14 June 2013

Klaus Regling: The IMF is making the Stability and Growth Pact look ridiculous

Translated from the German

The IMF writes in a new report that the first haircut in Greece came rather late. Would you agree with that?

No, on the contrary, I'm very unhappy with this report. It weakens those in Greece who have rallied behind the reform programme, and strengthens those who question the reform strategy of the government. 

All members of the Troika - the IMF, the European Commission and the ECB - who have assessed the economic development in Greece in 2010 were apparently overly-optimistic. How could this happen?

In my estimation, the main reason that the first programme wasn't successful does not lie in false predictions, but in Greek politics at the time. The socialist government had won the election in 2009 with the promise to increase government spending. With this mandate, the government was not able to reverse its course quickly. That cost us two years. The current government has been elected with a mandate for reform, and can therefore realise reform programmes more resolutely.

The IMF has criticised the EU Commission for putting too little emphasis on specific conditions for growth and development and only seeking to assure that the rules of the Stability and Growth Pact will be kept. Are they right?

I find this accusation particularly unfair. The IMF makes the Stability and Growth Pact look ridiculous and declares itself to be responsible for the creation of growth. This not only creates a false dichotomy, above all it shows that the IMF does not understand the rules of our monetary union. The euro area with its single monetary policy and 17 national economic and fiscal policies can only work if the rules are followed. If the IMF does not understand these facts, this is a big problem. I think that in the short and medium term, the IMF should remain on board the crisis management as it has the most experience with such programmes. In the long term, however, the euro countries must be able to fend for themselves. 

Were there any errors made in the chronology of the banking union? Even if the banks are able to self-finance necessary resolutions in the long term, in the transition period a "backstop" from public funds, possibly from the ESM might be required. Is that not the wrong way round?

All three elements belong together: the joint supervision, a resolution mechanism and deposit guarantees. Everything speaks for establishing a common banking supervision for the euro area as soon as possible. The matter is urgent. If we waited until the banks have amassed the necessary funds themselves, we would lose too much time.

Next week the Eurogroup will decide on detailed rules for the direct recapitalisation of banks by the ESM. Among other things, it is planned that the total sum the ESM should provide for this purpose should not be higher than €50-60 billion. Is that enough?

I will not prejudge the decisions by the Eurogroup, but the sums discussed seem appropriate to me. The question whether this will be enough only arose because the first bank stress tests were not stringent enough and some capital requirements have been assessed incorrectly. That has changed. What is still in the air, however, is the future role of the ESM in the handling of ailing banks in the euro area. What speaks for the ESM is basically what applies to the European Commission as well: We already exist, and we function. The alternative would be the establishment of a new authority. That would require a treaty change that would be difficult and take time.

During the court process in Karlsruhe about the ECB's bond-buying programme, the question of the legality of the ESM activities will also be raised again. Do you expect that a ruling by the Federal Constitutional Court might still change your "business model"?

I cannot anticipate any decision by the Federal Constitutional Court. However, I would point out that in September 2012 - before the ESM's entry into force - the court expressed a preliminary opinion. It found that according to its preliminary assessment, the ratification of the ESM treaty does not raise constitutional problems for Germany. Our impression of the hearing now was that the ESM is no longer the focus of judicial review and the Federal Constitutional Court is expected to confirm its preliminary assessment in its final ruling.

Full interview (in German)

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