"THE EU
(ONCE AGAIN) AT THE CROSSROADS: THIS TIME MAY BE
DIFFERENT?"
Keynote speech by Professor John (Iannis) Mourmouras*
Bank of Greece Senior Deputy Governor
Former Deputy Finance Minister
"The
at the National Bank of Romania - OMFIF Economists Meeting entitled
state of the euro area and conditions for accession:
lessons from the past, tasks for the future"
Bucharest, 22 May 2018
Your Excellencies,
Ladies and Gentlemen,
Allow me first of all to thank the Governor of the National Bank of Romania, Mugur
Isarescu, and the OMFIF Board of Directors for the kind invitation to deliver the
speech at today's National Bank of Romania-OMFIF Economists
keynote Meeting. It
is a great pleasure and honour to be in Romania, a country in which the 1821 Greek
Independence Revolution has its roots. Prominent Greeks originating from here helped
to free Greece from four hundred years of Ottoman rule. Your country today hosts a
vibrant Greek business community, which I will be addressing at the Greek-Romanian
Chamber of Commerce at a dinner event tonight.
In its history of six decades, the EU has been faced with multiple crises; it came close
to breaking point, but managed to overcome, for instance, the 'empty chair crisis',
when De Gaulle refused to take part in Council meetings, the rejection of the
Maastricht Treaty by the Danes or the Nice Treaty by the Irish. The solution then and
now is to move continuously pedalling forward, for instance, with the adoption of the
single currency, the enlargement to Central and Eastern Europe after the end of the
Cold War, and the completion of EMU today.
My speech today will be structured in four sections. After a brief introduction
presenting the current economic juncture around the world, I will very briefly discuss
the state of the euro area economy. In the second section, I will take a look into the
incomplete architecture of the Economic and Monetary Union (EMU) and where we
stand today, highlighting the downside risks of the lack of progress on the necessary
reforms and, more particularly, the populist rise. The third section will be focused on
the countries of Central and Eastern Europe (CEE) as candidates for euro area
accession and also present the benefits of EU membership, taking a look into the EU
funds received under the current EU budget and how EU financing will evolve under
the European Commission's new proposals on the new budget
for 2021-2027. I will
on Romania's prospective euro area
also offer my view there accession. In the final
section, I will offer some remarks about my own country, Greece, which seems to be
finally coming out of the woods after three adjustment programmes within the
eurozone.
*
Disclaimer: Views expressed in this speech are personal views and do not necessarily reflect those of
the institutions I am affiliated with.
1. Introduction and a few remarks on the state of the euro area economy
At a global level, as I was the official representative of the Bank of Greece to
IMF/WB Spring Meetings last month in Washington DC, I would like to share with
you my takeaways: caution and scepticism are the two catchwords I got from the
Meetings. For instance, the heightened fears about an escalation of tensions between
the US and China, in light of the US decision to impose tariffs on imports on national
security grounds and the US stance in the negotiations over the revision of the North
American Free Trade Agreement (NAFTA), more specifically, the US demands to
limit imports from Canada and Mexico. Markets are sceptical about the upturn since,
on top of the threat of a global trade war, there are important risks (including
geopolitical ones, breeding again in the US and I am referring to the US
Administration's decision to pull out of the Iran nuclear deal undermining global
-
stability and threatening to disrupt the global order the oil price has risen by almost
15% in the last month). Trade wars may be avoided, but trade tensions have been
having an impact on market sentiment, posing risks for the upturn in the global
economy.
In Europe, expectations for near-term euro area reforms are now very low. France has
been putting pressure on Germany to come to concrete decisions on deepening EMU
at the June European Council, including on the Banking Union. I will come back to
EMU reform in more detail shortly.
Turning now to the state of the economy in the euro area, headline inflation was 1.3%
in March, while core inflation was just 1%. Euro area GDP is expected to grow at
2.4% in 2018 and 2% in 2019 and to slow down to 1.6% in 2020 and this is worrying
of course for the dynamics of output growth in the eurozone. Nothing lasts for good!
