Will the Euro area's unprecedented program of fiscal risk sharing in response to the pandemic, and a new, likely less fiscally conservative, ruling coalition in Germany increase integration, raise growth and improve investor returns in the region? In the latest episode, experts debate whether the current moment will go down as a seized—or (another) missed—opportunity for Euro area integration. Host Allison Nathan, creator and author of the Top of Mind report on which the episode is based, speaks with Goldman Sachs Research’s Jari Stehn, former ECB Chief Economist Otmar Issing, former PM of Italy and President of the EC Romano Prodi and Oxford’s Timothy Garton Ash.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This exchange is it
and I am also Nathan, a senior strategist Goldman Sachs Research and create an editor of the firms dopamine report in this episode. Warfare
seeing on the implications of a potential shift in the fiscal mindset in Europe in response to the pandemic, Europe embarked on an
Precedent in programme of fiscal wish, sharing in the form of an eight hundred billion euro next generation Eu Fund and its recovery fund, which, for the first time in a hit
we have the EU provides large scale grants and loans to weaker economies back by the issuance of common debt
at the same time, Germany is about to get a new ruling coalition that slightly to break from the fiscal conservatism of the Merkel era, whether these shifts in fiscal policy tool
some more expansionary mindset mark a turning point for european growth and integration is top of mind. We first sit down
with our chief european economists you're staying to get his take on the importance of the rest.
fiscal developments for the evolution of the European Union.
Seen an important shift and european.
Fiscal policy merely over the last eighteen months,
new level countries, were very quick to provide fiscal support, and that was really aided.
The suspension of the Eu Wide Fiscal, also about quite quick in
and he knows it really making room for national
means to respond and then
at the EU level. The recovery plan,
we think was a real milestone in the real turning point for the crisis and oppose that agreement to issue joint debt, which was a supposed to forward and in
in those large scale, grounds, basically from the stronger too
economies- and I think that's a very important step forward. I think the
election outcome is likely to cement the chief that we ve seen of course, they're still
quite a lot of uncertainty around what exactly will happen, but is very clear that is.
I'm going to be a centre right coalition. Bad would have pushed for every time
the fiscal prudence so citing the factor
Green Party is going to be part of the next government. Nothing, that's pretty clear.
It is really going to suspend shift towards more public investment, and my stand. No
see. Anything really understand,
the shift. Let me see
It is important to add that we ve not
seen the shift on fiscal policy, but also
because the easy be played a very important role. Essentially in buying time with the agenda
the two on the path until
EU wide fiscal response have been put together because that have caused took some time. Anything it's not
the easy beat it. There's another really stepped up
purchases in a really big scale. It much more flexible way. Despite
the concerns that have been boys from the german constitutional court, not so long before that
and so I think it was a very clear sign that easy
he is also willing to do what is needed to protect the Monetary Union and really kick started a much more coordinated policy response between fiscal and monetary policy. Citing bottom line is that it is
more just- and I think it is-
from an economic perspective, because
the missing part in
the Monetary Union, of course, is the fiscal risks
and these
What steps that provide some of
risk sharing and sought. From an economic point of view. I think those are quite clearly desirable, but still
me of these initiatives in these steps are actually ultimately temporary
isn't that someone concerning report,
and of course it true that a lot of bee
situation that I just talked about. Ten worry in one form or another saw the fiscal rules only suspended temporarily. There will come back and I think the herd forward for treaty change is very high and it is possible, of course, that we are going to see a turn back to austerity ones. These ruled bite again, which is probably going to be twenty three free
on the recovery fund. He also right that is a temporary tool. It's not eurobonds. It's not join
in several county debt, and there are plans to wind down starting from twenty twenty seven or the weighted ratification is kind of a pretty long time span. But here it is, does
to be temporary, but
Nonetheless, I think there is
I saw on the fiscal rules we think days
to be more flexibility, and now those will be interpreted soul
formal. Adjustment of the rules is pretty
is it because this treaty change? But there are not two parts where you can reinterpreted
this will also give countries more time to do fiscal adjustment, and we also think there's going to be an effort to shield public investment from the rules and to make more room for that, and so that's a more informed change. But I think that is
That will be important in practice and it only recovery fund, yes, is planned to be temporary, but first of all
important to realize it really sets a precedent for
an EU wide response and effectively
comes out the very left tail in terms
this sort of micro distribution at Europe, setting its quiet,
reasonable to assume that if we were to get another shot like
sometime down the road- hopefully not, but maybe then,
there's going to be another one of those responses, and I think Europe has shown that when it matters it really can come together, and then we think there's a decent likelihood that some elements of the recovery fund was day saw for him,
Will the loan facility could stay?
the bottom line, is progress is
more incremental. Having is often the case.
But I do think it's real progress and not my anything, former chief
Economist and member of the Executive Board of the European Central Bank is more concerned about the precedent
fiscal burden sharing. In the Euro area, that's because he will
if that violates the Maastricht Treaty and because he is not convinced that kind
regional channel their newfound funds towards productive investments rather than consumption
fiscal policy in the Euro area and also
in the European Union, is at the crossroads.
on the national level, all countries have spend huge amounts to mitigate the economic consequences of a pandemic, finding back to a sustainable policy
for fiscal policy without endangering the recovery is, are you
challenge, especially for those countries,
this loan of depth on the euro.
