« Exchanges at Goldman Sachs

Europe at a Crossroads

2021-10-26

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. All price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the
accuracy or completeness of the statements or any information contained in this podcast in any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed the views expressed in this podcast or not necessarily those of golden sacks and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity.
Transcript generated on 2021-10-26.