Stick to the program, says the ECB's Joerg Asmussen
By Tom Ellis
Greece is still bound to the commitments it has made in terms of achieving fiscal targets outlined in the Memorandum of Understanding (MoU) signed with its lenders following the decisions reached at the European Union summit last week, ECB executive board member Joerg Asmussen told Kathimerini in Frankfurt this weekend.
The German economist and former deputy finance chief, did not rule out the possibility that the haircut to privately held Greek debt, or the Private Sector Involvement (PSI) scheme in March, may be followed by a haircut to Greek debt held by the official sector, saying that the international community must “do the utmost” in order to ensure the sustainability of the country’s debt.
Asmussen stressed that Prime Minister Antonis Samaras has already signed a commitment to implement the MoU, and that the troika -- as Greece’s lenders the European Commission, the European Central Bank and the International Monetary Fund are collectively known -- is willing to discuss tweaking certain aspects of the bailout deal on the condition that these changes do not affect its targets.
The German banker noted that in countries where fiscal adjustment programs have succeeded it is thanks to broad social and political support, and in this context hailed the formation of a coalition government between New Democracy, PASOK and Democratic Left.
Asmussen admits that in hindsight Greece may not have been ready to join the eurozone when it did, and said that he may be meeting with Finance Minister Yannis Stournaras on Monday.
What is your assessment of the summit? What do you think the effects of the summit’s decisions will be on Greece and Greek banks?
Important steps were taken. The summit produced several tangible outcomes that will help us address the challenges, such as the waiver of the preferred creditor status in the case of Spain and the future possibility of direct recapitalization of banks through the European Stability Mechanism. To be honest, I think that what it means for Greece and Greek banks depends more on what Greece does. There should not be the illusion that the outcome will somehow reduce the adjustment needs for Greece.
Many economists claim that in order to return to a sustainable path, Greece would need a haircut of its official sector debt too. Do you agree?
One of the key goals of the second program is to bring by 2020 the debt-to-GDP ratio to 120 percent. This is seen to be a sustainable position that needs to be achieved in order for Greece to be able to tap the capital markets. We have to assess how the fiscal situation is right now, and it could be that the debt sustainability is again on a knife’s edge. Then we would have to do the utmost to make sure that the debt will be sustainable and Greece can return to the financial markets.
When you say “we,” do you mean the ECB as well as individual countries?
We, as the ECB, have a limited mandate. Of course, we are part of the troika and have a joint interest that Greece returns to growth and a sustainable debt level. The adjustment program is not there to please the troika or any European leader. At the end it is in the interest of the Greek citizens for whom I have great respect since a lot has been done on the fiscal side. It is to a country’s own benefit to redefine its business model.
What do you expect from Athens now that the period of political uncertainty is over?
It is good that the new government has been formed quickly, which brings political stability in an economically difficult situation. Now one should aim for achieving sound public finances and restoring competitiveness. It seems that during the electoral campaigns -- and there were two in a row -- the reforms have stalled, and the program is off track. We have to verify this when the mission of the troika comes back to Athens. The point now is to make sure that the program gets back on track, which is very much in Greece’s interest. The key issues that I see are the need to close the relatively large fiscal gaps for 2013 and 2014, and the implementation of the labor market reforms as agreed.
Is the fact that the government is composed of three parties, one of which is from the left, helpful or problematic?
I want to be clear. I respect any outcome of an election. Any democratically elected government is our partner. When I look at a number of countries in Europe a key success factor for having a reform program that works, is a broad consensus in politics and in the society. In that sense having the broadest possible base supporting a reform program is really a good thing.
When Prime Minister Antonis Samaras voted against the bailout program in May 2010, he upset a lot of people in Europe but argued that the program lacked the necessary elements for growth. Would you agree that he had a point?
I would not comment on what an elected prime minister says. Before the elections he had written, together with the leader of PASOK, a letter to Eurogroup Chairman [Jean-Claude Juncker] saying he would work to implement the program. This was not an easy step, but it was a very important one. The only thing I would now say is that we should all look forward. The situation is difficult and we have to work together to make the adjustment process a success, for Greece and for Europe.
The prime minister wants to renegotiate some parts of the program. Is this possible?
We were always open and we are open to discuss elements of the program as long as we keep the key goals of the program intact. So, let’s say, if he wants to change the mixture of the revenue and expenditure measures this can surely be discussed. But with respect to the key results and goals of the program to make Greece more competitive and to reach a debt sustainability situation, I do not see room for change. And one has to honestly say that the country still runs a primary deficit, which means that even if one neglects all interest payments, current income does not cover current expenditure. And if the fiscal goals are shifted by one or two years into the future, that would immediately require additional external financing from the eurozone partners and the IMF.
That would mean the IMF executive board and the parliaments of the other countries would have to vote in favor of any additional financing.
Indeed. You see, you have a democracy in Greece, but there are also 16 other democracies in the euro area.