Level I think to Christians imminent. First, the stability and growth pact is under severe pressure. A number of countries from the South argue that investments should be excluded from the deficit limit. Various countries from the north, the so called
Ruby group who assist those requests. The credit financing of the huge next generation programme is an exemption of the law that the EU is not allowed to take credit.
the programme was presented as a unique measure to tackle the challenges of the unique event. The pandemic
For me, this declaration of the uniqueness was hardly credible uniqueness of fiscal policy.
situation not have been coming now, not surprising their strong push
for many sides to continue with further credit. Fine
thing at the EU level, investments to fight again
Climate change is the most prominent arguments for that. Behind those considerations he thought of it
dear to develop the Euro area in the direction of a fiscal union. But
four months to go further
election of fiscal union which, in the end
can be only done in the context of a broader political union.
need a change of the treaty but review the limits of the Maastricht treaty. Such a step of european icing or fiscal policies is undemocratic. She's not legally
Justified tissue policy still remains must remain in the debate.
national governments which are responsible to their voters and the kind of Titan
ignores already exemption in quite a number of law,
we say
violation of the treaty through? This cannot be continued without put
the old institutional arrangements in question, and unfortunately many countries will-
Secondly, additional funds coming from me
level not for investment in digitization, fight against climate change, etc in innovative activities, but spending it on public consumption spending it on pension schemes to some countries. I am afraid my to base this opportunity. The experience of the past tells me do
at least cautious, I think easily influenced my your dog, you will be prime minister- should go in the right.
election but soon, if he's out of office- and this might happen sooner than later, if you become president of the Republic next year, for example, and elections anyway- I'm not so far away so behind the scenes behind
from a position of Mario Draghi bodies. If already there long list of fishes how money should be spent even
for my country, Germany, nor with the boss to use public investment, has been very weak but resource, not you to fiscal austerity, but because,
There was a high priority for public consumption for pension schemes that are still to be convinced
that countries can really get out of the behaviour of the past. But this is difficult. This Smith, the voters who are now used took it benefits from come
but spending is a huge challenge for our democracies. Governments will take
No attempt shoe and not just look for the next election. This isn't permanent problem of
no policy, but in the Euro area, its even more pressing because of disappointing also far steam for his
and whether the bending a fiscal rules and increased fiscal wish sharing across the European Union go against the EU treaty framework and risk moral hazard in the region.
The world has changed since the Maastricht Treaty was put together, one of you
key developments, has been a decline in interest rates in the equal.
An interest rate has fallen over time, which I think makes it
harder to defend.
The structure that was put into place when EMU was constructed, where the idea was, of course, that monetary policy,
He does the stabilization and fiscal policy,
basically looks after debt sustainability, but all the cyclical stabilization is done on the monetary policy side and of course, we ve learned that this principle, it isn't possible,
stand when there's a little amount interest rates and the forces of law a thing, but suddenly
It's true in Europe and then said
I think it means that running a link that is
much cheaper than it used to be, and the sixty percent dead constrained.
Three percent constrained for the deficit, which is
Maastricht criteria. Those were talking.
and on interest rates that are much higher,
We calculated those numbers. You would get very different numbers because you can.
staying higher dad with bigger deficits today
I think there is a strong economic case for revisiting,
that interaction between fiscal and monetary and
standing that you can't constrain
both monetary and fiscal policy very much
This then you end up not having enough
four stabilization when its he it was, who speak a pistol
Sustainability is still often, but what we learned is that the fiscal rules are not very helpful if there isn't by an invisible, so in other words by fiscal rules, are quite ineffective. It shifting incentives.
country level, just because he doesn't mean that
following a really needs to be ion
by in the countries that are supposed to follow the rules- and I think that's been critical-
The rules have been broken up by Germany. The early two thousands better was convenient, and then I say
later on in the southern european countries. On citing that's really issue,
fiscal rules that you can't just ensure this.
sustainability. By writing. Knowledge rules need to be in sending combating obesity and a way forward,
my tea, and this is where the recovery functions is to have a system of sticks and carrots at the EU level. Where is it?
fiscal rules, kindly that's unrealistic as no courage- and I think,
the way forward is to use the EU wide resource is basically in exchange for more fiscal responsibility and seeing this already with the recovery from now on that the grounds
the allocated in return for commitment on structural reform and certain things that need to be fulfilled in terms of
conditionality for countries to be able to access those glance, and
you can imagine a system where you move away from just these pure constraints, where the evidence is that they have learnt that well towards it
where you combine grounds alone from the central level, with basically commitment can return assumed that the recovery plan is taken, and I think that is to me a promising road.
beyond these shift towards fiscal risk, sharing the larger.
Question is whether the cooperation between EU members that resulted in a decisive response to the pandemic can persist after the crisis and pushed the EU.
