Europe is still vulnerable to future financial shocks because its governments do not have the fiscal space to absorb them, the president of the Eurogroup, Jeroen Dijsselbloem, has told a Dublin audience.
The Dutch finance minster said the European Union’s capacity to deal with such major shocks “is still very thin”.
Speaking at an event at the Institute for International and European Affairs in Dublin, he said Europe had used a large part of the toolbox of monetary instruments during the last crisis. Alluding to the fact that most states have yet to build up the contingency “rainy day” funds that may by needed, he said: “EU governments do not have much fiscal space to absorb future shocks. We are still very vulnerable to an event that could come in the coming years.”
EU governments should use the current period of growth to create fiscal space, he said. That included continuing with reform on a national level, creating investment-friendly climates, as well as opening up markets and protected professions.
He emphasised the responsibilities of private financial markets. “If you want to absorb shock the best way to do it is allow markets to be the shock absorber. Let us not turn too quickly to the public side. Let us not make private risks a public problem.”
Renationalised
In a short reference to Brexit, Mr Dijsselbloem signalled that one consequence of Britain’s departure was that the financing of programmes such as the Common Agriculture Policy could be partly renationalised in future.
As Britain was a net contributor talks were ongoing about downscaling budgets and redistributing the costs. He said one issue that had arisen was the future financing of the CAP. “That debate [in funding] is ongoing. The position of countries is changing. Should it remain communitarian or should it be renationalised to some extent?”
Mr Dijsselbloem, who is now completing his second term as Eurogroup president, said the euro zone was now performing solidly. Growth was currently 2 per cent, but that was far from what could be expected over the medium term.
He warned about low growth in productivity, competitiveness and the fact that wage increases were lagging behind even though economies were performing strongly.
Wage stagnancy
He said wage stagnancy had played a part in political volatility in European states, noting that in the Netherlands disposable income for working people had not improved since 2001.
He argued it made sense to shift away from taxes on labour to other forms such as consumption and capital taxes.
He said in general the countries that had done most in terms of reforms had experience the highest growth. Ireland was an obvious example, as was Spain and the Netherlands.
Mr Dijsselbloem said the European Stability Mechanism, which is currently used when a state is in a bailout situation, could be developed into a European Monetary Fund. It could finance precautionary and preventative instruments (to prevent a collapse), as well as helping countries financing reforms in the labour market, in skills or in education.
On the issue of banking union, he said there were many legacies to deal with but progress had been made on deposit insurance funds.
Banks overchargin
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In a questions-and-answers session afterwards, Mr Dijsselbloem said he would not address directly the controversy surrounding banks overcharging customers on interest rates.
However, he said that regulation, especially if it is lax, can sometimes be an excuse for those in charge of banks. “You can give customers an unfair deal and still be inside the law.”
He said that as a matter of course authorities should do a “fitness check” on all people at board level and even below, including checking their personal ethical behaviour, their tax-paying record, and their track record in the financial sector.
The sanction, he said, was “if you have been responsible for a scandal you will lose your approval to work… you can lose your professional licence.”
