During the last four years, as president of the Eurogroup, I have spent many debates, interviews and Q&A sessions explaining what’s actually going on in the Eurozone and what we are doing to fix it. During this time, I have seen the economic facts, figures and results improve. But much less so, the sentiment. A lack of trust perseveres.
The topics changed over the course of time. Cyprus stepped into the spotlight in 2013 and has since recovered, leaving its support program already in 2016. Spain needed a much smaller banking program from the ESM than expected and left the program at the end of 2013. Ireland, badly hit by a credit-boom-bust cycle, left its program also end 2013. Portugal followed in 2014.
And all of these countries came out with improved competitiveness, with regained access to markets and with strong growth. Spain, Ireland, Cyprus are now among the fastest growing economies in the eurozone.
More and more countries have growth around 2 to 3%, the forecast for the Netherlands has been upgraded to 2,1%. The average growth is now 1.5%. Not enough, but it is improving.
Greece has more fundamental issues, economic and institutional, and here trust is still a key issue. Trust between euro member states but also trust of consumers and investors in the stability of the Greek economy. Since we hit rock bottom in the summer of 2015 we have entered into a constructive dialogue with the Greek authorities in the third programme.
Growth has returned and work is progressing, though not as fast as many would want, the Greek government included. The fiscal situation has also improved drastically since the depth of the crisis. When I came into office the average deficit in the Eurozone was below -4, now it is close to -1.5%. A deficit of -1,5% on average. And the divergence has been reversed. Austerity is no longer at the heart of our debate in the Eurogroup. The emphasis is much more on reforms and investments.
Investments are picking up, helped by the Juncker plan. And there is more space for public investments to supplement private investments.
However, I believe more reforms in markets and institutions are needed to create more investment opportunities throughout the eurozone.
In Europe we had to save many banks at a huge price. And we failed in the first years to recapitalize and clean up their balance sheets. But after the government leaders decided to create the Banking Union, mid 2012, we designed its structure and negotiated its authority in record period of time.
Only two years after this decision, at the end of 2014, the Banking Union was set in motion with the Asset Quality Review, a thorough check of the financial health of the balance sheets of the major banks. Many banks have since then been restructured and recapitalized, a process which is still continuing. Also, the legacy problems in Italian banks are being dealt with; finally some would say.
Solutions will have to be found within the setup of the Banking Union. A lot of attention is given, also in the media, to Banca Monte dei Paschi di Siena (MPS) but at the same time other banks are in the process of being restructured or recapitalized through private solutions. Unicredit, Italy’s largest bank, much larger than MPS, is currently in the process of raising approximately 13 billion euro amongst private investors. In the case of MPS a solution should and will be be found in case of possible mis-selling of bank bonds to certain retail customers.
So, to sum up:
1. All member states that needed financial help during the crisis – perhaps except one – are now standing on their own legs again.
2. The fiscal situation throughout the Eurozone has improved.
3. And the Banking Union has helped stabilizing and further strengthening the financial sector.
So it is fair to say the Eurozone has left the crisis behind. Still, the apocalyptic stories about the euro remain unchanged. I’d like to address three reasons for that.
First, as mentioned in the introductions, the political situation in this election year. Second, Brexit and its consequences. Third, inevitably the start of president Trump last week.
Elections always cause political uncertainty. And this year, with several important elections coming up, this uncertainty is even bigger, because populist parties rank high in most opinion polls. Coming from the Netherlands we have known a major extreme right populist party for 15 years now. With a constituency that fluctuates between 10 and 20% of Dutch voters. Due to our political system it is quite easy for new parties to enter parliament. At the same time, our system also results in many parties – big and small – in parliament and therefore coalition governments. And given the outspoken concerns many parties in the Netherlands have expressed, a coalition with the extreme right populists is very unlikely. So I’m convinced the next Dutch government will again be a coalition of the center or moderate parties.
In Germany the AfD will grow but remain a small group in the German parliament – also here due to the system – and will probably not be part of any thinkable coalition.
France will have the second round in its presidential election in May and it could turn out more surprising than many imagine. Fillon came up very quickly and beat Sarkozy. And former Minister of economic affairs Macron’s star is rising very fast. Both Fillon and Macron are reformists with an ambitious agenda to modernize the French economy. And Macron, also a very outspoken pro-European, also pleads for economic reforms in Europe. Meanwhile in Italy, there is an interim government in place and it is for now uncertain when elections will take place.
My point is: where many may expect or fear a turn to the (far) right, the outcome of all these elections is unknown and could be, again, quite moderate. My best guess is that at the end of this year Germany, France and the Netherlands will still be governed by mainstream, sensible politicians. Then will also be a good moment to push ahead on a number of topics regarding the future of the EU and the Eurozone.
Second, let me make some remarks about Brexit. The UK decided to leave the EU and we have to accept that. Full stop. And let’s be honest, the British have always been an uncomfortable member of the union for some time. Their attachment to their traditions, history and cultural heritage has always, over centuries, been very strong and the EU has been too intrusive for them.
This argument, or sentiment, is not unique but it is uniquely strong in the UK. And it was a major issue in the Brexit campaign, as was migration. Perhaps that wasn’t strange, if you look at the way the UK has dealt with migration. Where the UK allowed migrant workers from central and eastern European immediately into their labour market without constraints, other countries like Germany and the Netherlands, protected their labour force for another 7 years. These were years where economic convergence took place between the east and west of Europe. Where the UK allowed migrants tax benefits other countries avoided this.
