Toespraak van minister Reynders : "Euro introduction and accession to the Eurozone:challenges and opportunities - the Belgian perspective"

Datum: 14 mei 2013

Riga, the Stockholm School of Economics
May 10  2013

"Euro introduction and accession to the Eurozone:
challenges and opportunities - the Belgian perspective"

by

Didier REYNDERS
Deputy Prime Minister and Minister for Foreign Affairs, Foreign Trade and European Affairs of Belgium

Dear rector Paalzow, dear professor Strazds,
Professors, Students,
Ladies and gentlemen,

I feel honoured and privileged to be in your company today.  The Stockholm School of Economics in Riga earned itself a solid reputation in the highly competitive environment of business schools.  I would like to commend you for that, scholars and students alike.  What is more, you manage here to combine state of the art learning and research with a sublime architectural setting.  Art Nouveau is a heritage shared by both our countries and particularly present in our respective capital cities.
This auditorium bears the name of Georges Soros, a remarkable and influential personality indeed, describing himself rather too modestly as “a financial, philanthropic, and philosophical speculator”.  His views and statements are thought-provoking and offer interesting substance for debate. More on that later.

Ladies and gentlemen,

The organizers of this event have been so kind to depict me as an “active and direct witness of the introduction of the euro”.  But, please do not expect me to profess the ultimate truths on the euro. I would rather develop some thoughts on where the Eurozone stands now and where it is evolving to.  In doing so, I start from the conviction that the so-called “in’s” and “pre-ins” have valuable insights and experiences to exchange.

In the case of Latvia I should rather say “nearly ins”.  Latvia has entered the last leg of a long and laborious preparatory process to become a full member of the Eurozone.  I think it is right to say that your country has spared no effort and can present a remarkable track record in complying with the Maastricht criteria. It meant difficult policy choices from the government and put a lot of strain on the resilience of the population.

The Latvian case is crystallizing in many respects the multiple challenges and opportunities the EMU project is offering today at this particular challenging crossroads.

I feel tempted to start with some apparent paradoxes, not unknown to you, in the context of the numerous debates - I am sure – Latvian politicians and citizens are devoting to this question.

First paradox: “why join a Eurozone in crisis?”

The Eurozone goes trough turbulent times, challenging its proper functioning, its integrity or even – according to more gloomy analyses – its mere existence.  Still, incumbent members, as is the case with Latvia, are demonstrating an unwavering eagerness to join and the continued attraction of its model.

For me there is no question of a paradox.  Bringing about the Economic and Monetary Union is essentially a political endeavour, not subject to economic and financial axioms only.  Imperfect as it still may be from an economist’s point of view, the EMU-project translates a distinct resolve of the EU member states to bring the scope and intensity of their integration to a significantly higher level.  Also, the euro has quickly acquired an important symbolic unifying role and is widely accepted and cherished in Europe as a palpable expression of a common European identity.

The strong political undercurrent of the EMU also helps to explain why a “Eurozone break up” did not materialize.  The centripetal forces still prove to be stronger than the centrifugal ones. The resilience of the Eurozone and its power of attraction are not to be underestimated.

In aspiring to fully accede to the Eurozone sooner rather than later Latvia is adhering to this original political mindset and making exactly that same deliberate political choice.

Second paradox: “why having started up the EMU as it was flawed from the beginning?”

“Our understanding of the world is inherently imperfect. What is imperfect can be improved.”  Georges Soros

The EMU is still an unfinished construction.  A lot of the problems we face now result from the asymmetry inscribed in the European treaties between holding a common currency on the one hand and at the same time not providing the instruments to create a minimum of convergence of national policies in a monetary union. These instruments are needed, because from purely an economic point of view, Europe is a non-optimal currency zone given a wide divergence in levels of competitiveness/productivity between the Eurozone members.

As such, the current crisis was according to many, with the benefit of hindsight, labeled as a “crisis waiting to happen”.  Does this mean that we should consider the bold political steps taken in the early nineties (Maastricht 1992) as irresponsible or irrational?  Again, seen from a political angle I would certainly not qualify the voluntarism shown then as a “regrettable oversight”.  The fact of the matter is that bringing about the required level of budgetary and macro-economic policy coordination is a gradual process that takes time.  Indeed, it touches the heart of the political processes and policy choices in each member state. And those are conditioned by their respective political, socio-economic, institutional and societal context.

