GIG: Greek borrowing rates lowered considerably in 2019. Do you think that reflects an equivalent change in the fundamentals of the Greek economy?
Regling: Greek borrowing costs reflect a more supportive investor sentiment, and this is also a result of the country’s fiscal effort and the new government’s commitment to carry out growth-friendly economic policies. The challenge will now be to sustain this overall very positive momentum. Maintaining the reform path will be crucial to retain investor support, especially as the recovery in Greece is taking place against the backdrop of a weakening external environment.
GIG: What is your perspective on providing more fiscal space for Greece? And how do you view the new government’s call for a reduction in the target for the primary surplus, which is currently at 3.5% of GDP, to help allow more spending to fuel growth and the creation of new jobs? What would be a realistic target in the near-to-medium term, and what would this depend upon?
Regling: The government has confirmed that for 2019 and 2020, the primary surplus target of 3.5% will be observed. This is also the conclusion of the 4th Enhanced Surveillance Report, published in November 2019. After that, the Greek government has voiced a desire to have a discussion regarding the targets. The only way to have a substantive discussion with the Eurogroup is if future conditions, both in terms of macroeconomic fundamentals such as growth but also in terms of future market conditions, are better than expected in our last debt sustainability analysis. This is a debate that will occur in late 2020 when we are well into the year’s budget. By then, the growth-friendly initiatives will have started to materialise, and we will have a clearer understanding of what has happened.
GIG: How sustainable is Greece’s long-term debt? What needs to be done, in your view, to reduce it to nearer eurozone norms?
Regling: In June 2018, the Eurogroup agreed to a set of medium-term debt relief measures with real savings for Greece. Those measures are estimated to have a cumulative positive impact on public debt of around 30 percentage points until 2060, and this will allow Greece’s gross financing needs to fall considerably in the same time horizon. The European Stability Mechanism’s (ESM’s) view is that, as long as Greece remains fiscally prudent and follows the agreed structural reform path while shoring up the economy, debt will remain on a sustainable path. Debt relief measures are easing Greece’s debt repayments, but the ultimate success of the programme lies in the Greek government’s continued reform implementation.
GIG: How satisfied are you with the pace of reforms implemented by the new Greek government so far, and what are the main pending reforms that you see as a priority? How do you view new legislation reforming taxation and investment incentives?
Regling: The Greek government is reaping the fruits of a favourable market perception, the results of reforms implemented during the ESM programme and continued reforms. As I mentioned earlier, the 4th Enhanced Surveillance Report concludes that Greece has prepared a budget for 2020 that meets the agreed primary surplus target of 3.5% of GDP in a growth-friendly manner, and that it advances on a broader reform agenda. In the ESM’s view, growth-friendly initiatives are much needed since Greece’s economy is still vulnerable. It is particularly important that these initiatives give special weight to strengthening the institutional quality in Greece, as this has enormous influence on long-term growth.
We expect the full set of the agreed fiscal measures presented by the government to improve the quality of public finances and boost growth in 2020 and beyond. Although it does not fully overlap with the cancelled pre-legislated tax reform package, it does broadly deliver growth-friendly tax reforms such as reductions of taxes on personal income and corporate income, and broadening the tax base in some cases.
On competitiveness reforms, the government is taking steps in the right direction to improve procedures and licensing requirements and also to rebalance the economy towards promising export-oriented sectors. Implementing the plans, and continuing along the reform agenda, is again critical.
GIG: How do you view the government’s privatisation plans? What other measures would you recommend to attract more investments in Greece?
Regling: The government is progressing energetically with key transactions, in particular regarding Hellinikon. This is positive and will bring significant economic activity. It’s fair to say that other transactions are moving less quickly and could be sped up.
To attract more investment in Greece, the efficiency of the legal system must be significantly improved. Civil claims and insolvencies take far too long to be resolved. This creates legal risks that make Greece less attractive. Solving this problem is critical for investors, and it is fundamental for growth generally.
Aside from this fundamental point, the business environment also needs to improve with a tax system that is more stable over time to enable investors to plan, the property cadastre needs to be completed, and regulatory and administrative requirements need to be streamlined.
