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U.S.E./SFL  Symposium  “Eurozone:  Back  on  Track?”,  Utrecht,  January  13  2016  

 Was   the   euro   a   mistake   to   begin   with?   Does   it   have   a   future?   These   were   the   central  questions  for  the  U.S.E./SFL  Symposium,  featuring  the  President  of  the  Eurogroup  and  Dutch  Minister  of  Finance  Jeroen  Dijsselbloem  on  13  January  2016.    

Jeroen   Dijsselbloem   in   his   keynote   speech   stated   “the   euro   is   not   to   be   blamed…”   He  emphasized   the   benefits   of   European  Monetary   Union,   at   the   cost   of   surrendering   policy  instruments,   in   lowering   transaction   costs   and   exchange   rate   risks.   These   aspects   reduce  uncertainty   for   capital   investments   and   foster   economic   convergence.   He   further   added  “Except  Greece,  the  eurozone  countries  have  returned  to  the  growth  path.  While  recovery  is  on   the  way,   risks   still   remain…”   He   further   discussed   several  myths   in   the   euro   crisis.   He  ascertained  that  “the  sovereign  debt  crisis  is  not  caused  by  the  euro,  though  the  euro  affects  how  the  crisis  has  played  out.”  He  noted  that  lending  risks  were  priced  similarly  across  the  Eurozone   countries   prior   to   the   crisis,   implying   that   countries   with   unsound   economic  policies  are  able  to  borrow  aggressively,  which  feed  consumption  and  housing  bubbles.  “We  could   have   faced   the   same   crisis   without   the   euro…”   He   then   argued   “Although   the   EU  budget   is   crucial,   the   establishment   of   banking   and   capital   market   union   will   play   an  important  role  in  absorbing  the  shocks.”  He  gave  an  example  of  the  U.S.  and  indicated  that  the  U.S.  FED  budget  absorbs  only  50%  of  shocks,  whereas  the  rest  are  absorbed  through  the  private   capital   market.   Overly   relying   on   the   central   budget   may   force   temporary   risks  become  permanent.  Lastly  he  commented  on  the  statement  “the  structural  reforms  are  only  necessary  because  of  the  euro”  as  being  half  true.  He  highlighted  that  a  number  of  structural  weaknesses  (e.g.  health  care,  labor  market,  etc.)  are  deeply  rooted  in  the  EU  economies  and  are  not  related  to  the  euro.  However  the  deepening  of  structural  reforms  would  make  the  euro  more  resilient  and  contribute  to  the  real  convergence  of   life  standards.  He  concluded  “The  construction  errors  of  EMU  do  not  mean  the  euro  is  a  mistake.  We  need  to  adapt  and  make  necessary  adjustments  to  deal  with  the  macroeconomic  problems  we  encountered.”    

The  symposium  was  proceeded  with  a  panel  discussion,   consisting  of  Dr.  Sandra  Philippen  (Editor-­‐in-­‐chief  at  ESB),  Prof.  Arnoud  Boot  (University  of  Amsterdam  and  SFL),  Victor  Cramer  (Head   of   the   EU   division   of   the   Dutch   Ministry   of   Finance)   and   Dr.   Claire   Economidou  (University  of  Piraeus),  moderated  by  Martin  Visser  (De  Financiële  Telegraaf).  

Claire  Economidou  discussed  the  challenges  faced  by  the  EU.  She  particularly  pointed  to  an  overexpansion   that   is   too   soon   and   too   quick,   the   aftermath   of   the   euro   crisis  where   the  weaknesses   of   EU   economies   are   exposed,   the   lack   of   visionary   EU   industry   policy,  deteriorating   regional   periphery   and   the   persistence   of   nationalism.   She   envisioned   two  possible   future   scenarios   for   the   EU.   The   one   is   ‘Muddle   through’   based   on   the   current  setting,   whereas   the   other   is   ‘Even   closer   union’   aiming   for   a   more   effective   state.   She  

 

