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Interview of Henri Sterdyniak, Director of the department of the “Economy of Globalisation” at the French Observatory on Economic Conditions (OFCE)

The Eurozone is going through a severe crisis which has lasted a lot more than originally anticipated or hoped. It is now clear that part of the explanation for the duration and depth of the crisis is related to problems of the Eurozone governance mechanism. In your view what were/are the main problems and weaknesses of Eurozone’s governance?

There are a lot of problems. Maybe we can identify two or three main problems. The first is the leading cast and the technocracy in the EU and more precisely, the European Union bureaucracy, has a project to change the way that the European economy functions. They want to adopt a more liberal model and impose it on people and thus to destroy the traditional European social model. Therefore, there is a conflict between the European elite and the democratic will.

The second problem is that even before the crisis, the Euro, was not a good project, because it is very difficult to have a common currency among countries which are very different and need different monetary policies. Also, the European Institutions proved unable to achieve a good coordination of national policies. Some Northern countries chose very restrictive economic policies and they have accumulated huge external surpluses, while Southern countries used the decline of interest rates to have expansionary policies. Thus, even before the crisis we had a lot of differences/disparities among European countries. The financial markets did not see these problems and so when the crisis arrived they discovered that nothing was in place, that the common currency would not survive, that there was no solidarity between European countries and that the ECB could not guarantee public debt. Financial markets realized that and begun to speculate. Therefore, we can conclude that the common currency was not so well organized.

A third issue is the fact that the crisis is a crisis of financial markets, a crisis of financial capitalism. More precisely, the share of capital increased in most countries and the share of labor decreased. Financial capitalism increased demand and we needed financial expansion, we needed an increase of public and the private debt to sustain demand. However, this was not possible to last for long since some countries became too heavily indebted, while some private agents also became too indebted. Thus, we had a crisis of financial capitalism. In Europe the EU did not have a good strategy after the crisis and so we ended up in this very sad situation. The strategy that the European Commission proposes is not appropriate to the present situation.

Motivated from your last point, in your view have European leaders and European institutions done enough  during the past four years to remedy the weaknesses that you described especially on the institutional level of the European governance structure? And what type of institutions do we need in order to confront the challenges we face?

When the Euro was established, we had the Stability and Growth Pact, which was agreed in order to deal with the public debt and deficit. After the crisis the EU had the same point of view. Namely, the EU holds the view that the main issue is that all countries have to decrease their public debt and public deficit and thus we have the fiscal compact, which obliges all countries to reduce their debt and their deficit. However, this is not the issue, because after the financial crisis we need to sustain demand, so it is impossible to implement the restrictive policies that the Commission wants. Therefore, we need a break in the economic strategy at the EU level. We must focus on growth policies and we need a coordinated strategy to reduce this disequilibrium between Northern and Southern countries. The strategy cannot be anymore to reduce public and private debt without considering the fact that these public debts and deficits were inevitable given this economic disequilibrium. We need to change and to coordinate our economic policies, but this coordination must not be according to the some rules like the 3% rule about deficit, it must target macroeconomic growth and full employment.

So in your view austerity policies will not solve the crisis?

No, we do not need austerity because due to the current financial crisis, we have not enough consumption, not enough investment and we have, in most countries, firms and households, which want to have less indebtedness. Thus, is not the time to have austerity policies. We can say that in some countries like Greece, like Spain the wages increased too much, but if you take a European point of view we need more fiscal expansionary  polices in most countries and we must increase the wages and expand our social spending in the Northern countries. Thus, we need a well-coordinated economic policy in the Eurozone. In contrast, the strategy of the European Commission is to look at each country separately and insist on restrictive policies without considering the global situation. Thus, it can work.

What specific policies you would suggest? Could you spell out some specific steps you would like to see, because as you surely know often economists who adopt a Keynesian point of view are criticized for not being explicit in their policy proposals.

I will highlight two points. The first one is that we need to “break” the weight of the financial markets. The ECB must guarantee all public debt and must ensure that all countries can borrow at an interest rate less than the rate of growth, for example less than 2 or 3%, in order for the public debt to become sustainable. Also, we need to have a banking reform in a way that banks would be obliged to lend to people, to firms, to households, to investors and not to speculate. If we have a banking reform we would reduce the weight of the financial markets. I do expect that we have to develop public banks and public funds to finance European industries and not speculation and also to finance the state by using the savings of the European people at low and stable rates.

Moving to the second point, we have to have industries with “less energy”.’ We have to prepare the ecological transition, we must invest to save energy, to develop new alternative sources of energy. We have a lot of people unemployed in our countries and therefore we have to use them for example to build new houses that are using less energy and so we need a type of  “Marshall plan” at a European level to develop new industries which could contribute to the ecological evolution. Thus, these propositions are a way to sustain the demand but also the productive capacity.

Concerning the banking reform proposal, do you have specific reforms that you have in mind? Perhaps structural changes such as for example narrow banking or the Financial Transactions Tax (FTT)?

You know that we have agreed a banking union in Europe, but in a way that it cannot operate properly. It is the ECB which decides in a way what will be the banking system, the financial system that we need in Europe. So, we need a specific banking system which it is not allowed to speculate, which is not allowed to lend to speculators. Thus, I think that we need a separation between investment and retails banks and the retails banks must be guaranteed by the state and the state must be guaranteed by the ECB. We will say to the European people that you can put your money to the European their retail banks; this money will be used for public investments, for ecological purposes and not for speculation and we will have a financial sector that it will be much smaller, with risk, but no connection between the financial sector and the productive one.

