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Interview of Governor Yannis Stournaras to Greek Business File by Antonis Papagiannidis and Alexandra Vovolini

03/02/2021 - Articles & Interviews

Without further initiatives towards political integration Europe will stay behind

Yannis Stournaras, Governor of Bank of Greece, argues that the pandemic shock has incurred significant costs but has also had benefits for the Greek economy. At the EU level, he argues the Recovery and Resilience Facility is the first, albeit small, step towards a more federal fiscal policy in Europe and asks for further initiatives towards political integration for the EU not to stay behind

Is 2021 bringing in a plain-sailing period for Greece? We will celebrate our Bicentennial, but we will also be trying to survive the aftermath of the Covid-19 pandemic.

The pandemic shock is very important indeed for the world economy, the European economy and the Greek economy. It has already incurred significant costs, in terms of lost output, higher unemployment, rising public debt and higher non-performing loans. In a nutshell, it has interrupted the recovery of the Greek economy. But it also has benefits.

Benefits? How so?

Benefits are mostly those relating to the change of attitude…

Of public opinion or of the political class?

I would say mainly of the political and monetary community in Europe. European authorities had realized early on that we needed common action. That without common action, Member States which are vulnerable in their public finances would have faced a very grave risk. So we, at the ECB, decided immediately after the eruption of the pandemic to have a monetary policy that is not only accommodative, but also flexible and inclusive – for instance Greek Government bonds are now eligible for the Pandemic Emergency Purchase Programme of the ECB (PEPP), despite the fact that these bonds do not have investment grade status yet. Also, the Eurogroup decided to suspend the application of the Stability and Growth Pact (SGP).

For how long would you say? To what extent?

The SGP is expected to be applied again after the pandemic, but not in the same form. I think that now, as we speak, the Eurogroup is working hard to make the Pact more manageable, more realistic and more credible. Apart from the fiscal space given to Member States, we now have the Next Generation European Union (NGEU), based on the Recovery and Resilience Facility, which, in my view, is the first, albeit small, step towards a more federal fiscal policy in Europe.

Would you go to the point of saying that mutualization of debt has started in Europe?

It has only just started. Although it cannot be said that the “Hamiltonian moment” has arrived in the euro area, it would be very difficult, despite the voices against, to backtrack. I think this is a small step which, however, leads us only forward.

In Greece, we hope we will be showered with funds coming from the NGEU to counter the deflationary pull of the pandemic. Will such funds be used in a more constructive way than earlier EU funds, so as to leave behind not just incomes and some sort of pandemic relief, but also something more credible in terms of growth sustainability?

We have a huge opportunity ahead of us and we should be aware of this; I hope this opportunity will not be lost. As you remember in the distant past we have had the experience of lost opportunities as your question also implies. I very much hope that the political and business community in Greece – the Government, but also the political parties and the private business sector – will not let this become a lost opportunity. I’ll give you one example: the money we will get from the NGEU will come mostly in terms of grants, not loans; this funding is more than double our capital key in Europe. Our capital key is 2.1%. This is the capital key ECB is using to buy Greek bonds. However, the money we will get from the Recovery and Resilience Facility is more than double this key! Greece is the biggest beneficiary – in per capita or in GDP terms – along with two or three other EU Member States.

Moreover, the investment areas to which such funding will be directed are exactly those we need. For instance, digitalization, in which Greece is last, or perhaps penultimate, in EU rankings. So this is our great opportunity to digitalize the Greek economy – an opportunity for both the public and the private sector. The same applies to renewable energy, which is the other important area for NGEU funding.

And what about our level of preparedness to effectively use such funding?

It is not enough for the authorities and the public sector in general to have plans; the private sector should also join in. Private sector companies should be ready with appropriate plans to invest in digitalization, renewable energy, energy conservation, waste recycling logistics, the “triangle of knowledge”, that is innovation, education, research, etc. To say it in a different way: it is indeed a necessary condition for success for the State to act in a coordinated way. But it is not sufficient: The private sector should also respond accordingly.

Would you say that (a) the private sector is getting the message and (b) that finance is really available to co-finance such initiatives, meaning the banks?

Finance is fully available. The lax monetary and financing conditions will prevail at least until the end of 2023. I think even longer. I expect inflation in 2023 to be well below 2% in the euro area. Monetary policy will continue to be accommodative according to available data and forecasts. Hence, money will be available; the real question is whether this will be channeled appropriately. Large enterprises with adequate know-how and expertise can absorb these funds, but they should also plan for smaller firms, their suppliers, that operate around them. There must be networks of financing put in motion, whereby large enterprises, but also small and medium-sized firms around them, have access to finance.

Looking further ahead, what would be your vision for political union. Or rather should I say: do you have a vision for political union in Europe in twenty years?

Well, twenty years is a long time indeed. If we don’t have political union sooner, in the next ten years, we may never get it. There is still a window of opportunity; I hope that the wave of populism we have experienced in the previous years becomes weaker and ultimately disappears. Brexit is also a negative development both for the UK and Europe, but it also has a positive consequence: the UK cannot veto the political union of Europe.

Obviously, the conditions for political union are not ripe yet. Political union requires drastic changes in the Treaty. In order to achieve fiscal union, to have a single Finance Ministry, as the partner to the European Central Bank, you need very significant Treaty changes. That is to say, you need a federal structure to be put in place in the fiscal area, which does not exist now. This needs a much stronger consensus than the one we can achieve today.

But to me this is the only way forward.

If not?

If not, Europe will stay behind. Behind the United States, behind China. It will stay behind and will ultimately wither.

Would you say that the European Commission has this aspiration? At times I feel they have stopped…

No, I really don’t think that the European Commission has stopped. Such was the fear until some time ago; but the pandemic worked as a catalyst, as a wake-up call. Practically, the first step has been taken with the NGEU; to me, the next step will be a full Banking Union, with the creation of the European Deposit Insurance Scheme (EDIS). We have recently seen some positive and encouraging decisions both by the European Commission and the Eurogroup, which may be the harbinger of EDIS.

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