Ignazio Angeloni
European Central Bank Advisor Ignazio Angeloni discusses the euro crisis, the relative strength of European institutions, and economic strategies for the future.
05.24.12
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Overview
The European monetary experiment is dominating the headlines for all the wrong reasons, as eurozone members fight to keep their single currency from collapsing. Ignazio Angeloni, a speaker at The Chicago Council conference on “Searching for Strategies to Restore Global Economic Stability and Growth,” works at the heart of this crisis. An Italian economist with degrees from Bocconi University and the University of Pennsylvania, he is advisor to the Executive Board of the European Central Bank (ECB), where he has worked since 1998, except for three years in 2005-08 when he was Director for International Financial Affairs at the Italian Ministry of Economy and Finance. Angeloni is also a visiting scholar at the Bruegel Institute in Brussels, where he focuses on G20 issues. After his speech at the conference, Angeloni talked with me about the euro crisis and its likely results.
Q:
Richard Longworth
It seems as if the Germans are saying to the rest of the Europeans, “you’ve got to be like us,” but is the German model sustainable and exportable?
A:
Ignazio Angeloni
I think your characterization is a little bit exagerrated. The “Germans” (assuming one can lump together in a single label a very heterogeneous social and political reality like German society) are not saying all other European countries should be like them in all respects. Rather, they say that depending on national conditions, other Europeans need to adjust certain aspects of their economic and social arrangements to make them more suitable to face.
Basically, there are two challenges: one is higher integration in Europe, starting with a single currency, but also financial integration, economic integration, market integration in a broader sense, et cetera. Challenge number two is the increasing globalization of trade, production, and consumption patterns. Foreseeably the major driver of global economic transformation in the next 30 to 50 years, this process will be dominated by demand flows originating from emerging countries, modernizing their economies and building up their capital stock. Europe—as in other parts of the world—has to be prepared and get itself into shape for that. Let me add that Europe is well placed to meet this challenge, with its long-standing ability to supply highly sophisticated capital and goods that will be increasingly demanded by emerging countries as their economies and living standards progress. But meeting this challenge requires that Germany and the rest of Europe continue to undertake a certain number of structural adjustments economically and socially. This is what Germany is proposing to the rest of the continent.
Q:
Richard Longworth
Now, Germany, as you pointed out, went through its own series of reforms, but it did so largely in the aftermath of reunification, which was politically acceptable. In the other places, especially in the periphery or in southern countries, is it possible politically to do what needs to be done economically?
A:
Ignazio Angeloni
Certainly it is possible, though actually deciding to do so is in the hands of national public opinion and politicians. It is in the realm of possibility for prosperous and rich societies, such as the French, Italian, Spanish, or even the Greek society to enact what are, in effect, important but limited adjustments in their economic and social structures. We are not talking of dismantling the European social model here—in fact, of all political orientations the Germans are the staunchest defenders of it. It is a critical condition for making structural reform possible, that the distribution of the burden of these adjustments be fair and transparent and also be perceived as such. Otherwise the social resistance would be overwhelming. We'll need the perennial triad of efficiency, stability and equity.
Germans look behind their shoulders and see that they have gone through a similar transformation in the last ten years or so. Around ’98 or ’99, if I remember correctly, The Economist put Germany on the front page calling it “The Sick Man of Europe,” right? You remember that. So at that time Germany was the sick man of Europe, partly because of reunification, which was a heavy burden, but largely for the overly rigid, inefficient, malfunctioning arrangements in the corporate sector, labor markets, and product markets of West Germany itself. Domestic reform was undertaken and pursued in a consistent way during more or less the first ten years of this century, facilitated by a bipartisan agreement between the Social Democratic side (in power until 2005) and the Christian Democratic side (since then, consisting of different government formations), with remarkable continuity and political resolve.
And, you know, to some extent this is already starting to happen in a number of our countries. There have been important changes made in Italy very recently. There were changes made in France even earlier than that, and in a number of other countries as well. So I would just stress the fact that this process is economically possible: to become politically acceptable, it needs to be fairly distributed, and it also needs to be presented to public opinions as a collective project, a common design that all can understand and whose goals will benefit all, including future generations. Austerity alone does not generate consensus let alone enthusiasm, but austerity can be accepted once its meaning and purpose are understood. It is also essential that national and European authorities cooperate and speak with one voice. The center of democratic control has shifted to some extent, over the decades, from the nations to Europe as a whole, as the continent became more integrated. But too often we see national politicians blaming Europe for unpopular domestic policies that would be, in fact, necessary in all circumstances.
Q:
Richard Longworth
Let me ask another question that I heard you pose in your recent speech at The Chicago Council’s Global Economy Conference. Are the European institutions strong enough to help carry this out, and are they themselves changing fast enough?