The discontent about the following migration influx fed into the persistent euro critical attitude, with the Brexit as a result. And I say that with great regret. My family history is so much intertwined with England that no one is more sorry to see them leave. To tell you one story, my father’s home town in the south of the Netherlands, was liberated by British troops in 1944. He was 15, almost 16 years old at the time. Some of the British soldiers were only a few years older. And directly after the war at the age of seventeen, my dad got on his old pushbike, and cycled all across England and Wales to visit his liberators and to meet up with the English soldiers. They became lifelong friends. And that is how I will always see the British.
Notwithstanding we are lifelong friends, the current situation requires a fair settlement as soon as possible. The exit itself is already complex and costly, the future arrangement will be even more. In my mind it is inevitable that we will need a transition period to avoid a disruptive process, equally damaging to both sides. Two topics have my special attention in the proces.
The first is the relationship between the City as the largest financial center in Europe, and the EU rules and regulations, standards and supervisors for the financial sector. It is unthinkable that the EU will allow UK based financial institutions full access to do business in the internal market without a sustainable coupling of future (dynamic) UK standards to the EU framework. At the same time I realize that, given the promise of full sovereignty, this will be a hard truth to accept for the British.
Secondly, we need to talk about taxes. We have made a lot of progress in pushing back tax avoidance in the last couple of years.
The UK has played an active part in this. Yet, the work on this topic is far from finished.
In all of our countries – and the British are no exception – the people demand fair taxation, also for multinationals. And the only way to achieve this, is by far reaching international cooperation. The question now is, whether the UK will go the Trump-way or continue to work closely with its European partners. We have heard threats of going rogue and creating an offshore tax haven, just of the coast of Europe.
That would be a huge mistake. And it would certainly stand in the way of a fair trade deal that would suit us both.
Besides these possible pitfalls – and there are many more – I think the Brexit can also have a positive effect on continental Europe. I hope the Brexit will actually trigger a process of strengthening the EU. As chair of the Eurogroup I believe we should start a dialogue between all EU countries – including the non-euro member states – about stronger future relations and further integration, also for the monetary union.
The new Trump administration is another reason to rethink our position. The transatlantic relations are shifting. In many ways. Geopolitical issues, defense and security, tax issues, the future of international financial institutions, and off course trade are now surrounded by question- and exclamation marks. Trump challenges Europe in many ways.
I think we have to accept the fact that we will have to take our fate in our own hands. No use watching and waiting for what will come from across the Atlantic. We’re on our own. And we need to deliver.
The EU needs to provide security and economic perspectives. Trust in both has been hampered in the years behind us. The EU was part of the disappointment, for many people in Europe. From a historic perspective, the EU is still a major success and a huge accomplishment. Yet it was build taking giant steps and a lot of risks.
For example, when Schengen was set up, interior borders disappeared but no outside border control was put in place. Another example: when the Monetary Union was set up, no emergency mechanism nor a common framework for our banks were put in place. And once the crises hit us, the financial crisis or the migration crisis, we found out that we hadn’t put a lock on the door, and that we are extremely vulnerable.
So I think we need to acknowledge: we have disappointed people. We have allowed uncertainty and distrust to grow. The question whether it was ‘Brussels’ or the member states; whether it was the north or the south, is rather obsolete. The conclusion remains the same.
And only working together will rebuild that trust.
So, let’s continue to work, with more urgency, to maintain the unique social economic model we have in Europe. A social model which distinguishes us from the US and which once again becomes a building block for a “trust-society”.
So let’s continue to work…
To secure the outside borders of the EU, and control migration, so we can keep public support for helping refugees, here and in the war torn regions. Let’s continue to work to create a fair labour market in which workers rights are protected and prove that open borders and trade can be fair and advantageous! Let’s raise our environmental standards and lead in the field of climate and energy! Let’s work together to take the defense of our countries in our, joint, own hands again. Let’s finish the Banking Union, and complete it with a credible deposit insurance scheme for all deposit owners, while raising the quality of bank balance sheets. Let’s raise investments in Europe, by creating more investment opportunities by reforming of markets, legal systems, and policies, but also by prioritizing within our budgets investments in research & innovation, modern infrastructure and the best education.
The best way to push back populist simplicity is simply by providing better and safer lives and perspectives for European citizens. This isn’t easy. Over the last few years, we have all learned that doing the right thing isn’t always popular with voters. It’s hard to keep doing what’s necessary. And it takes determination. But we have to stick to our plan. The road to populism is paved with paralyzed politicians, and that is now our biggest threat.
In other words: let’s hold on to that unique European social model and modernize it so it can survive in the future. For this, we’ll have to work together. This is the only way to reach our goal, but it is also the way to distinguish ourselves from the unilateralists.
Ladies and gentlemen,
Let me come to a close. As I said, I expect moderate parties to control governments in the Netherlands, France and Germany by the end of the year. Of course that doesn’t mean that populism will disappear.
I think it is here to stay, nourishing discontent and blaming the outside world. But we mustn’t forget that the vast majority of our population still places its trust in moderate parties, left or right. These mainstream parties will have to regain trust. The trust of their people that they will provide security and economic perspectives.
Hard work is ahead. They don’t need one thing, paralyzed politicians. Let’s remember that. Little time is given.
So Europe and its member states have a lot of work to do.
Compliments of the European Council