14 January 2014

VP Rehn, ex-ECB president Trichet and ESM/Regling quizzed on Troika decisions

Commission VP Olli Rehn was the first to address the ECON committee, ahead of former ECB President Jean-Claude Trichet, who was quizzed on Tuesday, and Klaus Regling, the European Stability Mechanism's managing director, who was heard on Wednesday.

The co-rapporteurs for the inquiry, Othmar Karas (EPP, AT), and Liem Hoang Ngoc (S&D, FR) asked how accountability could be improved and whether the alleged Commission/IMF dispute on fiscal multipliers was now resolved. Other MEPs returned repeatedly to the issue of accountability and also sought a breakdown of how decisions were taken within the Troika system and who was ultimately responsible for the different decisions regarding economic reform, budget cuts and Greece's debt restructuring. 

Political resistance underestimated

Asked why the Commission had so greatly underestimated the negative impact of budget cuts (fiscal multipliers) and had developed forecasts which proved far more optimistic than the reality, Rehn singled out the lack of national political will to carry out the reforms. The wrong forecasts "show the limits of economics and econometrics", he said, arguing that lack of political will was the main problem. 

When asked if he had "any regrets" concerning the Greek programmes, Rehn said the task force, devised to help push through reforms, should have been set up earlier to avoid the initial lack of progress.

Underwhelming replies

In his replies, Mr Rehn repeatedly stressed that the conditions under which the Troika operated were particularly difficult and that this had to be kept in mind. He attributed much of the responsibility for the actual reforms and cuts to the governments of the bailed-out countries, saying that the final decisions on the reforms and cuts were ultimately taken by them. He also admitted that although the Troika was able to take decisions, this process was often hampered by having "three institutions (ECB, IMF, Commission) with independent philosophies" at the table. 

He also defended the accountability credentials of the Troika, describing how each of the three institutions was accountable, albeit to different bodies, in different ways.

Next steps

Meetings continue throughout the week.  A delegation of MEPs will then visit Dublin to hear authorities and other actors on the ground on 16 and 17 January and will do likewise in Athens on 29 and 30 January.  A report with findings will be adopted by Parliament in April.

Press release

In his speech, Rehn drew attention to the strengthening economic recovery in the eurozone, but cautioned against any complacency due to the challenges that remain. He highlighted the role played by the adjustment programmes in helping to unwind macro-economic imbalances, and preventing disorderly defaults with all their devastating economic and social consequences. He added that the purpose of macro-economic adjustment programmes is to remedy an emergency situation in a sustainable way, requiring determined action under enormous time pressure and in very difficult conditions. Programmes have a beginning and an end: once the emergency is over, the reform process is continued under the normal procedures of EU economic governance.

Full speech

See also: Troika inquiry-Parliament investigates the decisions that have been made, 13.1.14

At the hearing attended by former ECB President Jean-claude Trichet on the Troika's role and operations, MEPs strove to elicit explanations for the actions and positions taken by the ECB. Members asked specifically why Trichet had initially opposed restructuring Greek debt, why he had not bought government bonds of embattled countries more vigorously, and why the ECB had written secretly to certain countries requiring reforms when this was not the role of a monetary authority. Other MEPs demanded Mr Trichet's opinion as to whether the construction of the reform programmes, especially for Greece, had been faulty, and what would have happened had EU countries not bailed out Greece in the first place. Looking forward, MEPs also asked Trichet's views on what model should replace the Troika.

In his replies, Mr Trichet repeatedly noted that the situation had been "dramatic", especially when Spain and Italy were under attack. He acknowledged that the Troika or reform programmes were not perfect, but stressed that the "extremely difficult circumstances" demanded rapid action, such as the letters sent to Italy and Spain. "In an ideal world this would not have been done, but we were in the worst possible world", he said.

Various MEPs criticised Mr Trichet for having delayed a "haircut" of Greek debt for too long, thus exacerbating the problem. He replied that he had first needed reassurances from the member states that a restructuring of Greek debt would not have become a model to be replicated, because that would have rewarded speculators, rather than real investors.

Better governance key to the future

Asked whether a stronger stability and growth pact would have prevented the crisis, Trichet acknowledged that it had been the watering down of EU fiscal rules that had allowed countries like Portugal and Greece to go over the edge. Strong governance would be vital to future success, Mr Trichet said, adding that the advent of a future system should mark the disappearance of the Troika one and a move to prevention rather than cure.

Trichet also said that in a future governance system, the European Parliament and national parliaments should act as arbiters between the European Commission and national governments. Where the Commission and a government disagree on what reforms to undertake, it should be up to the European Parliament and that country's national parliament to decide, he said.

Press release

On Wedndesday, MEPs questioned EU bailout fund chief Klaus Regling. He recognised that the remedies had created hardship, but stressed that the severity of the crisis had made the decisions taken necessary. He also said that he envisaged a system without the IMF in the near future.

MEPs acknowledged that tough decisions had been necessary but questioned whether the "Troika" set up was indeed unavoidable and asked if other, better designed, options could have been envisaged. They stressed that the need to minimise negative social consequences and ensure national "ownership" of remedial measures should have been higher on the decision makers' agenda. They also disputed Mr Regling's statement that the Troika had only provided advice, arguing that since programme country governments had no room to deviate from this advice, the Troika had in effect become an enforcer of reforms, without proper democratic safeguards. They also asked how a possible future system could be made more accountable, transparent, and socially considerate.

Member States had opted for the intergovernmental approach to solving the crisis and for the "Troika" solution, said Mr Regling. At that time, there had been no alternative, economically or institutionally, to the Troika, he added, stressing that there could have been no "painless" escape from the crisis. Left-of-centre MEPs pointed to the huge social costs, excessive burdens borne by the poor, weakened social services, and the way in which wealthy vested interests had been able to avoid much of the hardship. Mr Regling admitted that the balance between the measures could have been different, but reiterated that the Troika had only offered advice – it had been up to states in the programme to choose the appropriate solutions. For the future, Mr Regling proposed that more use should be made of European Commission expertise.  He also mentioned giving the bailout fund, the European Stability Mechanism (ESM), more power through a treaty change.

Press release

Speaking to the Süddeutsche Zeitung, rapporteur and VP of the European Parliament, Othmar Karas, said: "We are discussing three variants of a model to succeed that of the troika. The work of the troika could either be continued by the International Monetary Fund (IMF) alone, or the European Commission could assume these responsibilities. A third option is to extend the euro bailout fund, the ESM, into a European Monetary Fund." 

According to the SZ, Karas would favour seeing the ESM in future playing a greater role in negotiations and the controlling of financial support for ailing eurozone countries, instead of the ECB. In the ECON's committee report, he points out that the ECB is already caught up in a conflict of interest as it is both part of the troika, supposed to advise countries in crisis, but at the same time a creditor of these same countries. In addition, its mandate was limited to monetary and credit policy. The involvement of the central bank in budget and reform programmes was, according to Karas, done "on an uncertain legal basis".

Full article (in German)

First conclusions, ECON Committee, 16.1.14

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