‘The euro is irreversible’

By Alexa van Sickle, Assistant Editor

Klaus Regling, head of the European Union’s bailout fund, says the EU is moving in the right direction after its debt crisis, but that Greece’s future in the eurozone depends on its progress in meeting the terms of its bailout.

Speaking at the fifth IISS Fullerton lecture in Singapore, Regling, the CEO of the European Financial Stability Facility (EFSF), was cautiously optimistic about the future of the euro and of the EU. Regling said structural reforms and action taken by EU governments to address the sovereign debt crisis were beginning to show signs of success:  ‘Ireland shows now a current account surplus after sizable deficits in earlier years, Spain is getting very close to a current account balance [and] Greece and Portugal have reduced their current account deficits by two thirds,’ he said.

Greece
However, Regling said while ‘nobody’ at EU policy level wanted Greece to leave – which would be the most expensive solution – a ‘Grexit’ could not be ruled out, and that its continued eurozone status hinged on its ability to deliver on its reform promises.

Greece’s fate remained uncertain. Regling’s remarks coincided with Greek premier Antonis Samaras’s visit to officials in France and Germany to ask for more time to make painful cuts, labour reforms and privatisations – causing renewed concern globally about a eurozone exit. Samaras stressed he was asking for time, not money, but France and Germany warned that more time would mean more funds, and that they would maintain a tough stance. Germany’s finance minister rejected any extension of Greece’s 2014 deadline for reforms, but Chancellor Angela Merkel reiterated her desire for Greece to stay in the eurozone – but also said that Greece’s deeds must follow words.

Merkel and other European leaders have said they’ll await a report, due in October, from Greece’s creditors – the European Central Bank (ECB), the European Commission and the International Monetary Fund – before deciding whether to release the next €31.5 billion aid installment.

In his lecture, Regling remarked that Greece’s predicament was a unique case – its debt, fiscal deficit and political structure made it far more problematic than Spain, Portugal or Ireland. ‘One could say Greece has solvency problems, while the other countries have liquidity problems,’ he said.

Government bonds?
Regling also discussed a proposal, made by ECB President Mario Draghi, in which the EFSF would provide financing for struggling euro economies by buying government bonds, (for example from Spain) in the primary bond market. The ECB would then intervene in the secondary market.

He stressed that the proposal had not been discussed by eurozone finance ministers, but that it could be a ‘possible model’ for the future. Under the plan, member states seeking funds would be obliged to undertake necessary reforms as a pre-condition for receiving the support. Because the ECB would bring its own money to this plan, it would also address market concerns that the EFSF lacked the ‘firepower’ to help European countries out of their financial crises.

Euro as a pillar of the EU
Regling said that contrary to the media’s assessment, the EU’s response to the crisis had been successful, but that continued commitment to structural reform was crucial.  ‘The competitiveness gap between Northern Europe and Southern Europe … has been cut in half. This demonstrates significant progress on the one hand, but also that countries in the periphery need to continue their adjustment process.’

Regling conceded that the debt crisis had caused political tensions within the EU, but that a ‘majority’ were still in favour of European integration and the euro. He was confident that the crisis and its accompanying tensions would be overcome. The devaluation of the euro was not the answer, regardless of that fact that it would not be possible in a monetary union. Recovery would instead come through structural reforms and government-level legislation, as outlined in the EU’s Fiscal Compact.

He described the euro as ‘irreversible’, suggesting that it should not be seen merely as an economic project, but as ‘one of the defining pillars of today’s European Union’.


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