GIG: At different times and for different reasons, various groups proposed that the ESM should act independently of the International Monetary Fund (IMF). Following Greece’s repayment of its loans to the IMF, this looks increasingly likely. On balance, would you say the IMF was a positive contribution to the programme? Will its absence be instrumental?
Regling: When the European Financial Stability Facility (EFSF) and later the ESM were set up, the presence of the IMF was very important. In Europe we did not have the experience to design programmes that the IMF had gathered over many decades. Also, we could not guarantee that we would be able to raise the amounts of money that were required for the programmes.
As time passed, the ESM and its European partner institutions acquired programme experience. Furthermore, the ESM demonstrated that it could reliably raise a large amount of money by issuing bills and bonds at very favourable rates. As a result, the ESM and its partners have become increasingly independent. However, when the decision on the ESM programme for Greece was taken in 2015, the continued presence of the IMF was an important point for a number of the ESM Member States. Greece was able to leave its ESM programme successfully in August 2018 and to stand on its own two feet again after eight years under programmes.
As the IMF was present during these years, it undeniably has contributed positively to Greece’s graduation out of programmes. Today, the country can become a sustained success story if Greece uses the budgetary breathing room provided by the ESM loans (at exceptionally low interest rates and very long maturities), and if it pursues reform-oriented policies that safeguard the objectives of the programme reforms over the long term.
GIG: Following Brexit, many European voices are once again pushing for ever closer union. One of the purported deficiencies of the euro, which the ESM has partly plugged, was a lack of associated fiscal union. Do you think the time is right to move in this direction?
Regling: Today, Europe and the euro area are in a much stronger position than they were when the euro crisis broke out in 2010. Thanks to determined reform implementation in programme countries; the creation of the banking union, with a European supervisor, for systemic banks and common resolution institutions; the better coordination of policies on a European level; the European Central Bank’s unconventional monetary policy; and the creation of the ESM as the lender of last resort for sovereigns, Europe can now weather a crisis that, back then, threatened the existence of a monetary union. But more is still needed to make Europe fully robust against future crises.
On the fiscal side, to have a macroeconomic stabilisation tool would be a game-changer. This could be used if one country is hit by an economic shock outside of the government’s control. One theoretical example could be Ireland in case of a very hard, contentious, or disorderly Brexit.
A macroeconomic stabilisation tool could be set up in different ways. One possibility could be a rainy-day-fund from which a country hit by a shock can draw money. Another option could be a re-insurance of national unemployment schemes that would pay out additional money to a country particularly hit by job losses. Both options exist and have been successfully implemented in the U.S. Importantly, in both cases we are talking about loans that the beneficiary country has to repay within around five years.
Other options are an investment protection scheme, like the European Commission proposed, or shorter-term ESM loans. These four options look quite different. But they all have the same goal of assisting a euro-area country hit by an economic shock without creating additional permanent transfers.
GIG: The global backdrop is increasingly one of tension and confrontation. Does this affect how you conduct the operations of the ESM and, if so, in what way? What role do you envisage for the ESM in a Europe that no longer has any open crises?
Regling: The enlarged mandate will give the ESM a bigger role. The ESM will provide the backstop to the Single Resolution Fund (SRF). It will have a stronger role in the design of future programmes, and it will follow the economies in all member states, always in partnership with the Commission. The use of the ESM’s precautionary credit lines will become more efficient. When considered useful, the ESM will have a role in debt related issues.
Obviously, the ESM will retain its tasks as the euro area’s permanent rescue fund that safeguards its financial stability. It has to be alert and prepared at all times, so it can counter a crisis that might strike unexpectedly. We are similar to the fire brigade in any city. As a fire can break out at any time, and in any place, you want the fire brigade attentive and well trained.
The ESM’s bond issuance keeps us busy all the time since a lot of our outstanding loans, around €260 billion, have to be refinanced over many decades. On top, the ESM is working together with its Member States, and its European partner institutions, to deepen Economic and Monetary Union further and to promote the international role of the euro. Both goals have become even more important in recent times as we see some countries withdrawing from multilateralism and international cooperation, and others emerging fast. A strong and resilient monetary union is the best way to promote growth and to protect its member countries and citizens.