The chief executive officer (CEO) of the European Financial Stability Fund (EFSF) Klaus Regling has expressed full confidence that the German Constitutional Court next month will clear the new funding programmes for the euro zone as the German people are in favour of further consolidation of the euro experiment, which has a long history.
Regling said the Anglo-Saxon media and other opinion makers were creating an excessively negative perception about the euro zone economies that was far from true. After the German Constitutional court clears the new funding programme, the existing EFSF and the new European Stability Mechanism (ESM) together will have about $900 billion to help resolve fresh problems, including the funding of Spanish banks, Regling told The Financial Express in an interview. Regling will also oversee ESM besides EFSF.
Regling was very confident that the German court clearance was a mere formality and that there was only a very remote chance that it would not happen. He said some of the euro-zone economies that had problems earlier have done a good job of cutting their deficits and even absorbing short-term pain by reducing their per capita income levels purely as a cleansing exercise.
He said the overall budget deficit of the 17 euro-zone economies, which was above 6% of GDP until just a few years ago, is poised to come down to below 3% of GDP next year. ?This is a huge improvement by any reckoning. And it certainly is far better than the massive budget deficits of 8%-plus run by the US economy,” he said.
Regling said the the US macroeconomic model of continued Keynesian fiscal and monetary expansion will not work for the euro-zone counties. “We totally differ from the Anglo-Saxon approach in this regard. And we are already showing results,” he said.
He cited another piece of data to prove that the overall adjustment programme in the problem countries is working well, contrary to public perception.
For instance, the productivity divergence between a strong economy, such as Germany, and a very weak economy like Greece is also reducing sharply. Greece’s per unit labour cost had exceeded that of Germany by 50% about two to three years ago. This divergence in unit labour cost is down to only 20% now. It will improve further, he said. “These are also clear signs that the adjustment programme is working, which the Anglo-Saxon press refuses to see,” Regling repeatedly pointed out.
When asked why rating agencies like Moody’s had downgraded EFSF bonds, Regling was quick to point out that the rating of EFSF was brought down to AA+ simply as a consequence of some of the AAA-rated member countries getting downgraded. This was no reflection on the EFSF per se.
Is the problem with the euro-zone countries the fact that they cannot take decisions quickly and are always behind the market? Regling admitted that it was impossible to be ahead of the markets when new problems arise every now and then that have to be discussed democratically within and among 17 nations. “We are trying to improve the decision-making process but still end up disappointing the markets,? he said.
He said the market will gradually understand that the euro-zone economies are doing a good job of fiscal consolidation, labour market reforms and other structural reforms to improve competitiveness. “As I said, data clearly shows a big improvement in all parameters and I’m certain that in another two to three years, the overall debt to GDP ratio of the euro zone will start to decline as a consequence of the painful adjustment programme we are going through. It is the short-term pain we are now absorbing in terms of reducing the nominal incomes that will lay the foundation for the recovery of growth in the euro zone,? Regling asserted with confidence.
On the banking side, he admitted that as yet there is no real estimate of the volume of toxic assets lying inside the euro-zone banking system. “There are varying estimates which I don’t want to speculate on. We are trying to work out a banking union in which all banks are independently supervised by the ECB (European Central Bank) and their additional capital requirements will be funded by the ESM to be formed next month with a 500-billion-euro corpus. We will be able to get a more accurate idea of the toxic assets in the entire system once all banks are brought under a common, independent supervisory mechanism,? Regling said.
