The CEO of the European Financial Stability Facility, Klaus Regling, in India to deliver the inaugural IISS-Oberoi lecture in Mumbai, believes that Europe has turned the corner when it comes to its sovereign debt crisis.
During his lecture, he dismissed talk of European decline and, in an interview with Pramit Pal Chaudhuri, said that the eurozone could be back on a growth path within two or three years.
The eurozone countries had accomplished more reforms and corrective action than most people realised.
Regling should know: his EFSF has been the primary bailout fund for the worst of the eurozone economies, like Greece and Portugal, and he will soon become the head of the European Stability Mechanism, the multibillion dollar fund which is to serve as a Euro-area IMF.
Excerpts from the interview:
On the present status of the eurocrisis:
The main message, the one I consider the most important, is that the progress we see in Europe the past two years is that while we are not out of crisis yet, but there is more progress than people are aware of.
In two to three years, we have reason to believe that the euro area will have a balanced budget, a large primary surplus on average. In two to three years we will back to growth.
At the national level, there is fiscal consolidation in many countries, they are improving their budget deficits, their competitiveness is improving - these things are not well known but they are getting done.
At the European level we have new mechanisms and institutions to supervise the macro-economy, the banking system, we have new tier capital requirements.
These are institutions that were not envisaged at the time monetary union took place. These should be seen as complementary to what is taking place at the national level.
All this will take time to have an effect, like the International Monetary Fund's programmes.
We have not solved everything.
Greece is still a matter of concern. Among all the economies, it is the most difficult in terms of the problems it faces and politically the most difficult.
I will repeat what the European Central Bank recently stated: No one wants Greece out of the eurozone; what happens depends on Greece as they have to continue to make more fiscal adjustments; they will be supported if they continue the adjustments.
Obviously we prefer that this adjustment not be a disorderly process.
One area that has not improved is the banking situation. We are seeing a renationalisation of the European banking system which is something contrary to what we wanted when monetary union was created.
There are three elements to the banking changes that we have or are carrying out.
One, direct bank supervision, which was mainly done at the national level, will now be done by the European Central Bank and that decision is already taken. The principle of supervision has been accepted but the scope and nature of that supervision is still under discussion.
The ESM may be allowed to recapitalise banks directly, right now it is being done indirectly through the national treasures.
A third element, a common deposit insurance scheme, has not been approved yet.
The first step of creating an ECB common supervisor has been taken. This is an appropriate decision as the eurozone's, banking and financial markets have not seen as much progress as we would like.
One should remember how negative people were about Indonesia in the 1990s and Turkey in the early 2000s. They were in economic crisis and everyone said both were headed for economic disaster. Today they are among the fastest growing economies.
Similarly, in Europe we have already seen countries like Ireland and Iceland turn their economies around because they carried out the normal sequence of reforms that were needed.
On the EFSF and the new ESM:
Without the assistance of the European Financial Stability Fund, Ireland would have left the monetary union by now, something that would have been terrible for the eurozone. Now Ireland's economy is on the path of recovery. So the fund has played a constructive role.
But the European Stability Mechanism will be a real international institution. The EFSF functions under Luxembourg law which was a way to set it up quickly.
The ESM will have real capital raised from the market.
The EFSF depends on the guarantees and backing it gets from the eurozone governments. It has done well -- its ten year bonds give only 2.3% interest and its short term bond is negative interest. It is able to borrow at interest rates that are only one percentage point above that of Germany.
The ESM will raise 80 billion euros in capital, the biggest paid up capital base for any international organization. The IMF doesn't go to the market as it draws on central banks for funding.
The instruments of the ESM will be same as those of the EFSF, the same sort of interventions and policy actions. They will even have the same staff and institutional base. But their balance books will be different.
The EFSF will continue as a legal identity even after the creation of the ESM. The fund will continue the three programmes it presently has - the combined 700 billion euros it has leant to three eurozone countries.
The EFSF has not yet lent to Spain, but it is likely that when Madrid does ask, it will be under the ESM. In time, but not for a while, the EFSF will be both shutdown.
Both the EFSF and the ESM will answer to the same political masters - the 17 eurozone finance ministers.
The ESM is prepared if there is a problem with any of the bonds it has issued.
Remember, we are the bondholders, not Greece. The eurozone governments committed to back these bonds when they were issued and they understood the risks involved.
On the politics of the eurocrisis:
One cannot completely shield oneself from politics. I am under instructions from the eurozone's finance ministers, they are my political masters. They have the last say in all difficult political decisions.
We are not shielded from the divisions among the European capitals. Look at what happens in the IMF which has over one hundred finance ministers. The divisions between France and Germany are merely the most publicised divisions.
But there is one important fact about decision making in the eurozone area. The EU makes decision very slowly. To the casual observer it may seem we have only controversies and few conclusions.
It should not be a surprise that seventeen countries have a lot of debate, at home in their respective legislators and then among themselves. Yet somehow they come together. After their national debates but they come to a consensus always. The debate continues.
And then on Sunday night at 2am, a consensus reached and a conclusion, but it is too late for the media who bury the news in the back pages of Tuesday's newspaper. But to casual observer the debate is noticed but not how it ends.
Claims that German Chancellor Angela Merkel is facing domestic political problems because of her handling of the eurozone crisis are mythical.
Merkel's support is strong and broad-based. There is always overwhelming support for her actions when they go before the legislature. I think the chances of the German constitutional court to vote against the EFSF and the ESM in September to almost zero. It would mean that everything I am doing now is illegal.
The Anglo-Saxon press is generally negative, but they underestimate the European commitment to the euro. The Anglo-Saxon world has a different economic philosophy. It doesn't believe fiscal consolidation should be done during an economic slowdown. They are much more short-term oriented.
I don't believe that quantitative easing is always good for growth. The European Central Bank is focussed solely on price stability as its prime objective
It is almost impossible to be ahead of the market. This is because it is always going to be difficult to make fast decisions when you have 17 governments. It makes it difficult and unreallistic to expect it to be ahead of the markets - just on the basis of the decision-making procedure that the EFSF has.
On India's contribution to the eurocrisis firewall:
The contribution of India and other emerging economies to the IMF's eurocrisis "firewall" is much appreciated in Europe. The IMF's contribution is only a fraction of the money to handle the crisis compared to what Europe is putting up from its own resources.
But the IMF has sixty years of expertise in this business and this we can use as we have never had to do this sort of thing before. The IMF should be involved: it is a global institution and Europe represents 20% of the world economy. Similarly, it makes sense for the emerging economies like India to provide support to the IMF.
On Chinese purchases of Eurobonds:
I have gone to China many times to make the case for Eurobond purchases. Most of the time, the Chinese will make some purchases. Asian demand for such bonds has been high the past few issue.
About 40% of bond purchases were from Asia, that includes investors, central banks and insurance companies.
Asians have at least 100 billion in Eurobonds outstanding for Greece and Ireland. The Chinese do not allow us to say how many bonds they buy, but when we make bond offers they are there most of the time. The Japanese are there always.