02 July 2012

Jörg Asmussen: Can we restore confidence in Europe?

Mr Asmussen answered his own question: "Yes, because we must, to put monetary union back on a sustainable track. The more complicated part is how to do it. In my view, it requires finding the right balance between national and European responsibilities."

What Greece can do to restore confidence

Under the first adjustment programme it has made substantial progress in adjusting its economy. The fiscal deficit was reduced from 15.6 per cent of GDP in 2009 to 9.1 per cent in 2011. And very important reforms, such as the pension reform, have been implemented.

The difficulties that Greece is currently experiencing do not stem from the programme. They stem from many years of unsustainable economic policies and a reluctance to implement the necessary reforms. The programme is so comprehensive because the problems in Greece are so deep-rooted. With or without the programme, any Greek government would have to pursue a similar adjustment to bring the economy back on track and restore the confidence of financial markets.

The difference is that with the programme, this adjustment is made much smoother. The fiscal measures under the programme have been designed to restore the sustainability of public finances gradually. If Greece were on its own, the adjustment would have to be much faster and more drastic, given that the sovereign has lost access to financial markets. So the programme is actually helping support the Greek people’s standard of living.

What the rest of the euro area can do to restore confidence

Many euro area governments have avoided dealing with problems by hiding behind overly optimistic forecasts or unrealistic stress tests. But this is ultimately a self-defeating strategy. The problems do not go away. Instead, the market loses trust in official statements. Governments then have to take ever more drastic policy measures to win back credibility. Overall, the constant stream of missed targets and data revisions saps at euro area confidence.

For those countries receiving financial assistance, confidence can be restored by rigorously implementing their programmes. For Ireland and Portugal, this means maintaining their strong track record of implementation. For Spain, it means a convincing recapitalisation plan that removes all doubts about the solvency of its banks. The first financial review can provide a basis for this. For Cyprus, it means finally addressing its macro-economic and financial sector vulnerabilities.

For other Member States – including France and Germany – it means learning the lessons of the crisis so far and getting ahead of the curve on fiscal and structural reforms.

The most pressing [measure] is addressing the institutional design of EMU. The euro area needs to send a clear message that it has understood its design flaws and has a plan to correct them. This would signal to markets that the euro area is a place [in which] they can invest. And it would underscore Member States’ commitment to the euro and remove any doubts about its integrity. This alone would provide a major boost to confidence.

The report by the four Presidents in principle endorsed by the European Council last week, sets out the four core building blocks of a genuine EMU. While it is a vision for the future, each of these building blocks is designed to address the issues that are currently eroding confidence in the euro area.

A commitment to reinforcing EMU in this way, coupled with the measures for Greece and other countries that I have described above, is the only way out of the crisis. There is no silver bullet. Those who advocate “once and for all solutions” – be that a banking licence for the ESM, a European transfer system, or the like – are contenting themselves with a superficial analysis.

Full speech

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