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For Europe: ‘The Firepower Is There’: An Interview

Klaus Regling, interviewed by Sami Zeidan
Thierry Monasse/Polaris
Klaus Regling, head of the European Financial Stability Facility, and Evangelos Venizelos, Greece’s finance minister, during a meeting of eurozone ministers in Luxembourg, October 3, 2011

This interview with Klaus Regling, the head of the European Financial Stability Facility (EFSF), took place on December 17, 2011, and was broadcast on Al Jazeera. The interviewer was Sami Zeidan. A revised and updated version of the interview follows, along with a postscript on the recent downgrading by Standard & Poor’s of credit ratings in the eurozone.

Sami Zeidan: On December 8 and 9, at the European Union summit in Brussels, European leaders tried to solve the debt crisis, and to agree on a long-term solution. The summit discussed a fiscal pact, as they call it, that if eventually enacted would actually make it illegal for a member country to run up budget deficits larger than 3 percent of GDP. Break that law, and the member country will end up in Brussels at the European Court of Justice, where it will face legal proceedings and ultimately sanctions.

But before things reach that point, the current crisis needs to be resolved, and that brings us to the European Financial Stability Facility, based in Luxembourg and set up by the members of the European Union in 2010 to act in an emergency. If a member state can’t pay its bills, this bailout fund may step in. How many people do you have working here?

Klaus Regling: We have been growing rapidly the last twelve months and we now have twenty-five staff, but let me clarify with regard to the EFSF‘s mission. Our mandate is to safeguard financial stability in the euro area. The EFSF provides financial assistance to euro-area member states in financial need. Its shareholders are the seventeen euro-area member states. To avoid any confusion: the EFSF has no direct link with the European Central Bank (ECB), which is the independent central bank of the European Monetary Union. The mandate of the ECB is to deliver price stability. This mission is clear and remains unchanged despite the crisis and is anchored in the Maastricht Treaty. The ECB has an undisputed track record. Since the start of the Monetary Union twelve years ago the average inflation of the member states has been close to 2 percent. The ECB is currently buying bonds of certain euro-area member states on the secondary market but this Securities Markets Program is only about ensuring that monetary policies of the member states get the support they need.

The ECB also provides ample liquidity to banks to safeguard financial stability in the eurozone. Recently the ECB provided nearly €500 billion in loans to banks with a maturity of three years. The EFSF provides loans and other financial assistance only to member states of the euro area.

SZ: It’s here, to this office in Luxembourg, that so much hope is now directed. The question is, does Mr. Regling have the money and the credibility it takes to resolve a crisis that so far isn’t letting up? Let’s start with the recent news of that fiscal pact I have described. Will it solve Europe’s problems?

KR: Well, the fiscal pact that was decided by the summit on December 8 and 9 was only the last point in a long process that we have seen in Europe during the last eighteen months.

SZ: Is it the key point?

KR: It was a key point. It will not be the final one. We know that we cannot expect one summit to solve all the problems, but we have to really understand that it was one important step in a long process of decisions that have been made since the crisis broke in early 2010. We have done a lot to improve the governance of the euro area, particularly with regard to fiscal coordination, structural adjustments such as labor market reforms, and tackling macroeconomic imbalances—all things that critics of the Monetary Union have said for some time need to be fixed in order to have, as a complement to the centralized monetary policy and to the euro’s single exchange rate, better-coordinated fiscal and economic policies.

Among these improvements and reforms, I would emphasize the strengthening of the Stability and Growth Pact of 1997 and the introduction of a new European procedure to deal with macroeconomic imbalances. Euro-area member states are also negotiating an international treaty, a “fiscal compact.” This treaty aims to promote conditions for stronger economic growth in Europe and closer coordination of fiscal and economic policies within the euro area.

National governments will remain in charge and accountable, responsible for their fiscal and structural reforms. However, reforms need to be better coordinated and must work better than in the past. And with these decisions, including those on the fiscal compact, I am confident that monetary union will function better in the future than in the past.

SZ: If that’s the case, though, we look at market reaction and it hasn’t been positive, has it?

KR: It has not been positive but it has not been a catastrophe either. We saw yields on bonds issued by some member states rising initially.

SZ: Markets are not convinced. Why? What would you say to them to tell them, “No, we are on the right track”?

