to pool sovereignty. Moving to a deeper
economic integration, which is commensurate with a monetary union, is necessarily a
process. But it is underway.
Such a deeper economic union will not be the archetypical Union, which some of you may
have in mind. It is worth remembering that the Union on this side of the Atlantic was built
over almost 250 years, and it took 150 years to establish a central bank. The EU is 60 years
old, and the euro, only 13.
Over recent years, the euro area has taken big steps forward to reinforce its framework for
fiscal and macroeconomic governance. Member States continue to display unprecedented
solidarity towards each other, providing financing for programmes of economic adjustment
along with the IMF. The establishment of a banking union, including a single supervisory
mechanism involving the ECB and, the forthcoming proposal for a single resolution
mechanism, are further examples of deeper integration.
Earlier this year, the ECONOMIST reviewed last year's doomsday predictions about the
"the pessimists did not overestimate
imminent demise of the Eurozone. It noted correctly that
the euro's problems, so much as underestimate the political will to do enough to stop a euro
break-up."
Going forward, it would be a grave error to underestimate the continuing political commitment
to making the single currency a success. But it also remains true what was once said,
namely that EU institution-building is like the love-life of the elephant: Everything goes on at
a very high level, a lot of dust gets raised - and you have to wait for months and years for
results.
Thank you.