I Attended Jeroen Dijsselbloem’s Last Lecture as Eurogroup’s President
The theme? Challenges for Eurozone.
Sat between a Spanish student and an English businessman, I attended Jeroen Dijsselbloem’s lecture at the London School of Economics and Political Science, on the second Thursday of 2018. Say what you will about private education, and I will add a few things, but it is a privilege like few others for a university to host such events.
His tenure as President of the Eurogroup is over, so this was his last address as one of the lead architects of the Euro project. As expected, the room was filled to the brim with an international mix of young students and men in suits of ambiguous professions.
I’m usually suspicious of men in suits but I have to admit that Dijsselbloem has a certain charm, which is a rarity among econοmists. He is basically a walking economics textbook, yet somehow manages to be funny. When asked a question, he will reply with a list of factors and an analysis of causality before he concludes. His terminology is well-rehearsed; accurate to the standards of an economics journal, but simple enough for the layman.
Three minutes in his introduction, Prof. Kevin Featherstone said “[Dijsselbloem] had the pleasure of working with Yannis Varoufakis. They didn’t get along.” The audience laughed. A pattern was launched that held true henceforth.
At the beginning, he made it clear that he wasn’t eager to talk about Greece, Varoufakis or Italian banks. The Q&A with the audience and some of Prof. Featherstone’s comments, made it clear that the room was keen to hear all about these hot topics and peak behind the closed doors of the negotiation process. He humoured everyone.
Speaking to an audience that expects to hear how radical Varoufakis was during negotiations, it wasn’t hard for his comments to get laughs. Perhaps this speaks to Varoufakis’s success in branding himself as the lone wolf of European economics and shifting the conversation from economic figures to political ones.
When Prof. Featherstone mentioned one of Varoufakis’s harshest statements when he characterised Dijsselbloem as Schauble’s puppet, Dijsselbloem took a pause before answering. The crowd laughed a little, as if his pause was comedic, someone behind me shouted something aggressively in Dutch. He then answered calmly that Varoufakis had no respect for anyone in the Eurogroup apart from Schauble, because of what he perceived as power. I wouldn’t say that it was his intention to be funny, but rather the audience’s interpretation of his actions.
In his view, “Everyone in the Eurogroup has a right to veto. The toughest countries were those whose GDP per capita is lower than Greece. When Varoufakis asked to increase the minimum wage, as a Social Democrat I was sympathetic to this cause, but in the middle of a recession I thought it didn’t make sense. The Baltic countries, for example, who have much smaller GDP per capita than Greece, would say “I also want the minimum wage, but I can’t afford it.” The idea that Germany was the toughest in the negotiations is not representative of the kind of debates we had.”
His address was coming from a place of controlled optimism. He made note of the positive economic indicators across the Eurozone (growth, unemployment) and the positive structural reforms undertaken by most governments, affirming that we are out of the woods.
Looking to the future, his main concerns are increasing competitiveness and the Eurozone’s capacity for shock absorption. “If another crisis happened within the next one or two years, we wouldn’t be able to fix it. You know the expression, fix the roof whilst the sun is shining. Well, the problem now is that our toolbox for dealing with future crises is empty. We need to create more tools.”
For many, the first tool that comes to mind is a common fiscal budget. Dijsselbloem disagrees. “We need to take a step back.The crisis was in part a result of the irresponsibility of governments.” In all fairness, he later made reference to the fact that Germany was the first one to forget the fiscal rules that had been agreed on at the start of the EU. “After that everyone followed. Forgetting fiscal discipline during the boom was very dangerous.”
Thus many of the tools that were necessary to deal with the crisis were and remain national, he insisted; labour reforms, pension reforms, banking reforms that would attract foreign capital when fiscal capacity has reached its limits. This is a true statement, but I found it slightly at odds with what he said later. “It’s not useful to look at the level of the member-state.” The German car industry is not really German. Some parts are made in Poland, software is made in the Netherlands and the leather might be produced in France.
“A strong union is multifaceted.” His measure of successful convergence seems to be shock absorption. Correspondingly, he is interested in “sustainable growth.” If that is accomplished, then the necessity for shared fiscal capacity will be minimal. Echoing Mundell’s model of the optimum currency area, he identified the need for labour and exchange rate flexibility that would allow for the necessary wage and price adjustments within the monetary Union. There are many factors that affect such flexibility, such as labour and capital mobility, that are tackled by legislative rather than financial authorities.
Already, partly due to Macron’s explicitly pro-European stance, “The deal between the French and Germans about Eurozone reform is about security and immigration reform first, and financial integration later.”
During the last Eurozone summit in December, two things were “roughly agreed,” he told us. The first was reforms on the banking sector, including the function of the European Monetary Fund as a backstop to the banking union. In other words, they will set up a safety net for the Single Resolution Fund. Additionally, the effectiveness of the European Stability Mechanism will be recognised institutionally. It might provide credit to the resolution fund, or help reforms in different member-states. The leaders will hold another summit in March, and expect to have decisions by June. “These are interesting times fuelled by optimism,” he added.
The baking reforms are very important, both in fostering shock absorption but also in terms of social justice. At the beginning of the EU, money was very cheap and risk was not appropriately priced. Unsurprisingly, this led to rampant lending, both by governments and banks, who didn’t really “understand or acknowledge the risks. They have admitted this to me.”
Bailing out the banks that were previously assumed to be ‘too big to fail’ was a big mistake, he repeated throughout the event. He was not in office when that decision was made, but he repeated that it was a mistake. He said it is “understandable”, given the circumstances.
Another regret he had was saving the hardest reforms for Greece for last. The Samaras government “didn’t have the nerve to do it,” so it fell on Tsipras. By that time the Greek public had been through a lot, and the hardest was yet to come. His relationship with Alexis Tsipras is very good. “We always managed to sort things out and keep Greece in the Eurozone,” he remembered.
Dijsselbloem identifies as a Social Democrat, albeit he is considered, in his own country, to be on the conservative side of the spectrum. “I am aggressively against social fraud. Everyone needs to put in the work for welfare to work,” he said with a tone of ideological conviction.
It is true that under his leadership a lot of necessary and painful reforms happened. Judging by economic indicators, Europe as seen from above is on its way to recovery. But that is only half of the story.
My perspective is informed by the experience of capital controls, which are still in place. That was a reigned-in run for the banks, the scariest scenario in any economics textbook. It is informed by the fact that taxes in Greece remain very high, and will for the foreseeable future. My experience is informed by the pain Greece had to go through in order to sort itself out.
Austerity was not pretty, and arguably not necessary to the extent that it was implemented, as many economists would agree. After all, there are isn’t one recipe to be followed when pursuing economic stability and prosperity. Some are worse than others in achieving the desired end. Amongst the best ones, policy makers have to make a choice, and that choice can never be purely mathematical.
There probably was an element of making an example out of Greece in the Eurogroup’s decisions, as is revealed by Dijsselbloem’s words on “social fraud.” There is a rationale behind that logic, and it should be recognised. What there can be no ambivalence about is that, once again, the taxpayers paid for mistakes made by the governments and central banks. They were the ones who failed to price risk at appropriately and created a financial bubble.
But that is just my perspective. I am very happy to have heard a different perspective on the crisis from someone who partook in the decision-making process as much as Dijsselbloem.
As I walked out of the room, the person in front of me was googling “Varoufakis”.
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