'Eurozone is in Fragile Situation Awaiting Another Crisis' - Academic

Sputnik discussed this with Antonio Moreno, head of the business department at the University of Navarra.

Sputnik: Now you have previously said that the euro is going to be in trouble. In what ways can the new measures proposed by the EU ministers impact this, if any?

Antonio Moreno: I think it's slightly less, but it's definitely not enough. I think the finance ministers reached a weak compromise to provide more funding to the ESM, to the European Stability Mechanism, which I think is something in a sense that all of a sudden you have kind of a bailout fund for governments and failing banks; but it's still far away from the optimal solution, I think.

Sputnik: There is this additional bailout fund and more power, but it did stop short of a sort of IMF for Europe. Is that something good or do you think they didn't go far enough?

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Antonio Moreno: I think unfortunately right now, the Eurozone is in a fragile situation awaiting another crisis to happen and everybody knows that the Eurozone architecture is unfinished business and it's not ready to handle another shot. So, I think there are two elements that would really strengthen the Eurozone: one would create a large fund, a kind of IMF, that basically provides funds to failing governments, or governments with fiscal trouble, or governments or countries facing very bad asymmetric shocks.

The second leg, in terms of finishing the Eurozone architecture, would be to have a European deposit insurance [scheme]. These two proposals, that I think every economist and most politicians understand are needed to share risks in the Eurozone, are basically not being agreed upon; in that sense, it's really unfinished business and the advance has been very little.

Sputnik: The aim of this was supposed to give the authorities a more effective toolbox, so to say, in the event of some kind of major shock to the EU economy. Do you think that was achieved?

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Antonio Moreno: I think the frank answer is no, because you do have a couple of more tools that are limited. And if you were thinking about big shocks, big negative shocks in some countries or in some banks that we're seeing now how even in Germany and other countries like Italy, the banks are not in a very good situation, and all of a sudden we may get into a baking crisis and we don't have the tools to answer it.

So, one of the things that was agreed upon is that the ESM will have powers to raise more capital to bail out some of these banks, but it is kind of a reactive power and I think it's going to be limited in terms of scope. Common deposit insurance, where you mitigate risk much more effectively and that has not been agreed upon.

Sputnik: Why do you think that the French initiative to create some kind of budget capacity for the single currency bloc was rejected?

Antonio Moreno: I think at the end of the day what we're having here is a power struggle where northern countries can reject this type of measures, which I think would definitely strengthen the euro area, because they fear they're going to contribute a lot and then, in the end, the recipients of those funds that they contribute to are going to be the southern countries, because they will be the ones that will enter into banking and fiscal crises.

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And I think this is what really is going on here; we've been playing this game for the last two-three years, I think there's a lot of consensus among economists and policymakers. I mean, to make the euro work in the long-term you really need to mitigate risks, but the northern countries, especially Germany, you see now Holland, Finland, what they want is a previous reduction of risks in bank balances, especially in southern banks, and also in terms of other finances, reducing fiscal debt.

I think in some way they're right, if you look at what's going on in Italy now I think it's very irresponsible. I think if they keep having this disagreement between the north and the south and the south is not disciplined enough, and let's say, the north doesn't show enough solidarity, then we're going to keep having an unfinished euro architecture.

Sputnik: What can you say about Germany? Germany has a weakened government after the last elections and they have actually been opposing the launch of a European scheme. Do you think it's likely now under the current situation with Germany taking a bit of a back seat? Do you think it is likely that the idea could actually be adapted?

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Antonio Moreno: The time that Germany says we're going to go [for] full euro reform, then I think things will happen — but we haven't seen that yet. I doubt that's going to happen with the more fragile government that they have now, with Mrs Merkel stepping down because I think any measure will be seen as kind of a weakening hand on European businesses.

There could be a chance when there's another election in Germany if you have the parties supporting more risk-sharing and more [of the] European project. If those parties get the majority I think that could be crucial for strengthening of the euro, but I think in the meantime, in the next two-three years, I don't think we're going to see that.

Sputnik: Then there's also the problem that there are smaller EU members, such as the Netherlands — they're a little bit irritated by the fact that the big decisions are made by the biggest powers. Is that something that's quite widespread among EU members?

Antonio Moreno: Germany is going to be key here. If Germany goes with the strong euro reforms, then these countries as Holland and Finland, especially these two countries, the small northern countries, I think in the end they will give in; but I think it's going to be a lot of politics here, because these countries will then want safeguards that in case of a bailout they won't contribute as much. I think there are going to be a lot of negotiations going on.

But let me be clear, I think if Germany's in the mood of adopting these reforms that the euro really needs, then the smaller countries will really eventually join. I think maybe in two years, there will be less risk and then Germany will be eager to join, but I think they're still uncertain and while it is still uncertain, then the euro is in danger.

The views expressed in this article are solely those of Antonio Moreno and do not necessarily reflect the official position of Sputnik.