The unemployment rate was 8.5% in February, the lowest since December 2008. The
April 2018 Bank Lending Survey for the euro area concluded that credit standards
eased considerably for loans to enterprises and housing loans, and loan demand
increased across all categories, thereby continuing to support loan growth. As far as
the ECB's QE programme is concerned, ECB holdings amount to €1.96 trillion under
the Public Sector Purchase Programme (PSPP), while total purchases under the Asset
amount to €2.39 trillion, and the APP is expected by the
Purchase Programme (APP)
majority of economists to come to a close by year-end. The pace of APP purchases
was reduced to €60 billion per month as of April 2017 (from €80 billion previously)
and to €30 billion per month as of
January 2018.
2. EMU reform and the risks from the lack of progress
2.1 EMU reform
I would now like to discuss the concerns about the EMU setup, especially in the
aftermath of the euro area debt crisis. The crisis brought to the surface major flaws in
the euro area's
functioning, which had been building up over time and did not emerge
overnight. The eurozone remains a job half-done and, without a doubt, the completion
of the EMU architecture could further facilitate and motivate Member State reforms in
view of euro area accession.
On the positive side, one has to mention the establishment of a permanent rescue fund,
the European Stability Mechanism, which provides financial assistance to euro area
countries experiencing, or threatened by, severe financing problems, which can no
longer borrow money on financial markets as a result. A Banking Union is on track to
be completed, ensuring centralised supervision of systemically significant credit
institutions subject to a single rulebook applicable across the European Union and also
ensuring centralised resolution in the event of failure of such a credit institution. A
Capital Markets Union is also under way, creating a new financial system that is less
dependent on bank financing with the potential to increase risk-sharing via the private
sector and address economic shocks.
Although the EMU is now stronger, it is not yet fully shock-proof.
Table 1 Elements to complete an Economic and Monetary Union
Source: European Commission.
I will stay a bit longer on the Banking Union which is of direct interest also to
noneuro area EU Member States. It is currently still lacking key components that would
ensure risk-sharing across the euro area and break the vicious circle between banks
and sovereigns. A reflection paper by the European Commission on deepening the
Economic and Monetary Union proposed concrete steps that could be taken by the
time of the European Parliament elections in 2019, but progress has fallen short of the
European Commission's
ambitions.
Figure 1 The three pillars of the Banking Union
Source: Single Resolution Board.
There is still no agreement on the Commission's proposal for its third pillar, consisting
of a European Deposit Insurance Scheme (EDIS), a banking union-wide scheme to be
introduced by 2025, pooling funding from banks across the Banking Union to provide
stronger and more uniform insurance cover for all retail depositors in the euro area.
Figure 2 The evolution of EDIS
Factsheet "A stronger Banking Union", p. 4.
Source: European Commission (2017),
The existing Directive (2014/49/EU) on national Deposit Guarantee Schemes
guaranteeing deposits of up to €100,000
also covers CEE Member States. Of course
later, once EDIS is in place, a single deposit insurance fund would be of interest to
CEE countries to offer deposit guarantee also through their national schemes,
supported by a common pot. As you understand, this is a strong incentive to join the
euro ultimately.
Table 2 Deposit Guarantee Schemes in the EU and the US (EU 2012 figures in
euro, US 2014 figures in US dollars)
Source: European Commission, "Towards a European Deposit Insurance Scheme", 9 November 2015.
EDIS requires only €12 billion on behalf of Germany to create the common pot of €38
billion, a country that is dragging its feet on the issue. French banks account for the
- -
largest contributions to EDIS, as France keen to the idea has the largest banking
sector in the euro area, followed by Germany. If we look at these sums, we should see
them as a tiny hedging against the risk of systemic bank runs.