Also, we need a FTT in order to prevent the financial innovation that is not useful and that is often dangerous for economic stability. Also, we must have a specific European banking system and we must say to countries like Luxemburg and the UK that if they want stay in the EU they have to obey to some rules because to it is not possible to allow some countries to develop a financial sector with risk and it is the same thing for taxation issues. More precisely, we need to prevent  tax invasion, tax optimization and we cannot allow to have tax evasion in countries like the Netherlands, the UK or Belgium; these countries must change their taxation rules in order to stop large firms from going to these countries with low taxation or no taxation.

The European Institutions have become very unpopular for many European people and if we want to have progress in the European project we need to have a new economic policy; Europe must not fight against people, by for example insisting that countries must decrease their social expenditure, their public expenditure. Therefore, European member states must tax more efficiently, they must have common projects for ecological development and common projects for social Europe. I think that if we could have this change of policy it would be possible to build a more efficient Europe.

What about the Cyprus decision? Are you in favour of this kind of solution? Do you agree with the model chosen for Cyprus, which also seems to be the way forward from now on?

I think public money should not be used to guarantee speculative activity. So, if some banks have difficulties due to speculative purposes, I think it is the responsibility of the banks and the creditors. I think that there is a part of the banking activity, i.e. lending to firms, to national firms, to national local collectivities or to national households which must be protected and I think small depositors and medium-sized depositors must be protected. Thus, I think that the best option is to have a clear separation between retail banks where deposits are protected and the financial sector with no public guarantees. For instance, in countries that are in depression, many firms are in trouble, and I do think that in this case it was the fault of the depositors and so the banks must be protected publicly. I think that in some cases it is necessary to have banks publicly guaranteed, retail banks lending to promote economic activity; they must be guaranteed by the state and by the ECB. I do not think that it is possible to allow in the future financial markets to speculate on the failure of banks and states. If we have a European system where the financial market can speculate against the banks and the states, it will be a very fragile system. The best solution is that the ECB guarantees banks and states.

A question about Greece, since you criticized the austerity strategy, what you would say about a mix of austerity and growth strategies in Greece, given that surely there must be some kind of way to reduce the extremely high deficit and debt that Greece had entering the crisis?

Here I see three problems. First, as I have already said we need a global strategy in the Eurozone, if we have an expansionary policy in the Northern countries it will help the Southern countries to improve their situation. Thus, from a global point of view we do not austerity but we need expansionary policies to support the Southern countries.

The second issue is that before the crisis in Greece the public debt was not sustainable and Greece did not use the fact that the interest rates were very low to make productive investments. Greece does not have a leading class that invests sufficiently in the country, so you need to reform the country, you might need some austerity.

The third point is that we made a mistake with the Euro. Namely, there was disequilibrium between Germany and the Southern countries, so we must all acknowledge that we made a mistake, that this project of European Union was not well designed and now all countries must contribute to resolve the crisis. We need an agreement at a European level, so that Greece pays for this crisis and but also Germany. Once we are able to share the consequences of this crisis, we must have a new economic policy with more growth, which would also constrain countries like Netherlands, Germany and Austria to have huge external surpluses without.  We must say to these countries that if you have a huge external surplus you must increase your wages or you must increase your public expenditure or you must lend your surplus to the Southern countries and not only for financial purposes but also for  productive investments. If Germany invests in the Southern countries, Germany must help these countries to build their industrial sector. It is not possible for Germany to increase all the time its surplus without having some countries on the other end that increase their debt.

How optimistic you are that the solutions you suggest are politically feasible?

No, I am not optimistic, because in fact we have a coalition between Northern countries and neoliberal European technocratic institutions, which block change; in order to change we must have a crisis in Europe, we must have an alliance between Southern countries and France, Belgium and the Social movement in order to change the way that European policy is being implemented in Europe. We must have a crisis because Germany will not accept to change without crisis. So, the problem is what crisis? Maybe the fact is that populist parties are expected to have good results at the next European elections will spark such a crisis or perhaps the fact that some countries stop respecting the fiscal pact. We need a crisis to change the situation in Europe. Thus, it is very difficult to persuade the European technocrats and the European leading cast. If we do not change I fear it will be catastrophic. For instance for my country…

If you do not mind, since you mention France, are you satisfied after a year of the election of Mr. Hollande, with the policy followed so far?

No, I am not happy because we expected that Hollande would have been able to change the situation at the European level. We expected that Hollande would not sign the fiscal pact, that he would succeed in passing a more efficient growth and jobs pact and he did not succeed in these things. To succeed he must accept that there has to be a conflict between France and Germany. Without such a conflict it is very difficult to change. So, we must say that in Europe we have two points of view, one which says that we need austerity and we need structural reforms, we need to reduce public expenditure and a second point of view, which says that we need to focus more on growth policies, we need to have more expansion in Northern countries, we need to allow Northern countries to lend to Southern countries in productive industries, we need to sustain demand and we need industrial policies. We have two policies in Europe and in fact we need to have an open and a democratic debate. France has accepted to follow Germany and not to oppose it in order to avoid a crisis in Europe, which I think, is not a good strategy.

Thank you.