But I do admit that the crisis and emergency situations we are tackling today have been a wake up call.  They clearly contribute to the political conscience taking of the imperfections in the structure and act as an effective trigger to speed up the process of removing them.  We have been rather brutally reminded of the strong interdependence of our economies within the EU, even more accentuated within the Eurozone.  The fact that national interests and the common interest of the EMU/Eurozone have indeed become much more intertwined is now widely recognized.

Third paradox: “why knowingly deprive yourself of the policy tools you need in order to address occurring imbalances?”

"Globalization has rendered the world increasingly interdependent, but international politics is still based on the sovereignty of states." – Georges Soros

As I said earlier, membership of the Eurozone and sharing a single currency means - at first glance - abandoning policy tools and policy margins identified as essential attributes of a state’s sovereignty, such as monetary intervention.


In reality, the members of the Eurozone have already knowingly abandoned their monetary sovereignty, swapping some of their centuries’ old and prestigious national currencies for a new common currency. And some of them had in the last years before introducing the euro already de facto given up their monetary independence by pegging their currency to the Deutsche Mark.

Moreover, one may ask the question whether a country, especially taking into account its relative economic weight, is by definition capable of redressing stability threatening imbalances drawing on own forces.  The Latvian case is interesting in that your country’s currency is already pegged to the euro since your independence and that your Government deliberately chose not to devaluate the Lat when the country was hit hard by the global financial crisis starting in 2008. 

In other words, having theoretically the freedom of taking “sovereign” decisions does not necessarily mean that you effectively dispose of the leverage to make these decisions influence the course of events. Other factors also come into play.  Embedded in a wider currency union, pooling sovereignty and showing solidarity, a country finds itself in a much more favourable environment to pull out of a crisis and has access to more important levers of economic action in a nightmare scenario.


Fourth paradox: “the Eurozone is in crisis not the euro!”

The euro as a currency has done reasonably well over the past years, to say the least. It remains the second most used reserve currency in international financial markets (almost 25%) and its rate to the dollar or the yen remains strong and stable. Taken as a whole, the trade balance of the Eurozone with its most important trade partners is healthy and its ratios of debt and budgetary deficits are relatively better than of its main competitors.
The euro as such is not in crisis, but a number of the member states of the Eurozone are encountering enduring and very severe problems of debt sustainability and external financing, of a weak banking sector, of unhealthy national property markets or of persistent lack of growth and an uncompetitive economy as a whole. These situations are very often if not mostly the result of unsatisfactory national policy choices (or the lack of choices...) and of unmonitored or insufficiently noticed macro-economic imbalances. Time and again, the blame for these distortions is often unfairly slid in the shoes of "Europe". It is true, on the other hand, that Europe was lacking (and still does so at some point) sufficiently strong monitoring and intervention instruments in order to stop a dangerous or unsustainable economic course of a Eurozone member.
That is why I am firmly convinced that the real problem we are still facing now, is a problem of the governance of the Eurozone. I will return to this later in the speech.

Latvia's membership of the Eurozone and of the OECD will increase the confidence of international financial markets and of rating agencies, thereby reducing the cost of borrowing for its private and public sector. Latvian companies that trade with the Eurozone will get rid of exchange rate risks or volatility. Travel to and exchange with Latvia will be facilitated and tourism in this country will be encouraged. Limited price increases of consumer products are likely to happen, but according to research in other Eurozone members, these increases usually were not higher than 0,3 %.

* * *

Ladies and gentlemen, so far, I gave you a number of reflections on the exceptional and restless context in which Latvia will enter the Eurozone. But your country and even you as young citizens know what the meaning of economic adjustment is. Latvia went through an extremely deep and difficult adjustment process in the past years. But you may be very proud of the result. It brought you, with the assistance of the EU and the IMF, to a point where you are ready to adhere to the Eurozone, because all of the criteria are likely to be fulfilled. In the coming weeks some crucial deliberations will take place. 

Your experience in the past years is a good reminder of the simple reality that being member of that formidable currency union brings many advantages but that it also entails obligations, something which citizens in other members of the Eurozone very often tend to forget. Member states cannot simply go on carrying out the policies they like most or “which were always done” or which do conform well with age old traditions in a society.