Remember that what is at stake is a mass withdrawal of deposits in the case of a bank
failure, which can create systemic financial instability. Even the announcement of
establishing this common pot, would have a strong confidence-building effect on
European depositors in the sense of avoiding risks of self-fulfilling prophecies on bank
runs. It is one example par excellence showing how risk sharing may contribute to risk
reduction. But, of course, EDIS approval is ultimately a question of political will,
This number (€38 billion) is not even half of the one
subject to national sensitivities.
percent of the total eurozone deposits (worth more than €10 trillion today).
2.2 The risks arising from the lack of progress on reforms
There are significant risks posed by the lack of progress towards completing the EMU
architecture. So far, actions have not matched the rhetoric on completing EMU with
the risk of missing what may be a limited window of opportunity to introduce
fundamental reforms at a time of prosperity. The euro area recorded its fastest growth
rate for a decade and has been expanding robustly for more than five years, but the fog
of uncertainty thickens, when it comes to growth prospects in the years ahead. The
Jean Monnet principle applies: "Europe is the sum of the solutions adopted to address
the crises it is faced with". If the flaws in the design of the euro area are not addressed
at this opportune time, given that the next crisis may be around the corner and the job
of fixing the EMU remains unfinished, this will come with a heavy price for the single
currency. The collective memory tends to remember the costs rather than the benefits
of European integration.
Many people, including myself, feel that we need to strike a balance in the classic
struggle between solidarity and national responsibility, or the 'new wine in the same
old bottle', namely
risk-sharing (namely mutualisation of costs) versus risk reduction.
Especially in the South of Europe, there is a strong feeling that this balance is unstable
and in order to make it more stable and more symmetrical; what we need are stronger
To quote Winston Churchill, a great European, "to do our best
European institutions.
is not enough; sometimes we must do what is required".
The ultimate risk is a rise in
populism and anti-Europeanism.
There is a rising populist trend across the world, as the following Figure (Figure 3)
shows. Populism is no longer a marginalised trend, but is coming increasingly into the
mainstream.
Figure 3 The global rise of populism
Source: Rodrik, D. (2018), Populism and the economics of globalisation.
We can identify two major root causes of populism in Europe. First of all, it may be
attributed to the failure of globalisation to reach some segments of the population,
which have been left behind in terms of its economic benefits, for instance in Europe
through chronic unemployment. Secondly, increased migration flows which triggered
immigration fears and a stronger anti-euro sentiment and broader support for populist
forces.
In Italy, the eurozone's
third-largest economy, two anti-establishment parties, the 5
Star Movement and the Northern League, which won 55% of the popular vote at the
March general election, defeating the country's traditional centrist political parties,
have struck a deal to form an all-populist government with an anti-European
sentiment. We should not take this prospect lightly, as Italy can be seen as a miniature
representation of the whole of Europe.
Another disguised version of populism taking advantage of the Brexit prospect can be
seen in the promise for broad-scale renationalisation, so-called Corbynomics, which
would mean a return to the 1970s, by the British main opposition party leader, who
has announced his intention to return to the model of nationalisation of banks, water
industries, transport, etc., through the back door. Based on the pretext of market
failures identified in their privatisation, full government control of such industries
would be disastrous for the UK economy and the world, with a 'megatone'
effect: 10
times bigger than Brexit.
Despite all this, a majority of EU citizens harbour a favourable opinion of EU
membership, which has recovered to levels close to those recorded prior to the crisis.
57% of respondents to the European Parliament's
Parlemeter survey feel that the EU
membership is a good thing for their country, almost as many as before the crisis (see
Figure 4 below).
Figure 4 Public opinion on EU membership
Source: European Parliament, "Parlemeter - A stronger voice. Citizens' views on Parliament and
2017
the EU", p. 17.
In view of the upcoming European Parliament elections in June 2019, there are
heightened fears of a further surge in populism in the form of protest votes, amidst the
ongoing migration crisis. As the clock ticks down to the critical June European
Council, European leaders must rise up to the challenge of introducing brave reforms
and give to the people more reasons to trust the European Union as an endeavour and
especially its institutions, because ultimately what the people want is jobs, growth and
stability.
