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Tectonic Plates Have Shifted in the Eurozone

In this edition of The Interview, Fair Observer talks to the EU commissioner for economic and financial affairs, taxation and customs, Pierre Moscovici. 

President Donald Trump’s election marked a new turn in US-EU relations. It is an environment dominated by tension, mutual suspicion and the questioning of historic ties between the two counterparts, such as in the field of trade. EU commissioner for economic affairs, Pierre Moscovici, did not shrink from using harsh language in the past to respond to President Trump’s comments about potential EU collapse. During the recent World Economic Forum in Davos, Moscovici suggested that the isolationist tendencies inherent in Trump’s “America First” approach could be countered by what he calls a “European way.”

While relations with the United States might be at a difficult stage, Europe itself is injected with optimism in regard to its political cohesion and economic stability. Emmanuel Macron’s election in France and the rejection of the far-right Marine Le Pen spelled good news for many Europeans. Their optimism is further strengthened as the eurozone’s number one problem, Greece, has been contained. Greece seems to be determined to complete the fiscal adjustment programs implemented since the 2010 crisis, and it is hopeful for a fresh start without more austerity come August.

However, these vibes of stability and positive messages for the eurozone bring concerns about the need for real reforms in the currency union — reforms that have stagnated over the years, such as the creation of a banking union and of a European Monetary Fund. The question now is whether Europe is more prepared than in the past to confront a new political or financial crisis, which, despite an optimistic approach, cannot be excluded as a future possibility.

In this edition of The Interview, Fair Observer talks to Pierre Moscovici, the EU commissioner for economic and financial affairs, taxation and customsabout EU-US relations, Greek economy and the prospects for the eurozone.

Athanasios Dimadis: What are the economic and political developments in the eurozone that make you feel optimistic, or at least more hopeful, about the short and long-term future for the currency union? 

Pierre Moscovici: In both economic and political terms, the tectonic plates have shifted in Europe over the past two years or so, opening a window of opportunity for us to reform the eurozone. Economically, we have moved from a phase of gradually strengthening recovery to one of robust expansion. Unemployment and deficits continue to fall and investment is, at last, rising in a meaningful way. In short, the sun is shining on our economy, and that is the right moment for us to get back to fixing the roof. Politically, the election of Donald Trump in the US and the Brexit vote in the UK, followed by the election of the Emmanuel Macron as president of France, have for different reasons provided a new impetus for us to strengthen our Economic and Monetary Union (EMU). But this window of opportunity to reform will not remain open forever: The moment to take the necessary ambitious decisions is now, in the coming months.

Dimadis: Almost eight years after the worst economic downturn in the eurozone’s history, what are the main lessons learned by the European political elites through this painful process of confronting and managing the debt crisis?

Moscovici: Neither Europe nor the US was prepared for the financial crisis that hit in 2007-2008, and nor were we prepared for the sovereign debt crisis that hit the eurozone in 2010-2012. Policymakers had to act in haste, under tremendous market pressure, to address those problems. Many vital reforms were made in those years: building a more resilient, more responsible, better-supervised banking sector; strengthening the governance of the eurozone and establishing a financial firewall in the form of the European Stability Mechanism; and, at the national level, stabilizing public finances and modernizing labor markets and pension systems.

We are in a much stronger position today because of those reforms. Of course, with the luxury of hindsight, we can see what we might have done differently or better, had the political or economic conditions been different. But it is of little use dwelling on the past. Now we must look to the future and make the necessary improvements to the structures we have put in place. The banking union needs to be completed. The intergovernmental European Stability Mechanism needs to be integrated into the EU legal framework. And the focus of structural reforms in our member states needs to shift toward enhancing productivity through investment in human capital: innovation, education and research must be our priorities.

Dimadis: Is the eurozone ready to manage similar crises in the future without the financial or technical support of third parties and external institutions such as the International Monetary Fund? 

Moscovici: The IMF made a valuable contribution to the efforts to stabilize the eurozone during the crisis, and indeed its support was both financial (especially in the first and second Greek programs, in Ireland and Portugal) and technical. On both fronts, the eurozone today is in a stronger position. But the IMF is still an important partner and several of our member states remain attached to its involvement. Its possible role in any future crises would need to be discussed at the appropriate time. Fortunately, we are far from needing to consider this question today.

Dimadis: Since 2010 the relations between Europe and the IMF went through various stages and saw some tensions form. Both sides had different approaches to issues such as the managing of the Greek debt. How do you see this partnership moving forward in the next years? 

