The Director of the European Stability Mechanism (ESM), Klaus Regling, believes that total budgetary union, manifested in large fiscal transfers from the richer countries to poorer ones, is not the best way to deepen and stabilise the euro zone.
“On fiscal issues, let me say that the EU does not need a full fiscal union, with larger transfers between countries. The EU budget already allows for significant transfers to poorer countries, to promote real convergence. These transfers amount to up to 4% of their respective economies”, Regling said on Thursday 2 November, at a conference in Nicosia hosted by The Economist.
According to the German director of the permanent bailout fund of the Eurozone, an appropriate budget designed to tackle any crises in the Eurozone is also unnecessary. Even so, he argues in favour of a macro-economic stabilisation fund that is capable of riding out asymmetric shocks and/or acting as unemployment insurance. A fund of this kind would take inspiration from the American model ('rainy day fund') and would not lead to any pooling of government debt. “Short-term ESM lending is another option”, Regling said.
On top of this fiscal capacity specific to the Eurozone, the ESM Director would approve of a system that would allow a better share-out of the burden between private investors in the event of the restructuring of government debt. “The ESM could take on the role of organising London Club-type restructurings”, he said, arguing against automatic maturity extension clauses.
Finally, on banking union, Regling called for a European deposit insurance system (EDIS). However, this system “can happen only if legacy problems with banks in some countries are first tackled. Healthy banks in one country should not have to pay for past mistakes made by their rivals abroad”, he stressed. He went on to observe that in Cyprus, despite the country's return to economic health, banks remain fragile due to a high burden of non-performing bank loans.
According to the Central Bank of Cyprus, non-performing bank loans represent €1 billion in Cyprus, or 4% of total banking exposures. Cypriot banks have carried out provisioning to the tune of €10 billion. (Original version in French by Mathieu Bion)