The “inconvenient truth” is that budgetary and economic policies of each member state of the Union and all the more so of the Eurozone have become extremely closely related to each other. Reckless policies of one member state can indeed have an impact on the Eurozone as a whole. Financial systems and banking systems are entirely linked to each other in one internal financial market, but the regulatory and supervision systems have followed in this integration only much later or imperfectly, too late maybe, as we have learned from what happened in e.g. Greece or Cyprus. According to recent data the GNP of the EU (27) amounts to 12.400 billion euro. 18 billion of that sum is produced in Cyprus, a tiny and apparently completely harmless amount. Yet unstable and oversized banks in Cyprus, that have become too large for this small home economy and public sector to support in case of problems, can be a severe factor of nuisance for other European banks or bondholders that have invested in these Cypriot banks. Solutions to this crisis could not just be Cypriot made, they had to be elaborated at European level.

I talked already about some of the advantages of belonging to the Eurozone; now I shall turn to some of the more difficult issues that are on the negotiating table and that aim to improve budgetary discipline, enhance economic coordination and strengthen the supervision and protection of our banks. We want to do this not just for the pleasure of developing these mechanisms, but to create the necessary conditions for more jobs, growth, prosperity and well being for our citizens and companies.

But where are we going from here?  Dealing with a crisis like the one we live today is a learning process in itself, from which important conclusions to draw in terms of governance, policy coordination, confidence building, solidarity, democratic legitimacy, precisely the key words at the heart of the deepening process of the EMU we are currently engaged in.

Ever since the outbreak of the financial and economic crisis in 2008, a tremendous amount of measures have been taken at European and national level in order to stabilize the financial system, to strengthen the instruments for budgetary discipline, to support member states in severe economic and financial hardship and to improve the mechanism for more and better economic convergence.

I am just recalling the most important decisions of 2012:
 
- On the second of  March, the Treaty on Stability, Coordination and Governance - the “fiscal compact” - was signed; on the first of January of this year, the Treaty came into force for those Member States that had already approved it.
- During the European Council of June 2012, a the Compact for Growth and Jobs was adopted.
- On the 27th of September 2012, the European Stability Mechanism (ESM) came into force.
- In the autumn of 2012, the general framework of a single supervisory mechanism for European banks and financial institutions was decided;
- Regarding budgetary coordination, the discussions on the so-called “Two-pack” made good progress. This package was finally adopted in March of this year.

Since 2011, national structural reforms plans and national budgets undergo a vetting process by the European institutions, the so-called European Semester.  It is proving to be one of the better kinds of preventive tools aiming at bringing about budgetary convergence within the European Union.

In other words, a great deal of important work has been carried out. But the job is not finished yet. It is not yet time for leniency, even though the financial markets are undeniably calming down and financing costs for Member States have been reduced significantly, even to historic depths, as e.g. for Belgium. 

At the present moment, the European Council has identified 4 fundamental tasks to be accomplished in the near future :

- the first fundamental is to preserve financial stability.
- secondly, our economies must be made more resilient, through sound public finances and improved competitiveness;
- thirdly, immediate measures must be taken for growth and unemployment; especially youth unemployment has reached unacceptable and unsustainable levels in the past year.
- finally, the fourth fundamental is to complete the architecture of our economic and monetary union.


As to this last point, a road map towards further deepening of the Economic and Monetary Union (EMU) was adopted at the European Council of December 2012. This road map was based on proposals from the President of the European Council, Herman Van Rompuy. In his opinion a robust, stable and sustainable monetary union should be built on four “building bricks”:
- a banking union;
- a budgetary union;
- an economic union; 
- an adequate system of democratic legitimacy and accountability.
 
The establishment of a banking union, treated with priority, is currently under discussion. The political decisions on the creation of a single supervisory mechanism have been taken. An additional responsibility for that will be given to the ECB. That was the first element of the Banking Union. In the meantime legislative proposals from the Commission to harmonise rules and tools for bank recovery and resolution across the EU are being discussed in the Council. Soon we expect proposals from the Commission on a single resolution mechanism. And later this year we should see the first elements of the third component of a banking union, which is a resolution fund, preferably a common fund, in order to assist financially the resolution of problematic banks.