KR: Markets focus only on one or two things. And they have a predominantly short-term view. I think the summit on December 8 and 9 focused on longer-term issues. The fiscal compact—that is, an agreement on how to conduct fiscal policies in the countries in monetary union—necessarily is something long-term. It will for instance require that the budgetary position of a member state be balanced or in a surplus. The member state may temporarily incur deficits only to take into account the budgetary impact of the economic cycle. Beyond such impact, it may also incur deficits in case of exceptional economic circumstances, provided that this does not endanger fiscal sustainability in the medium term. It’s not for tomorrow, the fiscal compact, and not for next month only; it’s for the next years and decades.

Markets, on the other hand, as we know, focus mainly on the short term and, therefore, they don’t appreciate the full impact of the decisions that have been made. In the long run, this will be very positive. There is obviously still uncertainty regarding the reform efforts in Europe at the national and community level. But we already see encouraging positive results, in Ireland, in Portugal, in Spain, and in Italy.

Ireland, which requested financial aid from us in November 2010, regained competitiveness and managed a turnaround. Portugal, which began a new macroeconomic program six months after Ireland, implemented many measures such as deep cuts in public expenditures, including substantial salary cuts for civil servants. In Italy, the new government adopted a far-reaching package to shore up the public finances and support economic growth, through measures concerning taxes, pensions, reform of public administration, and liberalization of economic activity. In Spain, the new government is taking measures focusing on fiscal consolidation, repair of the banking system, and labor market reform. These are encouraging signals.

SZ: You talk about the long run, though. Has Europe got the long run? Do we have years, even months or weeks, some would say? The yields on sovereign bonds were rising after the announcement in Brussels [i.e., the countries issuing those bonds had to pay higher rates to bond holders].

KR: True, but those yields also dropped in the weeks before, so let’s not exaggerate. To make it very clear, the euro will be there for decades to come.

SZ: Who’s going to manage it now if yields on bonds are rising?

KR: Markets will understand that there is enough “firepower”—i.e., immediately available financial assistance to any euro-area country—if needed. The support will be provided by the EFSF, the European partners, and the International Monetary Fund. At the moment the countries in need are Greece, Portugal, and Ireland. If other countries think they need assistance—and there’s no other country asking for it at the moment—it would also be available.

SZ: Is there enough firepower?

KR: The firepower is there. The EFSF has a lending capacity of €150 billion to the IMF through bilateral loans, which will be complemented by additional resources from other European member states and international partners. That was also decided at the Brussels euro summit in December. So the situation is not as bad as the markets believed.

SZ: Firepower is rising.

KR: Firepower is increasing, and also, importantly, the summit decided to review the availability of firepower, if that is necessary, by March 2012. By then we will know whether more is needed. At the moment I think we have more than enough.

SZ: The debts of Italy, and if we were to take Spain as well, together, we’re talking around €440 billion, isn’t it? How can you say we’ve got sufficient firepower? How can you send that message out to markets?

KR: I think your comparison is a wrong one. When I look at firepower, and look at what may need to be done, it’s not correct to look at the total outstanding debt of Italy, Spain, and the other countries that you mentioned—somewhere between €1.9 trillion of Italy’s outstanding debt will mature over the next seven years and will be rolled over.

When we look at firepower, the question is what may be needed over the next twelve months, maybe the next twenty-four months, but no more than that. So we have to take account of how much debt is maturing in a year or two, and of the actual fiscal deficit in Italy, which is falling. Italy is moving toward a balanced budget by 2013, so all the financing it needs from markets would really be caused only by maturing old debt that will have to be paid. That’s only a fraction, one seventh on average, of the total debt of €1.9 trillion.

We do know, for instance, that Italy and Spain have about €600 billion in maturing debt over the next two years. So that’s the appropriate figure for the comparison with the firepower of the EFSF.

SZ: But if you look at what’s needed over the next twelve months, can you honestly say that the money that you have now is enough to deal with anything that can come up during that period? I mean, out of the €250 billion available to deal with anything that could come up in the next twelve months with Greece, Italy, Spain, Ireland, Portugal….

KR: No, no, those numbers are not correct. What’s committed from our side, from the EFSF at the moment, is €43 billion for Portugal and Ireland. That is for their financial support programs, which run for the next two years. So everything that they need is already covered.

SZ: So you have about €400 billion?

KR: There might be an additional €300 billion.

And then we know that the IMF stands ready, in principle, to add about 50 percent of what the Europeans do, for whatever country asks for assistance. At the moment there is no country that is asking for assistance. So if, hypothetically, you say what are the countries that may need help, we think about Italy and Spain, but they have not made a request for financial assistance. So far, they are able to refinance themselves. One day they may say they need help; but at the moment we don’t know. With the firepower we have left, plus financing that would be available at the same time from the IMF, there’s more than enough to cover all these possible cases, which are hypothetical, for the next twelve months without any problem.

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