Spain Economic Office Chief: “If we wanted the euro, we needed to have more flexibility”

Q. The current informal Eurogroup is a bit unofficial as an institution. Right now the only European financial institution would clearly be the European Central Bank…

A. Not European, from the eurozone. The European institutions are designed to manage a single market, not to manage the macroeconomics of a country. The only institution that was born with an executive vocation within the euro area, comparable to other institutions worldwide, is the Central Bank. And what the government is proposing is that we must also have other kinds of authorities for the rest of the macroeconomic policies. Particularly those of the economic and fiscal union, in order to endow the European Union with the capacity it doesn’t have today.
Q. But we are talking about a Europe à la carte. All this would be optional.

A. Well, this is what there is now. Right now when a country joins the EU it has to accept the common policies which were defined in the Treaty of Rome: competition policy, land policy, agricultural policy, trade policy and the single market. Basically those are the ones that there were in the Treaty of Rome and that the European Commission developed in the 60s and 70s with the support of member states. At that time it was a much smaller club than at the moment, only 12 members before Spain and Portugal joined. We would be talking about an entirely different thing for the euro countries, which have already transferred a very substantial part of our economic policy.

 

Q. The inventor of the “opting out”, Margaret Thatcher, might be to blame for this multi-speed Europe…

 

A. The fault is that the bigger a club becomes, the more difficult it is to impose more in-depth and more general rules on all its members. Europe has had to solve the political problems that each enlargement and each transfer has generated. If we had maintained the principle of the acquis communautaire, according to which when a country joins the EU it must accept all its policies, we wouldn’t have gone away from the common policies of the afore-mentioned Treaty of Rome. If we wanted the euro, we needed to have more flexibility. The same has happened with foreign policy, with Schengen. If we wanted everybody to cross borders without having to show a passport or identity card, we needed to be more flexible. What does this show us? A political reality within the European Union: not everyone wants the same degree of integration. But it is true that some of us do want a higher level of integration. And that can’t be hampered either. Somehow, what we are discussing right now in the European Union is how to resolve this situation, including what will happen with the UK referendum.

 

Q. A country that will never be in the euro.

 

A. They were in the European Monetary System. We must not forget that. The pound was part of the European monetary system, but there were tremendous discussions about the behaviour of some central banks. Since then, the UK has been very reluctant to participate in monetary and exchange rate agreements because they think they did not work out well. The euro has to be a successful story in order to be attractive. It is clear that today we still have many issues to resolve. Hence the need to prepare a paper at the European level to see how things can be improved. So that member states which now think it isn’t a good business, end up thinking that the being part of the single currency is the best thing that can happen to them.

 

Q. In Greece, the extreme left governs together with the extreme right. In Spain, the local and regional elections have opened the doors in the two main cities for governments which probably don’t share the economic policy of Europe today. Aren’t you afraid that future electoral results will make it difficult to advance in the way that you have outlined in your document?

 

A. We will have to do it in that way because the euro has its rules and its way of behaving. Populism can arise for many reasons but one thing which is important to understand in Europe, and especially in Spain, it is that the euro has benefited our economy. We are a larger economy, there are more people working with the euro than there were with the peseta. And our standard of living is higher with the euro than with the peseta. What happens is that this means joining a club where you have a series of obligations and above all a series of needs. In the past, when we lost competitiveness and we became an expensive country, we could fix it by devaluing the peseta…A case of “eat today and starve tomorrow” because in the end it lasted three or four years.

Now we have a currency as strong as the German mark once was, which allows us to have lower interest rates, higher levels of activity and employment and more international trade. And above all, we don’t have to change currency when we move from one country to another and the domestic market is much stronger. All these things involve a series of obligations and a certain behaviour. Of course we would all like to avoid having to comply with the rules and just accept the benefits of the club, but that is exactly what populism is, that’s why it is called populism. “You want it all,” but in this life you can never have everything. Now if they make me choose, and if they make the government of Spain  choose between the euro or having a policy in which I don’t have to monitor inflation, I don’t have to control the public deficit, I don’t have to make structural reforms and I don’t have to be competitive…it is very clear that the euro is much better for the welfare of the Spanish people. Although it forces us to do things that obviously some people don’t like.

Q. But the drop in interest rates in 2003 wasn’t it a disaster for Spain?

 

A. One thing is that we had interest rates in 2003 and 2004 that put us below the level of inflation, and another is that when we had the peseta the mortgage rate in Spain was running at 12.5-15%. Why? Because the peseta often had to be devalued and those who invested in Spain lost money. That disappeared with the euro. Nowadays, we have much more similar interest rates to those that the rest of Europe traditionally paid on its mortgages or on its business loans. But in order to avoid what happened in 2003 and 2004, we say that the ECB’s mandate must take into account not only the average inflation rate in the European Union but also what happens in each country. This is because although the average is good, it may be not as good in some countries. And that also has to be monitored. What is also true is that when prices rise a lot in our country, and much more than in the rest of Europe, we cannot devalue. So the crises are much harder and the adjustments are much more difficult, as has been shown in recent years.

 

Q. Should we have a European budget? With its own revenues?

 

A. A European budget with its own revenues would be desirable. There is already an EU budget. I am referring to a euro budget that has a deeper vision. The EU budget is used to finance only the traditional policies of the European Union, but there is no budget that works in a macroeconomic way. What we call fiscal policy or budgetary policy, what level of deficit and public debt, must be based on the economic cycle. A good way to manage this is usually to spend in the lean years and save in times of plenty. Something like that doesn’t exist in the eurozone, but it does in the world’s large economic powers with which Europe is competing. The lack of this instrument complicates our performance as the crisis has shown.
Q. How do we make the competitiveness between countries more balanced?

 

A. Well, within the monetary union there is only one way. If your own country has become expensive it has to be a bit cheaper. As was the case in Spain. The country lost 30 points of competitiveness in relation to Germany with the euro, and 15 points compared to the European Union average. What does that mean? Well, if right now we have more or less a one point differential with Germany and a half with the rest of the Eurozone, calculate the number of years we have to have lower inflation than the rest of our European partners to recover the loss of competitiveness. This is accelerated if we implement structural reforms, increase the flexibility of our economy and ensure our companies to keep their costs at lower levels than that of their European peers. The others also participate and want to be more competitive. This is the game within the European Union. If my inflation is higher than the others’, I end up losing a lot. If I have less inflation than the others and I control my costs well, I’m advancing and growing stronger. This is what the northern countries know how to do very well. In Spain, unfortunately, we have not yet acquired that culture of ensuring stability and control of costs and prices which is essential to prosper within the monetary union.

 

*Read the first part of the interview here.