Belgium insists we keep the momentum on the banking union. If anything, the recent banking crisis in Cyprus has underlined the need not only for a single supervisor but also for a strong and effective single resolution mechanism. Only with a complete banking union will we be able to break the vicious circle between sovereigns and banks that has haunted us since the beginning of the crisis.

Different elements of a deeper budgetary and economic union are also under discussion, these days.

As regards the budgetary union, one of the proposals in the reports of Herman Van Rompuy and the other 3 presidents (Commission, ECB and Eurozone) is the creation of the possibility for a member of the Commission to intervene directly in the national budgetary process when e.g. in a country that is in a persistent situation of excessive deficit, new unsustainable budgetary measures are proposed. We accept nowadays without too many problems the intervention of the Commission in competition policy, with the imposition of fines on private companies that distort the competition or with the blocking of illegal state aid. Why is it for some politicians of political commentators unacceptable to allow a budget commissioner to raise a red card to a national budgetary measure that would be contrary to sound budgetary policies or to the agreed budgetary path, and would pose a risk for the stability of the Eurozone as a whole?

Euro-zone economies remain distressed because of the unresolved load of debts inherited from the past.   Also, whether and how to apportion this responsibility on those who created the debt, is at issue.  These debts cannot simply be put in one basket, i.e.  “collectivized”, for instance through the issuance of Euro-bonds, without hurting equity or creating moral hazard.  Certainly a number of Member states steadfastly refuse to do so. I think it is too early in the process to consider actively the collectivization of our debt policy. Yet, it will be a necessary element of a ‘real’ EMU in a much later stage, when credible and functioning mechanisms of budgetary discipline and economic convergence will be up and running smoothly and when a period of new growth will have arrived. For, indeed, to assume collective responsibility for each other’s debt is the extreme expression of mutual confidence, of a degree which is even unusual in larger families, but which can sometimes be a reality in the core of a family household.


As regards the economic union, several ideas of the Van Rompuy report are intensely debated nowadays. It is e.g. proposed that member states inform or consult each other and the European Union before deciding to introduce important structural reforms or economic policy measures. This general principle of ex ante coordination was accepted in the Treaty on Stability, Coordination and Governance in the EMU (Fiscal compact), but the modalities are being discussed now. I think it is an indispensable technique in order to avoid that members of the Eurozone engage in uncompetitive practices at the expense of their neighbours and of the Eurozone as a whole.

Examples of individual policy decisions of member states that have a potential influence on their competitivity, on their respect of budgetary objectives, on financial stability and hence on the health and stability of the Eurozone as a whole are legion: decisions to increase the pension age to keep the payment of these social payments sustainable on the longer term, wage policy formation (automatic indexation of wages e.g.), decisions on the duration of working hours, on the energy mix (sudden closure of nuclear power plants), on the characteristics of the housing market and its mortgage financing etc…Not all of these decisions influence the Eurozone negatively, but some may lead to distortions or imbalances that are clearly unacceptable and dangerous to all of us. The events in Cyprus are again a good example of these dangers. 

Another proposed technique is to introduce arrangements of a contractual nature, possibly accompanied by financial incentives, in order to agree between the European institutions and a member state on the necessary structural reform measures that strengthen the competitive situation of that country and thereby contribute to the convergence and cohesion of the euro zone. Many persons find this very intrusive and at the limit of what is acceptable for sovereign states. But here is precisely a nuance. All members of the Eurozone have lost a long time ago their entire monetary sovereignty, and now that frontline of sovereignty is moving again in the economic field. I understand the psychological and political difficulties, but I cannot but remind that this movement is actually part of a ‘real’ EMU, as Herman Van Rompuy calls it, that we have all subscribed to. Moreover, we should not really speak of the loss of sovereignty, but rather the sharing of sovereignty. Before Belgium adhered to the euro, our Belgian franc was pegged to the Deutsche Mark. Monetary decisions regarding our own national currency were in fact taken in Frankfurt, with no Belgian voice at the table. Today, monetary decisions are still taken in Frankfurt, but we have now always one deliberative voice at the table and momentarily even a member in the Board of Directors. In reality, Belgium has won in monetary sovereignty, although it is shared with others! 

