Bruegel’s Jean Pisani-Ferry, Zsolt Darvas, André Sapir: The euro-area debt crisis and revival


For more than a year now of the EU has
been struggling with sovereign debt problems. It all started with Greece at the beginning of 2010 and then went on with Ireland especially but also with
other countries which are not under an assistance scheme but which are under the spotlight with market
worries about this solvency and therefore which are facing difficulties borrowing from financial markets. The EU has responded to this situation with a series of initiatives but mostly on a case by case, country by
country, item by item basis and for some time now that have been talks
about a comprehensive solution. I’m joined now by my colleagues Zsolt Darvas and Andre Sapir who co-wrote the first paper with me. So I’m going to ask first Zsolt, ‘Is Greece bankrupt?’ The Greek government has already started to implement a very significant fiscal consolation program and they would like to reach six percent of GDP primary surplus. What is a primary surplus? Primary surplus is the general government balance, so revenues minus expenditures but excluding the interest payments. Now we have looked at whether this six percent primary surplus is sufficient to safeguard sustainability and in order to do this assessment we made some assumptions using market
estimates GDP growth also some assumptions on future
interested developments and also on the possible banking sector needs for government funding and we arrived at the conclusion that the six percent primary surplus will not be sufficient to maintain public-sector sustainability. So you mean Greece cannot repay its debt? If you want to reach a lower level of
debt then even the primary surplus will be even much higher and we have looked at the international experience for other countries how large of a primary surplus they could achieve in the past and we concluded that it was very rare that countries could maintain even a six
percent surplus for many years. What about the other countries Portugal, Spain, and first of all Ireland? Portugal and Spain are in a much better shape partly because they have much lower debt and we have looked at also the possible implication of banking system losses and we generally arrive to the conclusion that Portugal and Spain are sustainable. This is also true for Ireland even though the possible losses from the
banking system that may require public funding is still
uncertain but on the other hand the Irish economy is much more competitive than the other three Mediterranean countries. So if creditors have to take the losses it means the banks. Right, and so this adds to the problems already existing in the banking sector. Well remember that the crisis when started three years ago was a financial crisis and it was the banks that were hit first throughout Europe and also in the United States. So when the sovereign debt crisis started about a year ago banks in many countries were already fairly weak. They were weak in Ireland, they were weak in Spain where there had been a big housing boom and where banks presumably hold a lot of
non-performing loans then on top of that came the sovereign debt crisis and banks hold a lot of government debt. So they are being hit both by the financial crisis and the housing boom and by the sovereign debt crisis. How can we know exactly what the situation is in the banking sector? We had hoped in July of last year that we would have learned a lot about the true situation of the banks when
a European stress test was conducted unfortunately that stress test proved to be not very credible and now
a new stress test is being conducted. But the fear is still out there that you know maybe we could still not know
everything so we advocate that besides the European institutions involved in conducting the stress test we should bring in outside referees as it were the IMF
the bank for international settlement that could add credibility to those stress tests. But that means giving more money to banks and so that means also more
public debt. That’s probably inevitable but it’s
much better to put on additional public debt than leave a situation of
uncertainty at the same time we should not think that all of the extra funding
that is needed for the banking sector needs to come from public funding. Some of it will come from private funding for instance via mergers. And so cleaning up this situation would be sufficient to restore to recreate conditions for growth? No that will not be sufficient but it will address in a sense the numerator of the debt to GDP ratio. So both the private debt the public debt needs to be addressed but we will not be able to bring
back sustainability to those countries unless one is be able to get back into a
process of healthy growth. I’m now with Benedicta Marzinotto research fellow at Bruegel who is publishing a paper on the third plank of the comprehensive approach to the current debt crisis and it’s a paper about growth. So Benedicta how can the EU help restoring growth in those welfare countries? Yes we are suggesting that the crisis
countries are also given the opportunity to grow out of their own debt. We propose the creation of a European fund for economic revival that uses outstanding structural and cohesion funds. But where should this money come from? Is there money somewhere that is unspent? It’s money that has been pre-allocated some of the payments have not been made some of the pre-allocation have not been even committed. So there is an amount of usable funds at the disposal of crisis countries. Should this money be spent faster only or also differently? Our strongest message I think is that it’s also necessary to redesign the objectives and possibly spend the money differently looking more carefully at the short term needs of this country but
also the structural weaknesses and make these objectives consistent with the broad economic policy guidelines and EU 2020. So for example? For example certain countries do not
need infrastructure projects. Spain does not need too much change in that respect. Greece does especially in the railway system but most of them need lots
of reforming on labor market skills, education training, or more efficient product markets. Can it really help to restore growth? I think it will counterbalance the contractionary effect of fiscal adjustment. All these countries are under strict conditionality. They have to go through ambitious fiscal adjustment. So it’s a way to support growth in the process of adjusting the fiscal house and also from a political perspective it’s about creating a consensus at home in favor of reform.

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