A:
Ignazio Angeloni
Europe is reforming itself on three grounds. One is the fiscal side, with a new treaty having been agreed upon this year among the eurozone countries. Number two is a new arrangement for monitoring and correcting competitiveness imbalances, macro-economic imbalances, among the countries. Third, there is ongoing reform in the area of banking supervision and regulation. These complementary areas of work have progressed, but none of them is complete. The fiscal compact has to be ratified, and we will see what the results of the election will imply for the ratification. The new arrangements to monitor and adjust cross-border competitiveness will have to be put to test. And the banking compact has to be completed along with a number of things, including a euro area-wide deposit insurance scheme and bank resolution schemes that do not currently exist. So, you see, the policy construction is in progress but not yet complete. Much work is ahead.
And now I come to your second question, are they proceeding fast enough? The speed has increased tremendously as a result of the crisis. The crisis was a catalyst, no doubt. We are confident that the changes that have taken place are already important, but of course the speed of further action will depend on the circumstances and how the crisis evolves.
Q:
Richard Longworth
Now, politics get in the way. We have elections coming up. I think it was mentioned this morning that we’re seeing a resurgence of the far left and the populist right, who are all sort of united in anti-banking, anti-European sentiments in general. How much of a threat is this to this process of what Europe needs to do?
A:
Ignazio Angeloni
I’d prefer to see it on the positive side, namely that all these are challenges that should stimulate governments to cooperate more intensely within the European institution in order to enact reform well and more quickly. The end point is a much higher level of integration in Europe: fiscal, financial, economic, and eventually political. This is a fundamental driver of change in Europe. There have been and will again be difficulties, setbacks, crises, political opposition, and resistance. But I think this is the inevitable direction we’re marching in.
Q:
Richard Longworth
Europe has gone through many crises since the Treaty of Rome. Many of us who thought, “Well, this is the end of it,” have always been surprised and impressed by Europe’s ability to move forward in this process of integration and as people begin to feel more and more European. Gideon Rachman was writing in the “Financial Times” that this may be changing. The people who thought they were Europeans are suddenly discovering that they are Germans or Greeks first. There’s a resurgence of nationalization. Do you agree with this?
A:
Ignazio Angeloni
I do agree that there are ups and downs in this process. It is a complicated, long process. At least since 2008, we in Europe have faced a number of difficulties and the hardship has been very serious for some countries. So I think it is natural to see growing resistance, the extent and implications of which remain to be seen.
Q:
Richard Longworth
Let me ask about the banking situation there. In today’s “New York Times,” Floyd Norris has a column comparing the American approach to the post crisis recapitalization, reformations, and refinancing of banks with the European approach. He basically says the United States did it right, but that there’s much that there’s much more restructuring of banking in Europe that remains to be done. Would you agree?
A:
Ignazio Angeloni
The amount of taxpayer resources that have been put into the banks in the U.S. as a result of the crisis was much bigger than in Europe. And the Federal Reserve System in the U.S. has expanded its balance sheet, for the same reason, more than the euro-system has done. So Europe has been comparatively successful—at least from this specific point of view—in limiting the collective burden of the crisis. But this is not the end of the story. The crisis is still ongoing and considerable risks are still present in the banking sector in Europe. Challenges remain. It is important that the process is conducted in a euro-wide-consistent fashion. I mentioned the question of euro area-wide deposit insurance schemes, as well as bank recapitalization and resolution schemes. In Europe, these policies are still being conducted differently from country to country, and that is a source of segmentation.
Q:
Richard Longworth
One last question. Once we get past the euro crisis and the present crisis, there’s still the matter of Europe thriving in the world, European countries supporting themselves. There has been a lot of talk about an export-led strategy, especially exporting capital goods to emerging markets. Now, you do a lot of work on the G20. There is some skepticism as whether the emerging markets can buy enough export goods from Europe to make this achievable. How do you see this?
A:
Ignazio Angeloni
I am a bit disappointed by the way the discussion is proceeding in the G20. I think one of the important things that the G20 would have to tackle was precisely the type of complementarity that must exist between production, consumption, and investment patterns in emerging countries and those in advanced economies. After all, the G20 summit was created precisely to discuss and coordinate policies among all relevant global stakeholders—north and south. But this is not taking place enough. The G20 was very busy and successful at the start, in 2008-2009, with crisis management. Subsequently, global financial conditions have stabilized and its working mode has shifted more to crisis prevention. There, its effectiveness has been less impressive. More effort is needed. What I am certain of is that the challenges of the next 30 to 50 years, that I already described, will require a strong and effective G20. Emerging countries will transform their economies, reshape and build up their capital stock, and progressively find their place in the international economic geography. This will put increasing pressure on global resources, whether material, human, or environmental. Sustainable growth models for the world cannot, I believe, arise spontaneously, but only as a result of negotiation, exchange of knowledge and experience, and coordinated policy. It’s a big agenda for the G20, but one we cannot do without.
