"In 2016, is the European Union finally out of the so-called" euro crisis? Or should the Euro Area be ended?" -Hello Jacques Le Cacheux. You are an economist, a professor at the University of Pau and Sciences Po, a researcher at the OFCE, the Office français des conjonctures économiques, and you are specialized in European economic issues. -Hello. -I wanted to ask you if, in 2016, the European Union finally got out of the so-called euro crisis. -Almost, could we say. As the President of France put it, things get better. The economic growth in Europe has become stronger over the last 2 years. We have left behind us the tensions on financial and state aid markets for the moment. The situation has improved but the economic situation of the Euro Area is still fragile. The growth is still lower to what it is elsewhere in developed countries. -Do you think that the euro crisis term is relevant? -Yes, this term is relevant since, as of 2008, we have faced the so-called international financial crisis, the subprime crisis. Almost everywhere in the world, there has been a very deep recession in 2009 which impacted the Euro Area like the rest of the world. But, this Euro Area crisis is characterized by the fact that, as of 2010, only the Euro Area has suffered from a slump linked to the so-called sovereign debt crisis. This slump led the European economy to suffer from a recession in 2012-2013. -What are the sovereign debts? -The sovereign debt crisis started in the spring of 2010 with the Greek debt crisis and then, following a kind of contagion, reached a certain number of public debt markets in Euro Area countries, mainly Ireland, Portugal and Spain. It is a kind of crisis of trust regarding public debts of the member countries in the Euro Area. Investors doubted that these countries would be able to service their public debt in a sustainable manner. -That is to say, redeem the money they borrowed from the markets. -Exactly. In fact, they doubted the solvency of these countries that were particularly indebted or whose outlooks for an increase of the public debt were particularly strong and which, since they were part of the Euro Area could not rely on the good old expedients countries used up until then. Meaning mainly money creation, inflation, etc. -At that time, it was also said that the sovereign debts had been strongly increased because European states in particular, those in the Euro Area even more, had to save their banks, recapitalize their banks that had strongly suffered from the crisis. Therefore, taxpayers would have had to bear the weight of the mistakes of bankers or financiers. That it happened this way. Is it as simple as that? -It is not really that simple. It is only part of the truth. The case of Ireland, for example, is really striking for that matter. The Irish public debt, before the 2008 crisis, was very low. It was one of Europe's lowest. In 2010, the Irish government had to save the Irish banks that were nearly bankrupt and had to inject over 50 billion euros in the banking system. It is true that it is more or less the same case, on a smaller scale, in Spain, etc. So it is true that the public debt in 2010 is partly the consequence of these public interventions to save private banks and thus face errors made by the private sector. At the same time, it is not the only cause because, before 2008, some countries, in particular Greece, already had quite high public debt levels. -When you were saying, at the beginning, that we were out of the Euro Area crisis, even if it was not a resounding yes... -Not quite, indeed. -According to you, are these recapitalizations responsible for the fact that, in 2016, we are not fully out of it, or on the contrary, saving the banking sector allowed us to limit the damage that could have been even worse? -I think we had to save the banking sectors. The American government more or less did the same. The British government, who is not in the Euro Area, also injected a lot of public money in the banking and financial sectors. We live in economies in which banks play such a crucial role that the states cannot really let the banking sectors down in the event of crises called systemic crises. From that perspective, today we have made significant progress in the Euro Area by creating the banking union. Meaning that, for a year and a half, the European Central Bank has supervised the major European banks. We are implementing a mechanism called banking crises single resolution mechanism. Should a major bank go bankrupt in the Euro Area in the upcoming years, we now have common procedures to face it. So, in time, possible errors made by major banks and their consequences on the public debt should be disconnected. But this will not happen before 2020 because it must be progressively implemented. -Anyhow, you would not say that without the Euro Area, it would have been much less worse? -I do believe that it can be said for a certain number of countries because the flexibility of countries that were not part of the Euro Area was much more important than that of countries constrained by their affiliation to the Euro Area. Both because of the rules on deficits and public debts in the Euro Area and simply because of their affiliation to a monetary area with a central bank depending on a common currency. If we look at the United Kingdom, for example, it had more flexibility and could depreciate its currency, which eased the ending of the crisis. While a country such as Greece, for example, did not have this option. Even if it had had it, the situation could have been worse, I do not know. Anyhow, flexibility would have been greater. -What you are saying for the United Kingdom, can it also be said for Hungary or Poland... -Yes. -Who, obviously, have had a much higher growth rate, over the last 3 or 4 years, than the Euro Area average rate? -Yes. I think that these countries do benefit, because they do not belong to the Euro Area, from more flexibility particularly in terms of currency management and currency parity. So we can say that they moved out of the crisis a bit more easily. However, getting back to the United Kingdom, if we look at their results, even if in 2015 it looked as if they were above the average, since 2008, that is to say since the start of the crisis, it has not really been better. They also faced a quite severe crisis. -You do understand that your feeling, your diagnosis, is very important. There is a major debate to know if the Euro Area is poorly managed. In which case, we consider that the Euro Area is something good but we can change the public policy within the ESI. Or, on the contrary, if the Euro Area must be considered as being more a part of the issue than of the solution. If, ultimately, you are rather considering this second assumption, it can have major consequences in terms of public policies and even make people wonder if we should not put an end to the euro and get back to national currencies. -Some economists indeed consider that the creation of the euro was a mistake, that we should draw the consequences and get back to the situation before 1999, that is to say national currencies. As for me, I think that the Euro Area is amendable and perfectible. It is like the metaphor when you are in the middle of the ford. Is it best to get back or go on to fully ford the stream? Personally, I have the feeling that it would be better to go on and complete the institutional architecture of the Euro Area. For a long time, many economists, including myself, politicians too, have been talking about an economic government of the Euro Area, a so-called budgetary capacity for the Euro Area. In fact, up until now, we have created a Central Bank, budgetary policy rules for the state members, but there is no institution to efficiently coordinate national policies, in particular budgetary and tax policies. -Germany does not play this coordination role de facto? -Germany does not play it because, fundamentally, in the current system, it is in each country's interest to go alone, particularly Germany. Germany was lucky enough to undergo, before the 2007-2008 crisis, a certain number of national reforms, adjustments, etc., in order to find again competitiveness it had lost during the 1990s. So it found itself, during the 2007-2008 crisis, in a much more favorable position than all the other Euro Area countries. Eventually, Germany decided to use this individual advantage instead of playing collectively. -Thank you very much. -Thank you.