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proposed  a  single  fiscal  authority  (with  own  sources  of  revenues,  ability  to  issue  debt  and  capacity   to   make   ongoing   fiscal   transfer…),   structural   reforms   to   improve   labour   and  product  markets  flexibility,  visionary  industrial  policy,  and  finally  an  entrepreneurial-­‐friendly  (e.g.  low  administrative  costs)  that  unlock  business  potential  of  EU  economies.      Sandra  Philippen  questioned  the  timing  for  structural  reforms.  She  was  not  convinced  that  the  eurozone   is  back  on  track  as  harsh  measures  are  taken   in  countries   like  Spain,   Ireland,  etc.  The  real  effects  of  capital  market  union  and  banking  union  are  yet  to  uncover.      Victor  Cramer  added  that  protecting  the  social  system  in  the  eurozone  is  the  focal  point   in  the   international   discussions.   We   have   done   a   lot   with   respect   to   the   establishment   of  banking   union   and   reforms,   but  more   need   to   follow.  He   further   discussed   the   important  role   of   democratic   legitimacy   in   establishing   the   banking   union,   which   requires   a   major  transfer  of  sovereignty.      Arnoud  Boot   first   commented  on  Dijsselbloem’s   speech   as   being  predictable   and   realistic.  He  commended  on  his  gradual  approach  because  big  steps  will  backfire  due  to  democratic  legitimacy  reasons.  However,  there  is  no  precedent  in  the  history  how  such  a  system  should  work.      Arnoud   Boot   further   clarified   the   confusion   between   the   benefits   of   having   am   internal  market   vs.   the   benefit   of   the   euro.   “The   internal   market   does   not   necessarily   need   the  euro.”  He  ascertained.  He  explained  the  process  of  creating  an  internal  market  to  be  gradual  and  logical,  where  strong  countries  rise  and  weak  countries  fall  out.  The  euro  is  to  facilitate  this  process  in  a  more  efficient  manner.  He  argued  that  the  strong  force  from  the  center  of  the  eurozone  in  setting  the  goals  might  disrupt  this  natural  process.      Arnoud  Boot  additionally  suggested  focusing  on  wider  aspects  of  the  EU-­‐wide  policies  (e.g.  youth   employment   in   the   south   of   Europe,   education,   etc.)   that   bind   people   together  without  inflicting  on  sovereignty.  “The  EU  citizens’  attitude  on  the  Eurozone  is  up  to  the  new  generation.”      Lastly,  Arnoud  Boot  urged  us  to  rethink  the  future  of  the  financial  sector,  which  will  be  the  key   issue   for   the   next   30   years.   He   emphasized   “We   haven’t   figured   out   a   truly   stable  financial   system   yet.   The   status   quo   of   letting   the   government   keep   the   financial   system  alive  is  a  totally  wrong  equilibrium.”    The  panel  members  continued   to  debate  on   the  benefits  of  having   the  euro.  Arnoud  Boot  acknowledged  there  is  no  easy  answer.  Labour  union  is  particularly  vocal  about  the  benefits  of   the   euro   for   the  workers   they   represent.  More   importantly  we   confuse   the  benefits   of  internal   markets   with   those   of   the   euro.   Sandra   Philippen   further   added   that   the  construction  of  a  counterfactual  scenario,  i.e.,  what  would  Europe  look  like  if  the  eurozone  had   never   been   created   is   relevant   to   convince   people   the   benefits   of   the   euro.   Victor  Cramer   stated   that   the   currency   issue   is   less   important   than   the   challenges  we   face.  We  need  more  competitive  member  states.  Claire  Economidou  stressed  there  is  no  easy  divorce  for  Greece.  The   social   costs  of  exiting   the  eurozone  may  outweigh   the  economic  benefits,  which  might  take  50  years  to  recover.  The  panel  discussion  continued  on  a  number  of  issues  related   to   the   political   economy   of   the   eurozone,   the   diversity   of   the   financial   sector,  harmonization  of  the  insolvency  frameworks  and  the  refugee  crisis.      

 

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In   conclusion,   the   crisis   has   revealed   a   number   of   structural   weaknesses   in   the   EU  economies  and  in  the  governance  of  the  EMU.  The  crisis  response  has  focused  on  addressing  these   shortcomings.   More   systematic   changes   are   necessary.   We   need   to   form   common  policy  agenda  to  tackle  the  challenges  we  face  collectively.