Brussels, 05/03/2013 (Agence Europe) - The prime minister of Luxembourg, Jean-Claude Juncker, wants Italy to rapidly confirm its budget and economic commitments, as he explained in an exclusive interview with this newsletter on Monday 4 March 2013, in which he describes the Cypriot situation as being of a “systemic nature”. Juncker said that a calibrated approach to deficit reduction would be needed to solve the crisis, along with a reduction in labour costs for struggling nations. He reiterated his call for a minimum wage system in every country in the EU. (MB and EL/transl.fl)
Agence Europe (AE) - Should the outcome of the Italian elections be seen as Italians rejecting the economic policy recommended at European level?
Jean-Claude Juncker (JCJ) - There was a fair amount of bitterness towards Europe in the Italian election. That said, one shouldn't believe that the only issues in the Italian election campaign were closely connected with European policy. Yes, Beppe Grillo campaigned against the euro, but most of all against the behaviour of traditional politics. Silvio Berlusconi waved the possibility of tax relief, which I think is going a bit far. There were also Italian domestic issues. It's very hard to identify exactly which of these matters determined how the Italians voted.
AE - Is the uncertainty about whether the reforms will continue damaging to the eurozone?
JCJ - In a few weeks' time, I would expect to see whether the new Italian government, the one that emerges from the negotiations among the parties, will apply the measures that both the Eurogroup and Italy had agreed upon. The fact that the question has to be asked is a sign of a new uncertainty that has slipped into the European system. I would like Italy to remove all doubts as quickly as possible. Because it is unthinkable that, from one day to the next, Italy would radically change tack and add to its deficit and pile up more debt.
AE - Which is more urgent - removing uncertainty in Italy or the financial bailout of Cyprus?
JCJ - The two are separate issues and are equally important. An answer to the problems posed by Cyprus must be found quickly and Italy must reassure us about its plans in the medium-term.
AE - Is the Cypriot problem being taken seriously enough?
JCJ - If a country like Cyprus, however small, is facing insoluble problems, then these problems must be seen as needing the same attention as the Greek, Irish and Portuguese problems. If a member state in the eurozone has problems of the type, nature and scale of the Cypriot problems, then it must be considered a systemic case. If it is not solved, any major problem in a eurozone country is a systemic problem because of the high likelihood of it spreading.
AE - Cypriot banks have suffered enormously from the Greek debt writedown. Was the private sector involvement (PSI) a mistake?
JCJ - Involvement of the private sector in solving the Greek banking crisis no doubt did not have a very positive impact on the Cypriot situation. That will not necessarily lead us to produce a different bailout package for Cyprus, but I would like people to remember how the Greek solution impacted on Cyprus. [On PSI] It would have been better if we had not thrown ourselves at the solution with open arms and closed eyes.
AE - Should savers be expected to contribute to making the Cypriot debt sustainable?
JCJ - The IMF and a number of member states are focussing on the need to ensure the sustainability of the Greek debt. This is an essential criterion for any bailout mechanism. As for the involvement of savers, we mustn't go into this problem with our eyes shut.
AE -Is it still possible to reach agreement on a Cypriot bailout in March?
JCJ - The new chair of Eurogroup is right to stress the need for find a solution in March.
AE - What does Athens still need to do?
JCJ - The Greek authorities must constantly demonstrate that the Greek problem is on track. If any suspicion of derailment arises, then how it is to be remedied must be examined with the Greek authorities. The Greek programme is moving in the right direction - the direction we chose for it.
AE - In 2011, the troika is reported to have offered Greece the option of leaving the eurozone. Is that true?
JCJ - I have always strongly opposed such a scenario, which was rejected in the end. The hypothesis was never a real issue in the way in which the question is formulated. I said at every meeting that we must put an end to speculation about Greece leaving the eurozone. Talk of this type was, and proved to be, highly dangerous. When people stopped talking of the scenario of a 'Grexit,' then things got much better. Greece has paid a heavy price for such irresponsible talk.