3. The candidate countries for euro area membership and the benefits from EU
membership
3.1 The candidate countries
Following the accession of Lithuania on 1 January 2015, the process of euro area
enlargement has stalled and none of the 8 EU non-euro area Member States (see
Figure 5 above) has so far actively pushed EMU accession. Out of the two Member
States, whose national currencies are linked to the euro, Bulgaria has stated its intent
to join the interim Exchange Rate Mechanism (ERM2) and Denmark has opted out of
euro area accession.
Figure 5 Euro area and non-euro area member countries
Commission, COM (2017) 821 final, "Further steps towards completing Europe's
Source: European
Economic and Monetary Union: a roadmap", p. 2.
We do not expect any proposal for eventual euro area membership to be made in the
ECB's new Convergence Report,
due to be published tomorrow (23 May), despite the
progress made with regard to compliance with the five economic indicators,
wellknown as the "Maastricht criteria", designed to ensure nominal economic convergence
between interested non-euro area countries with the Member States of the euro area
(see Table 3 below).
Table 3 Maastricht convergence criteria
The ECB publishes convergence reports every two years, or when there is a specific
request from a Member State to assess its readiness to join the euro area. The new
Convergence Report should point out that none of the countries under review, that is,
Bulgaria, the Czech Republic, Hungary, Croatia, Poland, Romania and Sweden (given
that Denmark has an "opt-out"), is under an excessive deficit procedure and point out
that progress has been made in addressing imbalances in their economies and further
improvements of their fiscal positions.
As you are aware, crucial to the ECB's Convergence Report is the notion of
"sustainable convergence", which is not automatic upon fulfillment of nominal
convergence criteria prior to the adoption of the euro, but also requires policy efforts
and appropriate national reforms following the entry into the euro area.
President Juncker said in his State of the Union speech on 14 September 2017 that:
"Member States that want to join the euro must be able to do so."
This is why he
proposed the creation of "a
Euro-Accession Instrument, offering technical and even
financial assistance".
As shown in the following table, some of the CEE countries outperform the euro area
average, for instance on the government budget deficit or general government debt
thresholds of 3% and 60% respectively (see Tables 4 and 5 below).
Table 4
Table 5 Government finance indicators for non-euro area EU CEE Member
States, EU-28 and euro area
General government net General government
Country
lending/borrowing (as a % gross debt (as a % of
of GDP) GDP)
2017 2018 2017 2018
0.9 -1 23.9 23.6
Bulgaria
0.6 -0.5 78.4 75.5
Croatia
1.3 1.1 34.7 32.9
Czech Republic
-2 -2.1 69.9 67.4
Hungary
-1.7 -1.9 51.4 50.8
Poland
-2.8 -3.6 36.9 37.8
Romania
-1.1 -0.8 83.2 81.1
EU-28
-0.9 -0.6 91.3 84.2
Euro area
Source: IMF World Economic Outlook (April 2018).
3.2 The benefits of EU membership for CEE countries
3.2.1 EU as a soft power
The benefits of EU membership should be clear by now to governments and citizens
of CEE countries: considerable economic progress as part of the European Single
Market, the gradual convergence of living standards with those in other European
Member States, and of course progress towards modernity, including the move
towards a market economy, the opening up of the labour market, free movement and
free trade, a business-friendly environment and undistorted competition, etc.
There is no doubt that we are all part of the big European family. Unlike some
autocratic leaders (no names please) who want to be lonely riders in an era of
globalisation and also want to rule their central bank and make decisions on interest
rates: just look at what has happened with the Turkish lira last week.
The European Union is a soft power and a community of values that has become a
strong regional pole promoting shared prosperity, democracy, independent institutions,
the rule of law and transparency across the European continent. Following the CEE
countries'
EU accession, reform efforts have had to be sustained, as the EU has the
potential to act as an external constraint by imposing common rules on its Member
States and discipline on profligate politicians, through the transposition of the
European acquis (for instance, combatting corruption).
