NEWS Release - Interview with Peter Praet, Member of the Executive Board of the ECB, Conducted by: Martin Visser and Dorinde Meuzelaar on 12 December, published on 20 December 2016
How optimistic or pessimistic are you about the European economy?
We see moderate but strengthening growth; that is better than it was a while ago. The main welcome surprise is the increase in employment, which is boosting people's disposable income.
How can you call this a surprise? We have had to wait for more jobs for so many years.
Of course, that is a fair point. But that is because of the excessively high growth expectations before the crisis. In Europe, there was a wide gap between overly optimistic expectations and reality. As a result, people were spending borrowed money. Governments were not overly concerned about the sustainability of their debts. The cause of this expectation gap was a decline in productivity. Sectors that had borrowed on the basis of excessive growth expectations ran into difficulties.
And it then takes a long time to recover from the crisis?
Indeed. Everyone needs time to bring their balance sheet back into shape.
Year after year, the ECB and the European Commission's projections were far too optimistic. You always thought that things would be better in the coming year. Did that not fuel scepticism?
Perhaps. In 2011 the European economy found itself in a second recession. We did not see that coming, as most analysts didn’t. Italy has even undergone three recessions. That explains why, eight years after the outset of the crisis, citizens are becoming impatient. But there is now a danger that they will be tempted by simplistic solutions.
How much progress have governments made in restoring their economies?
Not enough. Some countries have undertaken a number of reforms, Greece being a case in point. But it had to make up so much lost ground that it is by no means finished yet. But there are also countries that are showing signs of reform fatigue.
Which countries are those?
You see that everywhere. We will have to see what happens in 2017, but 2016 was not a good year as regards economic reforms.
Are you referring to Italy and France?
Yes, but not only. Some reforms have been made there in respect of pensions and the labour market, but there is still a large backlog. Citizens are now displaying anger and resistance. They are disappointed in their expectations. We also see a deterioration in income distribution. For many people, the rise in income is lower than the growth in the economy.
Do you understand why voters are angry?
Yes, of course I do. And there is a strong temptation to opt for simplistic and national solutions, which in my view could be disastrous. Protectionism leads to chain reactions. That game quickly results in shrinking prosperity.
All these voters underwent austerity measures, their taxes were raised, they saw European politicians simply muddling through the crisis. And as a reward for all this misery, they also have to face painful pension and labour market reforms. Do you think it's any wonder that voters are saying "no"?
Of course, quick solutions to make reality meet expectations would be great. But, unfortunately, that is not possible. Easy answers are an illusion, because the gap between growth expectations and outcomes is real. The austerity measures are responses to this problem. If you set up your social security, your government expenditure on the basis of economic growth of 4%, while only 1% or less is realised for many years, then you enter into a vicious circle. That is why we need a comprehensive approach.
Even if anti-euro parties do not win a majority, they will still have strong support.
Confidence in the euro has remained high, also in the Netherlands, as the Eurobarometer survey shows. However, confidence in the ECB has declined sharply, especially during the crisis years. The situation in which the ECB was the only player that was still solving problems did it no favours, because people expected too much from us.
Is the monetary union not a part of the problem?
It was not only monetary union that led to a fall in risk premiums and interest rates, it was a global development that started well before the euro. Countries joining the euro saw their interest rates fall very quickly. That contributed to a real estate bubble in some countries. In other countries, it gave an overly favourable picture of public finances. At those low rates, the government debt suddenly appeared sustainable. The euro was born during that period, but it is difficult to determine what would have happened in twenty years without the euro.
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