In the European Semester, this form of coordination is expressed, at the end of the process, in the form of a set of country specific recommendations that are proposed by the Commission towards the end of May of each year. It is often said that these recommendations (even if they are indeed ‘only’ recommendations, not injunctions or orders) are perceived as too unilateral and that they interfere with national policy choices that are supported by political majorities in the national parliaments. That is without doubt the reason why the Commission and the President of the European Council have tried to preserve the essence of the system of recommendations, while increasing at the same time the ‘ownership’ to the members states and the democratic legitimacy by proposing to the national parliaments to approve such arrangements. Even if the details have to be worked out and even if I think in general that we should be cautious not to add too many new layers of European governance in a short lapse of time, I entirely approve of the general idea of these techniques, as they will indeed improve ownership and legitimacy of much needed reforms, while at the same time providing financial help in order to produce these reforms. It combines in a clever way common responsibility (discipline) and solidarity. Both elements are indispensable in a real EMU. The debate is still open. I can only hope it will not last until 2020 !

Transformations on this scale are never easy, to say the least ; either they take many years to produce (cf. the long road to a federal system of economic governance in the United States), or they are never produced or only partly. Today  the pace of our modern lives, the globalised financial markets and the ever more accelerating speed of our information society do not give us anymore the many decades which were needed in e.g. the United States to realize their own EMU.

Also, the continued exclusive emphasis on the imposition of stern austerity programmes is proving counter-productive as it is throwing countries concerned into outright recession and, as a consequence, compounding the problem of debt reduction.  It may eventually hurt, if it is not doing so already, the more healthy economies of the Eurozone. That is why the new emphasis on short term growth accelerating measures is of such importance and why we are eagerly awaiting the initiatives that were announced early this year to attack aggressively the unacceptable high levels of unemployment in many member states of the EU, and especially youth unemployment.


Finally, I guess that the present reform programmes and imbalances could be managed more easily if a perspective existed on a workable endgame. The public opinion gets exhausted by a never ending stream of always new proposals to enhance our coordination and convergence. But where will it lead to at the end of the road?

The roadmaps which the President of the European Council has been developing since last year in June certainly helped to describe the essential building bricks of the endgame, which would be needed at some date to complete the EMU. This roadmap is likely to help instil confidence and bring the kind of trust that is so essential in matters relating to money and financial markets.  Yet, this endgame would entail, Europe-wide, a tighter connection between economic, fiscal and monetary policies. It would require a higher degree of convergence among European economies as well as a higher degree of shared competitiveness. 
From my point of view, this would imply further tax harmonization, even tighter budget discipline and also a series of potentially painful Europe-directed structural reforms.  In a word, it would imply a devolution of sovereignty to the European Union of a kind that democratic Member states, including my own country, understandably have to ponder about very cautiously.
This also proves that discussions about economic reforms and convergence cannot take place in a political void. The political dimension is unavoidable, and I would rather say: it is highly desirable. This reminds me of the central thesis of the famous German philosopher Jürgen Habermas, who gave a much anticipated lecture on the future of the European Union at the University of Leuven, 2 weeks ago: “What is necessary in the first place is a consistent decision to expand the European Monetary Union into a Political Union”.


With this consideration, we have arrived at the fourth and last building brick of the report on how to work towards a ‘real’ EMU of H. Van Rompuy, namely the further development of an adequate system of democratic legitimacy and accountability. I am happy to note that also at the level of the European Council the principle has been adopted that “any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability.” (conclusions, Dec. 2012).
Last year, a group of 11 European Foreign ministers, at the initiative of the German Foreign Minister, adopted a paper after several months of discussions and it came to the same conclusion in this regard. Acknowledging the importance of a problem is one thing, finding concrete solutions another. We shall have to find in the coming years the appropriate answers, in dialogue with national and European parliamentarians.

Ladies and gentlemen, dear students,
(conclusion)

The timing of the accession of Latvia to the euro is challenging to say the least. But the preparations have been extraordinary and courageous and the resolve of the Latvian government is very convincing. The Latvian government is making not only a economic or financial choice but also a political choice, because it will enter into the heart of the European project. The government, citizens and companies will enjoy the membership of a strong and large currency area, but will also have to take on them a larger shared responsibility for coordination, convergence and stability in this integrated currency union.

I was very happy to share some considerations on this historic process with the young generation of future leaders here in this room who will have to carry out the euro project and everything it brings with it. I really hope that the last hurdles will be taken without problems and to welcome you in the Eurozone as of next year !

Thank you for your attention.


++++++++++++++++