3.2.2 EU financing to CEE Member States
CEE Member States have been net recipients from the EU budget, as shown in Figure
6, and also in per capita terms, as shown in Figure 7.
Figure 6 Net contributions to the EU budget by Member State (2016, in billion
euro)
Source: European Commission, EU expenditure and revenue 2014-2020.
Figure 7 Per capita net contributions to EU budget by Member State (2016, in
euro)
Sources: European Commission, EU expenditure and revenue 2014-2020, and Eurostat.
After EU accession and entry into the Single Market of 500 million consumers, the
region has been recording rapidly improving economic growth rates offering an
attractive environment for foreign investment, stronger demand, easy financing
conditions and of course making the most of available EU funding, mainly through the
EU's
structural and cohesion funds.
Under the current EU budget (formally known as the Multiannual Financial
Framework or MFF) for the period 2014-2020, the 6 CEE EU Member States (that are
are allocated €157 billion or 45.4% of the
not members of the euro area) total amount
the EU's two structural funds
earmarked for (European Regional Development Fund -
ERDF and the European Social Fund - ESF), and the Cohesion Fund. Among 6 CEE
Member States, Poland is by far the largest recipient of EU structural and cohesion
funds (22% of total allocations), followed by Romania (6.4% of total allocations). By
Greece has been allocated €15.8 billion, which represent 4.6% of
way of comparison,
total allocations. The CEE economies enjoy around 4% of GDP gross inflows from the
cohesion and CAP funds on average during the current 2014-2020 EU budget cycle.
Table 6 EU funds allocated to CEE Member States and Greece under the
Multiannual Financial Framework (MFF) 2014-2020
In €
Country As % of total allocations
15,774,066,781 4.6
Greece
7,312,413,787 2.1
Bulgaria
8,245,993,253 2.4
Croatia
21,501,038,980 6.2
Czech Republic
21,444,582,271 6.2
Hungary
76,345,205,832 22.0
Poland
22,283,994,996 6.4
Romania
Total 346,289,772,498 100
Note 1: The figures refer to the two structural funds, namely the European Regional
Development Fund (ERDF) and the European Social Fund (ESF), as well as the Cohesion
Fund (CF).
Note 2: EU funds allocated to other countries are estimated at about €160 billion.
Source: European Commission.
This may drop by 0.2%-0.7% of GDP during the next seven-year period. Under the
new MFF 2021-2027, for which the European Commission presented its proposal to
the Council of Ministers on 14 May. The total budget is worth €1.28 trillion and
amounts to 1.11% of EU gross national income, which is about 1/50th of most EU
Member State government spending. The aim is for the new budget to be approved by
spring 2019, but the proposal has several contentious parts and difficult and
longdrawn negotiations are expected between the Member States especially given the large
budget gap to be left by the UK's exit from the EU which may be addressed through
additional funding from the EU-27, on which there is already strong opposition.
Current status on Romania's
3.2.3 prospective accession into the euro area
Romania has repeatedly pushed back its target dates for euro area accession from 2014
to 2015, then to 2019 and now to 2022. Between 2009 and 2013, the country had been
subject to an excessive deficit procedure. Romania is currently experiencing an
economic boom, with real GDP recording a post-crisis peak growth rate of 6.9% in
2017. This growth rate was driven by a boom in private consumption boosted by an
expansionary fiscal policy and is expected to remain robust in the current year.
According to the ECB's previous Convergence Report, Romania now also meets the
convergence criterion of price stability, which it did not fulfil according to earlier
reports, along with the criteria on public debt and government deficit. So far, no
decision has been made for the Romanian leu to enter the ERM2.
I am not here to advise when would be the right time to enter the euro area. Any
decision to adopt the single currency is up to the people and their democratic
institutions. But I would like to give you a word of caution concerning the conversion
rate between your currency and the euro and my remarks apply to all candidate
countries for euro area membership, not only to Romania. This conversion rate is the
key to euro area accession and, once fixed, it is irrevocable for each participating
currency. With the benefit of hindsight, I could share with you the Greek euro area
accession experience, where it is debatable even today if the entry to the euro back in
2001 was made on the valid conversion rate (overvalued); also many people claim that
the country needed more time to put its economy in order. Ex post, this is evident by
the country's economic devastation triggered by the global financial crisis back in
2008, which turned into a full-blown double crisis, namely sovereign and banking
crisis, in my country.