However, many, including Juncker, have talked about a possible extension of a year or two. Is that something that can be discussed?
I would suggest that we first let the mission return to Athens and assess the fiscal situation.
What is your reaction to the appointment of Yiannis Stournaras as finance minister?
We have met a few times in the past as he is a well-known economist and has worked for Greek governments in the past. I am sure we can work very productively together as I have done with [former finance ministers] Mr [Giorgos] Zannias, Mr [Evangelos] Venizelos and Mr [Giorgos] Papaconstantinou. I will try to meet him as soon as possible and I will work with him productively on the issues ahead of us. We had a meeting set up with Mr Zannias for Monday, but I might see Mr Stournaras as well.
Is it better to have a technocrat or a politician as finance minister in a critical situation like this? Stournaras is more of the former, but he has also been part of the political milieu.
Maybe he is a good combination. As finance minister you surely need economic knowledge, but you also need political leverage. You have to have both to be successful.
Could it be that it is not only Greece that is falling behind in its implementation of the program, but it’s also the program itself that feeds the unprecedented recession Greece is experiencing ?
The overall program design is country-specific and is founded on two pillars. First, the need to restore sound fiscal policies, and second, to restore competitiveness, growth and jobs. What we all underestimated was the rapidly deteriorating situation, but the success of the first program was also hindered by the lack of a broad national support. Implementation is easier if you have a broader national ownership of what is being done.
Where the eurozone stands
Could the European financial and monetary framework withstand a potential exit of Greece from the euro area?
My preference, and our preference, is that Greece stays in the euro area. I would not speculate about anything else. I am sometimes surprised how some analysts and even journalists talk light-heartedly about a possible exit. I would not do this.
Was the introduction of the euro in Greece a mistake?
I am deeply convinced that the euro is a great project and is to the benefit of European citizens. It might be that in hindsight, Greece was not well prepared to enter the common currency area, but this is looking backwards, and I would now put all my efforts into making sure that we continue a success story for all 330 million Europeans.
German Chancellor Angela Merkel said that as long as she is alive there will be no commonality of guaranteeing debt. In that context, how likely do you see eurobonds being issued?
Eurobonds mean different things to different people. Ultimately they are a joint liability for debt issuance. I think eurobonds are not a crisis management tool, so there is nothing for the short term. What is important is that the sequence is right. We ultimately need a fiscal union to complement the monetary union, and if Europe is a fiscal union then eurobonds are a natural element, but before we reach that we must also have more shared sovereignty on the revenue side and the expenditure side of budgets. This has to go together. The sequencing is key. There can only be joint debt issuance if there is joint control about budgets.
Should or will the ECB continue to stand by Greek banks, and if so for how long?
Within its mandate, the ECB has taken on a great responsibility for the Greek banking sector. The rules are the same across Europe, so, in principle, all banks are eligible to participate in monetary policy operations under two conditions: they have to be financially sound and they should have adequate collateral. The first phase of the bank recapitalization was a very important step. Now, there is a second step that needs to follow, which is dealing with further recapitalization measures but also with the rapid resolution of non-viable banks.
Are there plans for bank mergers in Greece?
It is up to the Greek authorities to decide, especially the Greek supervisor, to create a banking system that has viable banks that can provide its services to the Greek economy.
Are you satisfied with the way the Greeks banks have been operating because there has been some criticism of the manner in which some of them have been granting loans?
I cannot evaluate this from the outside. If it is as you describe, it is important that the banking sector gets back to a situation where it provides loans to profitable investment, provides loans for housing. This has to be assured as part of an adjustment program.
Do you foresee the ECB becoming more like the US Federal Reserve?
The Fed and the ECB operate in different institutional settings. The Fed deals within one federal state; we have to deal with 17 states. We have different mandates. The ECB’s mandate is to ensure price stability for the euro area as a whole and to contribute to financial stability. I would not change our mandate. But answering your question, I would say that the Fed has become more like us in adopting price stability as a goal and having a monthly press conference, for example.
US President Barack Obama has encouraged Europe to follow a more expansionist policy as the most appropriate way to deal with the recession. Do you agree?
There were times when we feared becoming irrelevant to the US political process. We are very relevant these days, but unfortunately for the wrong reasons. I would note that if a country’s debt situation is seen by investors as unsustainable, the solution is clearly not adding more debt to the existing debt. One has to undergo painful fiscal consolidation even if that is negative for growth in the short term. I am not disputing this. But what is the alternative? May I also note that with respect to the debt and the deficits, the eurozone as a whole is in a much better position than the United States, the UK and Japan.
How do you respond to French President Francois Hollande’s and Italian Prime Minister Mario Monti’s emphasis on growth and the need for a more expansive policy?
Growth is like a baby. Everyone loves it. The question is what do you mean by this and how do you get it. In our view it is not so much that by a credit-financed expenditure program one can boost growth in the next one or two quarters. It is important to have a growth package that increases the growth potential of the country by structural reforms, something which indeed is not easy to do in aging societies.