AE - With hindsight, could and should Eurogroup have done things differently?
JCJ - We developed our decisions, sometimes very quickly and sometimes too patchily, with talk in public about solutions that could not work, like a Grexit, for example. This is an error that Eurogroup itself did not commit, but others did.
AE - Why apply a policy mix everywhere and at the same time that shrinks growth?
JCJ - Replacing consolidation and rigour with laxism and a policy focussed exclusively on growth is a pipe-dream. If expanding public deficits and increasing public debt were a guarantee of growth, then we would have discovered it years ago! It is empirically established that a highly indebted country is incapable of ensuring constant growth. It has never happened. Is the Japanese economy charging ahead with a debt of 125% of GDP? No. Does the United States of America, which increases the size of its public debt each year, give the impression that its economy has returned to sustainable growth? No.
If, before the crisis, all countries had balanced their public finances, then they would have the room for manoeuvre to counteract the damaging effects of the recession. That said, we should consider, within the framework of better economic co-ordination, what is the ideal policy mix of belt-tightening and growth. Savings must be better targeted so that they do not clash with recovery.
AE - Is Germany doing enough for growth in the eurozone?
JCJ - The sharing of duties must be better articulated. The Germans have good results in terms of jobs, growth and exports, which are far better than the combined results of all the rest. But it is very difficult to explain to them that they should change policy. Progress is possible, but do not expect the Germans to abandon the keys to their success. I have a nuanced view of Germany because there are enormous numbers of workers in a parlous position in the country who, in full-time employment, need welfare to make ends meet. There are areas of shadow in Germany too.
AE - Is making a country-specific devaluation by cutting labour costs the only way to help struggling countries return to competitiveness?
JCJ - Broad external devaluation is not possible with the single currency system. Countries cannot escape from a degree of internal devaluation. I do not see any other way. The best way to tackle such imbalances is to properly target the structural reforms to be introduced.
AE - Is the signing of contracts between the European Commission and a member state, along with possible financial aid, a kind of “low-calorie bailout”?
JCJ - No. I am not a determined defender of the idea of signing such contracts. The advantage of them in my view is better national ownership of the policies carried out - so long as national parliaments are closely involved. The rules in place (6-pack and 2-pack) should be enough to achieve the same result. But, if it helps speed through reforms, then I'm not against it.
AE - What exactly should be in a cluster of minimum European rights?
JCJ - This idea is a demand I have been raising for years, since the introduction of the Single Market. If everything is eliminated to establish a realm of competitiveness that is not very differentiated, then social differentials become more important. We see that today because devaluation is no longer possible. I would, for example, like for us to agree on the principle of a minimum social wage, without going as far as the extreme of saying that the minimum social wage should be the same everywhere. Twenty-one member states, eleven of them in the eurozone, have such a thing already. It should be the rule. Otherwise, all the talk about the European social model is just empty words.
In December, I was one of those at the European Summit who wanted to see the social dimension of Economic and Monetary Union feature in the conclusions document. If we had discussed these considerations in detail, we would most probably not have seen this dimension in the European Summits' conclusions. Herman Van Rompuy must ensure that this is not left as an empty idea devoid of content. Our British friends, and others, would probably find it difficult to accept that, if Europe doesn't want to be simply a free-trade zone, then it must have a serious social policy.
AE - Does extending the ECB's mandate come under expansion of EMU?
JCJ - I do not see the conditions as being in place for us to be able to convince everyone of the need to expand the ECB's mandate. For long years to come, we will stick with a system that will recognise the prime objective of the ECB as being price stability. The Fed in the US and the Bank of England have other objectives - growth and fighting unemployment, but the founding pact of the Maastricht Treaty ruled out such things for good reason. That said, the Maastricht Treaty is more subtle than people think. Under this treaty, the ECB contributes to achieving the EU's objectives, and the EU objectives include full employment and the social model. The achievement of the first objective of price stability does not prevent these.