⚠️Automatic translation pending review by an economist.
Introducing the 3rd session of the Entretiens du Trésor, Christine Lagarde (Director of the International Monetary Fund) mentioned the 3 pillars that constitute the IMF’s main areas of interest with regard to the Eurozone: fiscal integration, banking union and the restoration of competitiveness. Mario Draghi (Governor of the European Central Bank) also recalled that the ECB, both through the launch of the MTO and its future role as single banking supervisor, is participating in and contributing to the achievement of the objectives set around these three axes. Macroeconomic imbalances in Europe will only be resolved once solutions have been found around these 3 pillars, ensuring the overall integration of the Eurozone.
Fiscal integration aims to prevent budgetary risks through debt pooling, joint borrowing and the establishment of safety nets to guarantee the system’s sustainability in the event of difficulties on the part of one of its members. The banking union should help to limit the fragmentation of countries, while providing a framework better adapted to systemic risk, thanks to more effective supervisory tools, notably to protect deposits. Fiscal integration and banking union are currently linked to each other, and Europe must find the most effective solutions, without increasing the complexity of its organization, which is all too often perceived as incomprehensible by countries in the rest of the world, especially by outside investors. For Mrs. Lagarde and Mr. Draghi, competitiveness is a major issue for the Eurozone, and the recent reduction in trade balance deficits, essentially due to a fall in imports, does not ensure sustainable competitiveness. Reforms to combat the duality and rigidities of the labor market, to limit the rise in unit labor costs (or even lower them) and to adjust wage increases to productivity growth must be pursued in all countries of the Zone if we hope to correct the macroeconomic imbalances that represent a real brake on European integration and solidarity.
A number of leading figures took part in round-table discussions on each of these topics. With regard to fiscal integration, participants shared a fairly common vision: many efforts have been made by countries, and these must be continued, while avoiding a dangerous asphyxiation of the real economy. P-O. Gourinchas (Professor of Economics at Berkeley), moderator of this first round table, focused on five issues: the effectiveness of budgetary discipline mechanisms (choosing between the following two approaches: either the adoption of strict budgetary rules by each State or a transfer of sovereignty with a cross-country surveillance system), the need for budgetary federalism, Eurobonds, institutional organization and democratic representativeness. V. Grilli, the Italian Finance Minister, insisted on the need to adopt a common European budget, which he sees as a decisive step in European integration. Generally speaking, budgetary union is desirable and should be achieved step by step. Speakers briefly touched on the idea of » eurobonds » (« a natural step towards greater solidarity and fiscal integration »), praised the work of European financial stability mechanisms, and questioned the difficulty of establishing fiscal federalism in a zone as heterogeneous as the Eurozone. MEP Sylvie Goulard, on the other hand, deviated from the debate, calling for more democracy in establishing budgetary rules.
With regard to the banking union, the question was raised of not slowing down the implementation of the timetable for banking regulation (application of Basel III, negotiations for the creation of the Single Supervisory Mechanism) and not relaxing the reforms announced in the wake of the financial crisis. J. Pisani-Ferry, Director of the Bruegel think tank and Professor of Economics at Dauphine University, argued, among other things, that when the euro was created, finance had unfortunately been forgotten, whereas today we see that sovereign risk and banking system difficulties are closely linked. He also raised six issues which he considers necessary to ensure the effectiveness of the banking union: harmonization of the legal basis on banking and financial issues within the framework of joint supervision; generalized supervision of all banks, with more specific attention to large systemic institutions; gradual integration of European countries outside the euro zone into the project; consideration of the problems posed by conflicts of interest; governance arrangements; and joint management of bank resolutions by an independent administrative authority. Some of the answers provided by this second round table are summarized below:
- – The harmonization of prudential rules forall banks can only have a very favorable impact on Eurozone countries and other European states (J.Rostowski, Polish Finance Minister);
- – Banking supervisors must not only monitor financial institutions, but also make provision for crisis resolution in the event of future shocks;
- – In the future, to avoid the taxpayer and public finances being called upon to pay the costs of the crisis, it is necessary to find alternatives, ex ante, (via a bail-in of the banks? A solution mentioned by K. Knot, Governor of the Bank of the Netherlands).
According to B. Weder di Mauro, Professor of Economics at the University of Mainz, in an emergency, we must not hesitate to seek short-term solutions in order to mutualize risks, and then build on the results obtained in the long term. Everyone is impatiently awaiting the conclusion of the negotiations and the launch of the single supervisor (scheduled for January 2013) to usher in a new era of banking regulation.
The question of competitiveness was the source of more debate than the other roundtables.
- – P. Aghion (professor of economics at MIT) considers that growth and competitiveness in Europe will be stimulated: in the short term by real devaluations (enabled by wage moderation) and fiscal devaluations (VAT increases to finance reductions in charges), and in the long term by structural reforms (liberalization of the labor and goods markets, use of structural funds). At present, the Eurozone has reached the limit of its technological frontier, and should follow the German example, where cost and non-cost competitiveness are combined. In his view, the ideal solution would be a new investment policy in Europe, targeting the most competitive, high-tech sectors.
- – For L. Gallois and Foreign Trade Minister N. Bricq, this cost/non-cost differentiation is meaningless, and the search for growth sectors (typically in the high-tech and energy sectors) with high added value must be the key to restoring competitiveness. The aim is to restore company margins, enabling them to step up R&D spending and win market share in a range of higher-quality products.
- – Efforts must also be made to establish links between the business world and education, as well as between companies and SMEs. For N. Bricq, CSR (Corporate Social Responsibility) must become a major source of competitiveness in France.
- – For JF. Trogrlic, Director of ILO France, believes that competitiveness must not call into question the standards of the European labor model, which is a true global benchmark (even if it has been somewhat shaken by emerging countries). In his view, competitiveness through » social dumping « , as seen in Spain, is no guarantee of sustainability.
At the end of the round-table discussion, L. Gallois reminded participants that the great European models of competitiveness, such as Germany and Sweden, were built on periods of growth, and that equivalent conditions do not currently exist. This is why L. Gallois advocates slowing the pace of deficit reduction and loweringthe value of the euro against the dollar, as a strong euro would accentuate divergences and imbalances between Northern and Southern European countries. We may all share the same currency, but we mustn’t forget that all countries are not alike, and have different comparative advantages and specializations; consequently, the effective real exchange rate differs from one country to another. P. Aghion concluded the debate by stressing the need for a European macroeconomic plan in the future, to encourage investment in productive sectors to counterbalance the effects of the budgetary restrictions imposed by the SGP.
In his closing address to the conference, Pierre Moscovici, France’s Minister of the Economy and Finance, made it clear that, despite the demands of Mr Gallois and Mr Aghion, France will continue on the path it has embarked upon, and intends to demonstrate its exemplary budgetary credentials. In his view, this deleveraging process is a decisive step for the Eurozone as a whole, and should help bring countries back to greater stability. The various finance ministers of the Zone, as well as the European Parliament, continue to actively discuss, seek and find solutions to all the problems raised during this Entretiens du Trésor forum. Europe must be political, economic and democratic, and this desire for solidarity and integration should lead all countries towards financial, economic and social stability.