It's a stronger and more effective union. Romano Prodi, former pay
minister of ITALY and president of the European Commission leaves the
You is headed for further integration, but the requirement of unanimity around big EU decisions means integration, will likely be very slow and ultimately incomplete,
regulation means Store Belgrade. What is your job where they are
german backlash
on this day, when do you
draw all the necessary dialogue with the European Central Bank or repression is increasing every day. There is giving forget that there are not any more nation
Did you go to debate this issue back Houston now, when the decision is taken in the banking system and the first question, what poorer brush speaking? Not all,
through more ambitious. Rejecting this process cannot be reversed. It could be or should be, more engaged drawers
the shoulder encounters controlling Africa? Politics?
what I mean is that Spain, through suitable, agrees restrictions in their appearance plants all the mediterranean countries.
There are very worried that what is happening
in Africa and wish the issue was not
fifty years ago by the northern european countries,
Now we need a common european immigration and because of that, I get in bed
we should have a more polished among France, ITALY, Spain and Greece also knew their sour. Then
or that of Europe. There is one obstacles, one to bring that fish unanimity.
We should bear this sorrier up. You know, I don't see the possibility,
adopting the majority decision, but very stumbling block, and so little progress of Europe. But starting that say that now
Europe's population, all their programmes more end, like
like three policy decision, they blocked by the date of you. So I do see some progress, but there are you
so let us talk any more. I shall agreement on accounting. That's a part.
believes that the european parliamentary elections in twenty nineteen kicked off a new wave of pro european sentiment and that
you no longer faces, as essential danger from populist forces will be stored away. You will demonstrate that people want Europe is different,
in Britain. We would all wish the idea of a nocturnal too and then an issue with the United States to be freed from here.
The other guy look
the most recent election, they should go to the police to its partners and lost ground shouldn't again
you're married Geringer, darkish growing out of Europe preacher,
went away even
the local elections, twelve million people voted clearly pointed out that is closer to Europe,
They were going to do that,
people mind european reality without the limits that day depicted before activity garden.
professor at the University of Oxford caution that you
past seldom missed an opportunity to miss an opportunity over the past decade and is not convinced that peak populism in Europe is behind us. We're gonna history
and then for Europe, and what you see is that since two thousand and five but
Secondly, since two thousand and nine ten, it has been crisis after crisis after crisis.
and like with someone who has had a series of healthy scenes, they take their toll. So
This is in many ways a more weaker and more divided Europe, and one in which both politics and the opinion polls show that forces of passion is populism and of euro scepticism.
I still quite strong in wrong numbers, a third of citizens of EU member states
slightly less say, I think our country would be better off outside the EU, so those forces a very strong
whether after barium week beginning there has been a decisive EU response to the covert pandemic, there is
strong green agenda coming out of the EU.
I would say those forces of finely balanced, but Europe has never missed an opportunity to miss
not for tuna to over the last ten years and which the most important. I think that Angela Merkel, greatest single mistake, was a failure to take the initiative at the beginning of the year is in crisis
what Helmut Kohl would have said? Maybe we must do whatever it takes, as a result of which it would have taken much less than it did. But, let's be far european,
a refund is a very big step. So in response to this big crisis, there has been a big response and
I think as a historian, Robin seizes it. A great deal will now depend on the consequences,
crises in the sense that it's entirely,
simple, that we will get more inflation for one
we might even get stagflation. Are you
we might have a very difficult economic times. The pandemic itself has been a bad time for populous, but
the consequence of a pandemic might be a very good time for populist and in France, the populace there
not even the panel eggs them all. The combination of the two,
I'm running neck and met with a manual macro. So
elsewhere. In Europe we have a very different political landscape and I think, if populous compatible,
in ITALY or came to buy in France as well, is already being power in countries like Poland and Hungary. Then the politics of this in a very definite how likely
you think it is that the populace see resurgence again post this difficult period for the world, but
only for Europe as well, so
Anyone who talks about chief populism being passed should just forget it populist.
Still in government in several EU member States, Poland and Hungary, but clearly the two key place is to watch, particularly after breaks it, which is itself an example of a successful populism. A self evident
France and ITALY. In the french case, we all say and thank Heaven. France has such an intelligent electoral system for the presidential.
Actions was a second round, but you knew if it turns
that, in the end, french voters rejected LE pen in favour of a centrist candidate. Like my crop. That will be the third time that french voters
to do that, they did it for Chirac against Father Le Pen. They did
from my trying marine LE pen. If they have to do it again, that's not a very good system where
People are having to hold their noses in the second round to voting
and stronger than for a candidate France, has been hit by terrorist attack of the terrorist attack, one of the worst hit countries in Europe if there were a terrorist attack the day before the second round
Who knows the other one watches equally we're fine, so long,
super. My is there, but if
open value did decide to move across to the presidency. The
The political game is once again open and
so really, another populist might well from stormy through the door, given the risk
and opportunities Europe is currently facing will continue to watch for this moment will go down as a seized or another missed opportunity for the European Union I'll leave it there. For now
you enjoy the shall we hope is describing apple, podcast and liberating or comment. I am Allison Nathan things for us.
need to exchange the Goldman Sachs and I'll see you next time.
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Transcript generated on 2021-10-26.