Financial consolidation in the euro zone also develops. Thus, the European Central Bank is set to take on oversight powers next year over all euro-area banks, until the formation of the single resolution mechanism (SRM). The ECB will have the right to issue and withdraw banking licenses, control recapitalization of banks, etc.
In an interview with Forum, European Union Economic and Monetary Affairs Commissioner Olli Rehn spoke about topical anti-crisis tasks of Europe and ways to accomplish them, as well as about Ukraine's European integration.
- How can you characterize the current stage of economic situation in the European Union?
- The euro zone is no longer under the risk of collapse, though a year ago we had serious concerns on this matter. We have done a lot to overcome the crisis, but not everything is in its right place yet. The European crisis is not a simple cyclical slowdown, but deep structural problems, resulting from irrational use of resources, which in turn led to macroeconomic misbalance (credit boom, real estate bubbles, etc.).
The European Commission expects recovery of the economic growth in the second half of this year. We should focus on the competitive ability of our economy, as well as on its industrial base, which will create new jobs and lead to prosperity.
- What can you tell about the future banking union, being promoted by Brussels?
- Construction of a banking union is one of the most crucial tasks at European level over the coming months and years for reversing the process of financial fragmentation in Europe and preservation of integrity of EU market. One of the important characteristics of the banking union is the ability of direct bank recapitalisation by the European Stability Mechanism. In the end of June the council of finance ministers of the EU agreed on the principles and rules of a direct-recapitalization instrument. According to the agreements, the goal of allowing the 500 billion-euro ($669 billion) ESM, the euro area’s permanent rescue fund, to infuse lenders with emergency aid directly rather than via national governments is tied to plans for a European banking union.
Every bank will have three "alert phases": 1) preparative and preventive; 2) early intervention; 3) restructuring and liquidation. The earlier the misbalance in the bank is detected, the faster ESM will intervene, and less probability for the bank to go bankrupt. However, implementation of the directive is a long process, and it should come into force at the beginning of 2018.
There are still other issues to be solved, like to determine the order of reimbursement (or not) of money to creditors and depositors in case of bank failure; to create national funds, which will finance restructuring. Such rules will reduce the risks of misuse of budget funds.
- Some words about budget consolidation. Why did the EU decide to soften austerity measures?
- We want to carry out reconstruction of state budgets of counties-members for better growth. The fact is that at the beginning of the debt crisis we needed strong actions to restore paying credibility of Europe. And we needed to it fast. Now we have a possible to slow down the pace of fiscal reform.
The latest data proves that the euro zone has achieved certain progress in fiscal consolidation. Deficit of currency zone, which made 4.2%of GDP last year, has dropped to 3.5%, and in 2013 we expect it to fall to 2.8%. However, while Germany expects budget proficit in 2016, economies of other counties are still in stagnation. The new measures do not mean that Europe has abandoned its message of austerity and strict budgetary discipline altogether.
- Do you think it is expedient under such conditions to accept new members to the euro zone, Latvia for example?
- Latvia meets all the conditions to join our common currency, and I am pleased to announce that it will happen in January, 2014. Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger.
Following the deep recession of 2008-9, Latvia took decisive policy action, supported by the EU-IMF-led financial assistance programme, which improved the flexibility and adjustment capacity of the economy within the overall EU framework for sustainable and balanced growth. And this paid off: Latvia is forecast to be the fastest-growing economy in the EU this year.
The European Commission has analyzed the problems and achievements of Latvia and come to the conclusions that the country has reached stable economic convergence to join our common monetary area. However, it does not mean that we are fully satisfied with the achieved progress. Latvia should continuer the work to keep the economy stable. By the way, similar experience can be useful for Ukraine as well.
- What about the situation with Greece and Cyprus?
- Greece should continue the successfully launched economic reforms. As known, one of the parties, "Democratic left" announced recently its withdrawal from the ruling coalition because of the arguments around the decision of PM Antonis Samaras to shut down state TV company ERT. At the moment, stabilization of political situation in Greece is very important, as the country should focus all energy on economy. National leaders and population should focus on the announced strategy, as it is more important than politics.
The same can be said about Cyprus. It took obligations to follow the conditions of the presented rescue program, which was agreed with all parties - European group, creditors and government of the island. However, its government now asks to revise the conditions of the program, but the only possible compromise is to change certain conditions for a short-term period.
- And of course, a question about Ukraine. In autumn we might sign the Association agreement... How would you estimate the chances of the project?
- I want to point out that both parties hold active dialogue on the matter, which means the project is important for both, Ukraine and the EU. The world crisis is not over yet and it is logical to join efforts to fight it. Moreover, European integration will enable Ukraine to improve effectiveness and competitiveness of economy, to attract investments and modern technologies. However, the steps Europe takes to accommodate Ukraine, including Association agreement, free trade area agreement, visa regime liberalization, should not be considered as a present to Ukrainian authorities.
The agreements are aimed at the whole society of Ukraine, not only its economy. Together we have better chances to develop and go forward. Moreover, the EU is not dying and is not going to. On the contrary, it will overcome every difficulty and will help Ukraine to do so. We have all necessary preconditions for such development of events.