Moscovici: The European institutions cooperated smoothly with the IMF with the financial assistance programs for Portugal, Ireland, Cyprus — and, for the most part, in Greece too. Since the start of the current Greek program in August 2015, the IMF has been closely involved even if it has not been formally on board. Of course there have been difficulties over the years, reflecting the different prerogatives, constraints and cultures of our institutions. We have often differed in terms of our fiscal projections and debt; on the other hand, the IMF has been right to insist on the need to address Greece’s debt burden in a credible manner. Our cooperation in the context of the recently concluded third review of the Greek program has been very good, and I trust that this will continue to be the case up to the end of the program in August this year. It is in all our interests that Greece concludes the program successfully, as a normal member of the eurozone able to stand on its own two feet in economic terms.

Dimadis: Is the risk of a potential Grexit off the table, or will it always remain a possibility if Greece doesn’t follow through on its commitments?

Moscovici: I always fought against the idea of Grexit, first as French finance minister and later as European commissioner, because to me it was self evident that this would have been a disastrous outcome for Greece and also very damaging for the Economic and Monetary Union as a whole because of the precedent that it would have set. Of course, it is in Greece’s own interests to stick to its commitments in the future. But it would be wrong to characterize Grexit as a persistent shadow over the country — that is not the case. I truly believe that the threat of Grexit has now been banished.

Dimadis: Do you share the optimism of the Greek government that has promised to the people that austerity is over once the third economic adjustment program finishes this summer? 

Moscovici: The conclusion of the program this August will be a real as well as a symbolic turning point for Greece — there will be a before and an after. After so many years of dependence on external financial assistance, Greece will become, in economic terms, a normal European country once again. Greece’s economic policies will then be monitored through the coordination process we call the European Semester. Because many of the agreed reforms will continue to be implemented long after the program ends, and this process will need to be supported, there will need to be an appropriate type of post-program surveillance. The details of this will be agreed in due course. But let’s be clear: There will be no more “memoranda,” and, provided responsible fiscal policies and a credible growth strategy are pursued in the future, there should be no reason to fear a return to austerity.

Dimadis: Given the recent comments by President Trump on Europe and his significantly harsher stance against America’s European partners, should the eurozone count on the support of the US leadership? 

Moscovici: Clearly some of the decisions that the Trump administration has taken we do not agree with at all — I am thinking in particular of the withdrawal from the Paris climate accord. In my own area of responsibility, we have some concerns about whether the recent tax reform is compatible with internationally agreed anti-tax avoidance rules. We are looking into this. However, I want to emphasize that overall we maintain a constructive dialogue with the administration. I met with Treasury Secretary Steven Mnuchin a number of times over the past year, as well as with President Trump’s main economic adviser Gary Cohn and other interlocutors. The transatlantic economic relationship remains strong and it is in our mutual interest that it remain so.

In the meantime, the EU is pressing ahead, forging new trade agreements with key partners around the world: The Comprehensive Economic Trade Agreement with Canada is being provisionally applied; we have finalized a major trade deal with Japan; and we are moving forward with talks with Mexico and Mercosur. In short, whatever choices our American friends make will not reduce our determination to reject protectionism and remain open to the world.

Dimadis: Recently, you rejected a “Europe First” response to President Trump and suggested the so-called “European way.” What does the “European way” mean for a European Union that seems to lack cohesion among its member states? 

Moscovici: The European way is the way of multilateralism, of open societies and open economies, of fairness and equality, of diversity and tolerance. We must stand firm in defense of our values, wherever in the world, they are questioned or challenged — and that includes within the EU itself.

Dimadis: In this polarized international and economic environment, can the goal of deepening the eurozone be institutionally and fiscally feasible? What are the steps that need to be taken for the currency union to achieve a higher degree of convergence?

Moscovici: As I said in answer to your first question, recent international and economic developments have provided a boost to efforts to deepen Europe’s Economic and Monetary Union. But we need to act fast because this confluence of factors will not last forever. The proposals that the [European] Commission put on the table last December aim both to improve the governance of the euro area and to boost economic convergence. On the governance side, we aim to improve coherence and efficiency, notably through the creation of a European Monetary Fund in 2019, equipped with a €60 [$74] billion backstop for the Single Resolution Fund to strengthen the credibility of the banking union.

We have also proposed the establishment of a European economy and finance minister, who would be both president of the Eurogroup and vice-president of the commission. This is an idea that has long been close to my heart and I believe it would give a significant boost to the transparency and accountability of our decision-making. Then, to support convergence between EMU economies, we are proposing to strengthen budgetary and financial support for technical assistance and structural reforms and crucially, to create a stabilization function to help eurozone countries to deal with asymmetric shocks.

The current discussions among finance ministers, in view of the upcoming summit of eurozone leaders on March 22, are focused on the proposals related to the backstop for the Single Resolution Fund and the reform of the European Stability Mechanism. But this must not mean that we lose sight of the other elements of the package, because we need to have a global vision of the deepening of EMU — one that goes beyond these short-term priorities.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: William Potter / Shutterstock.com