Klaus Regling in interview with Radio Bayern 2

Interview with Klaus Regling, ESM Managing Director
Radio Bayern 2
Live broadcast: 1 February 2022
Interviewer: Christine Bergmann
Original language: German

Christine Bergmann: Mr Regling, people in Greece are still feeling the effects of the severe austerity measures. Were you too strict back then?

Klaus Regling: The measures were tough. The recording from Athens made that clear once again for the health system. But overall, they were unavoidable. At the time, Greece had huge economic problems and was no longer getting any money from the international financial markets to balance its budget deficits and trade deficits. Therefore, an adjustment was inevitable, which affected all areas of Greece and was very painful for the population. But in the end, it was unavoidable because the income development in the first decade of the monetary union, i.e., from 1999 to 2009, was simply too high in Greece. Incomes, salaries, and pensions rose much faster than in the rest of Europe. As a result, Greece lost competitiveness and was permanently dependent on huge capital inflows from abroad to finance it. And the markets were no longer willing to do that. In this respect, these problems had to be eliminated so that Greece could have a healthy economic future again.

Bergmann: The ESM has long played the role of bogeyman in these crisis countries. But as you say yourself, even in Greece it has obviously worked. In the other countries that received loans, this drastic coercion was indeed necessary.

Regling: Yes, because there were problems that had to be eliminated – most substantively in Greece. The problems there, such as the budget deficit, but also the loss of competitiveness, were the greatest from an international perspective. The other four countries that received funds from the EFSF and the ESM – Portugal, Ireland, Spain and Cyprus – also had this problem and therefore had to eliminate their economic problems. And for this, there was funding from the European partners for several years. But it would not have made sense to give this financing without the countries eliminating their problems. Because then we would still be in the same situation today as we were ten years ago and would still have to continue lending there if the underlying problems had not been eliminated. Fortunately, they were eliminated, in the other countries within two or three years. In Greece it took eight years, but in the end the approach was successful. Because all these five countries, including Greece, then regained access to the market at reasonable, now low, interest rates. And until the pandemic hit us all, up to and including 2019, the economic development in these five countries, including Greece, was better than the average for the euro area. In this respect, the approach worked. Greece, for example, had a “black zero” (balanced budget) from 2017 onwards for three years, so it was successful in adjusting. The problems were eliminated, and the adjustment was also successful in terms of economic development, growth and employment development.

Bergmann: At that time, the situation was really critical. And many people helped to save the euro, including the ECB [European Central Bank] with its unusual measures, working in crisis mode. If we look at the ECB now, we do not seem to have really left this mode. Interest rates are still extremely low, and that could turn out to be the next problem, since many euro countries have now also become further indebted as a result of the pandemic. Are you worried about that now?

Regling: Well, first of all, what you said at the beginning, three things came together to get us out of the crisis, and it is important that this happened at the same time. First, countries actually did their homework and reduced and eliminated the economic problems that had led to the crisis over a number of years. If that had not happened, these countries would still be in crisis. Second, the ECB has indeed helped very significantly. And third, the creation of the ESM. Without that, it would probably also have been inevitable that some countries would have left the monetary union. In this respect, it is this triad that has brought us out of the crisis. I would not say that we are still in the same crisis mode today as we were ten or twelve years ago. The economic crisis that Covid brought, hit countries in the euro area, in fact, all countries around the world. It has a completely different nature than the euro crisis. At that time, there were massive economic problems in individual countries, such as budget deficits and loss of competitiveness. These had to be eliminated, and that then led to painful adjustments. Covid threw the whole world into a crisis, but a completely different one. There were no country-specific adjustment problems that had to be addressed, but for all countries there was the problem that economic activity had fallen because of the lockdowns. And as a result, the state had to take a lot of money into its hands in all countries to counteract this. And that was absolutely right, because otherwise economic output would have collapsed even more in 2020 than it actually did. In this respect, it was the right economic policy response to this kind of crisis, which was, however, quite different from the euro crisis ten years ago.

Bergmann: Now there is also a debate about softening the debt rules. You yourself have made a proposal that may have surprised some people. Where did the change of mind come from, that now the debt limits will somehow be handled more flexibly?

Regling: We have had the Stability and Growth Pact since the beginning of monetary union, and it has worked rather well – better than is often perceived – even though not perfectly. We can see that the economic environment has changed. Interest rates are lower today than they were 30 years ago when the Maastricht Treaty, which led to monetary union, was negotiated. And the task of the debt rule is to ensure that states, all member states of the monetary union, are permanently solvent. We do not want individual countries to become insolvent. And if you then look at what level of debt is sustainable without a country sliding into insolvency, then you come to the conclusion that today this level of debt can be higher than we thought it could be 30 years ago. Economics is not a natural science where everything always remains the same, circumstances change over time. And there are good reasons why interest rates are low today. They will not stay as low as they are now. Interest rates will rise from today's level, but they will not rise again to the level of the 1980s or 1990s. And that makes it possible to finance a higher level of debt than was previously thought possible. At this moment, all countries in the euro area have a much lower interest burden in their budgets than 20 years ago, although debt levels have risen sharply, also because of the pandemic. The interest burden in the budget is only a third or a quarter of what it used to be. And there is a great deal of research on the topic of why interest rates are low today – as I said, not as low as they are now, but on average they will remain lower than they were two or three decades ago – simply because savings are increasing due to the ageing of the population, because the inequality of wealth means that the savings rate is high. And this is an issue not only for Germany or Europe but applies to the whole world. Because there is an international interest rate that is influenced by these factors. And one can be confident that this will not change quickly. Therefore: a higher debt level is financeable. By the way, I would not call this a softening of the debt rules. It is simply necessary that we have a system in the monetary union – also for the oversight of budgetary policy – that is economically appropriate and does not lead to false conclusions.

Bergmann: As a certain flexibility, which would also make sense in the European monetary system. Klaus Regling, the Managing Director of the ESM, thank you very much, Mr Regling, for the interview.