As one of the most influential Eurogroup figures during the previous crisis, Thomas Wieser chaired the preparatory meetings of eurozone finance ministers between 2011 and 2018. In an interview with EURACTIV.com, the American-Austrian economist described the EU’s fiscal rules as “bad practical economics”, in particular for handling a crisis such as the current one.
Wieser was appointed to lead the European Commission’s high-level group on the capital markets union, whose final report will be published on Wednesday. The report’s recommendations could narrow the gap between the EU’s financial markets and the US capital markets.
But first, the EU and the UK need to know what kind of relationship the ‘City’ of London will have with the continent, he said.
What is your assessment of the state of play of the EU’s capital markets union?
From any point of view, we still have 27 national capital markets and not one single capital market. You immediately face obstacles whenever you attempt to do anything cross border within the EU, whether you try to buy assets or raise funds for your startup.
What does it need to be implemented?
First, we have to considerably unify more the 27 national markets. Second, you have to make people more interested in capital market investment, instead of simply having their savings in the bank. And third, politicians need to come to grips with what the implications of Brexit are. Up until last year, we had a very large capital market centre in London. Do they want Europe’s largest capital market outside the EU? Or does one want to have the ability to set rules, supervision standards, and.consumer protection for London to a certain degree within the EU?
But it takes two to tango, and the UK clearly said they don’t want to be rule-takers…
If we listen to the voices of the British government, and to the members in our working group from the City, our presumption is that over the next couple of years, there will be a drifting apart of regulations. The EU will not have a financial centre which is comparable to London, with a ‘unicentric’ structure. That is totally clear. The future of the EU’s financial landscape will be more ‘polycentric’.
What proposals have you included in your report to unify the European capital markets?
There are 17 clusters of proposals, ranging from improvements in national solvency laws to improvements in the process of refunding withholding taxes, or the ability to have insurance companies to invest in equity, or improvements in the governance of how enterprises in capital markets are supervised. Another proposal is to simplify and reduce the listing costs for SMEs, which is a very costly enterprise.
Would these reforms create a unified capital market like in the US?
The answer is of course not, because the US has one supervisor and one tax regime, and we have 27. They also have one accounting standard and we have a variety of different accounting practices. But if these recommendations are followed, it will bring us much closer to something that is a true internal market for capital.
The Commission proposes to borrow from the markets a record figure of €750 billion for its recovery plan. What do you think of the proposal?
As it stands, I am very positive on the proposal. I was very strongly supportive of as high grant element as is feasible, because loans are not what member states in need are requiring. I am looking forward to seeing how the Commission will make sure that the money is spent on resilience and pandemic related issues, in an efficient and well-governed way. If it is done the traditional way, like structural funds are disbursed, then we are facing a significant risk.
The money may go into badly designed projects or may end up possibly not even in the project itself. But the groundwork is here. I hope that there is not too much dilution in the deliberations of heads of state and government, and a very clear and transparent way of ensuring good delivery is found. If all of that is done, we will have made a sensational contribution to the recovery in Europe.
Do you think involving the member states in the disbursement (via ‘comitology’) would improve the governance, or could it make things even more complex?
If there is some kind of macro-oversight to ensure that the right sectors get the right amount of money and the Commission is indeed following through, then I think such ‘comitology’ procedure is good. If it becomes too granular or intrusive, and you have a bureau digging into the details of each and every project, that is a catastrophe. That will slow down the recovery and lead to tensions between member states.
During the previous crisis, the excess of austerity to rebalance the economies after the stimulus provoked a self-inflicted recession in 2012. Have we learnt the lessons from those mistakes?
We made a double mistake. The first one was the monetary policy reversal by raising interest rates. The other one was that, quite frankly, the fiscal compact is an instrument which is too complex and bad practical economics. It is not a good guiding instrument for fiscal policy in general, and in the crisis anyway. It makes very much sense that it’s been at least in abeyance, for now.
Once the stimulus is released, what should be the right path to rebalance the member states’ economies?
We will have to see if there is still significant slack in the economy, what sectors have been able to absorb a significant part of the unemployed, or how the aggregate demand is performing. You will have different timing, and from country to country, a significantly different impact on the fiscal stance of the government. Anything with an aggregate-across-the-board solution will be a catastrophic failure. We will need to have a much more nationally and sectorially differentiated approach to fiscal policy. I think nobody is so stupid as to propose ‘just be back under 3% by year X’. That would be probably the largest mistake.
But we still have the fiscal compact limiting the deficit and the debt in place, and eventually, it will be reactivated.
When I was still working in Brussels, I was heavily advocating a significant reform of the Stability and Growth Pact. Everybody was afraid of changing a stable disequilibrium. The Italians were afraid that the rules would get more German. The Germans were afraid that the rules would get more Italian. And so people prefer to be stuck with something that was nonsense, instead of embarking on the road towards the unknown, which might have led to significantly better rules. But nobody dares to go there.
Italy and Spain are again in a difficult situation. Debt levels will get even higher than during the eurozone crisis, when a ‘full’ bailout was considered for these countries. Would a bailout be necessary now?
As long as interest rates and monetary policy remains as it is, we are on extremely safe ground, especially given the very long maturity of government financing that is easily accessible for all member states. For Spain, I am frankly quite relaxed anyway. But it is clear that, over the medium term, things will need to be rethought. Anybody who says it doesn’t matter what level of government debt you have, well, I would just refer them to the larger headroom that Germany had compared to Italy, for example, during this crisis.
[Edited by Zoran Radosavljevic]