In the case of Romania, things are quite simple. You don't have to look at EU
forecasts or Convergence Reports to find out. All you have to do is listen to the wise
man that you are very lucky to have in this country: ask your Central Bank Governor
Mugur Isarescu who, as you are aware, is widely regarded as one of a handful top
central bankers in the world!
4. Post-MoU Greece
Greece's economic recovery is finally gaining
Finally, a few words about my country:
traction after an unprecedented depression, where the country lost 25% of GDP in the
space of 10 years. Real GDP in 2017 increased by 1.4% with strong positive
contributions from exports of goods and services (2 percentage points) and gross fixed
capital formation (1.2 percentage points). This positive outcome creates a strong
carryover effect of 0.5 percentage point for GDP growth in the current year, which supports
the outlook for a growth rate of around 2% and 2.5% in 2018 and 2019 respectively.
Indeed, this is a fortunate moment for Greece. After 9 years of economic hardship, we
can say with confidence that there is light at the end of the tunnel for the Greek
economy. The economy's progress during the last eight years of adjustment has been
really impressive, both in terms of fiscal and external adjustment of more than 15
percentage points of GDP. The huge twin deficits turned into surpluses. Last year, the
primary surplus was 4.2% of GDP, outperforming the target of 0.5%. The current
account during the last two years had effectively been in balance, from a 15% deficit
eight years ago. And last year: an all-time record of 30 million tourists visited the
country.
Throughout this period, sweeping structural reforms have been implemented, covering
the pensions system, the health system, labour markets, product markets, the business
environment, public administration, etc. Moreover, there is evidence that the economy
has been undergoing a rebalancing towards the tradable, export-oriented sector: the
share of exports of goods and services in GDP increased from 19% in 2009 to 28% in
2016, with most of the increase coming from exports of goods.
Two weeks ago the results of the Greek banks'
2018 stress tests conducted by the ECB
were published, pointing to no capital shortfalls. Of course, despite the positive
outcome of the stress tests, the major challenges are still there: for instance the drastic
reduction of the non-performing loans and the ability to provide liquidity to the Greek
real economy (new loans to businesses).
In view of the end of the current programme in August 2018 and a return to European
normality, the Greek people look into the future with optimism, which I also share,
provided that there is no complacency, no slackening of effort, and authorities do not
let up on reforms, especially in the public sector, cutting red tape, etc.
The overwhelming majority in Greece still want to be within the core of Europe. This
is our legacy as a nation that goes back to our history and our tradition. After all, the
name of our continent Europe comes, in the first place, from an ancient Greek
mythological figure, a beautiful young lady with whom Zeus, the father of the twelve
Greek Gods, fell in love, but since she was refusing his advances, he decided to
transform himself into a bull to catch her and bring her to Mount Olympus, the
mountain of Gods in northern Greece, where I come from!
Concluding remarks
In closing, I understand that public sentiment in Central and Eastern European
countries is not very strong right now in favour of joining the single currency and that
euro area accession is seen by some as a byword for the loss of sovereignty. The crisis
has certainly made the euro area look less attractive for future members. In my view,
the issue is ultimately, on the one hand, for the eurozone to persist with completing the
EMU project and, on the other hand, for candidate countries to be at a par with the rest
of the eurozone on all fronts (sustainable convergence). After all, CEE Member States
have considerable discretion over the timing of their accession into the euro area.
architecture, a
Amid the uncertainty about the euro area's wait-and-see approach for
final outcomes is perhaps the safe-bet policy, given that any decision to adopt the
single currency, once made, is irreversible, since the costs of exit by far outweigh the
benefits.
Thank you very much for your attention.