Few people know the euro like Klaus Regling. As a senior official in the German Finance Ministry during the 1990s, Regling helped lay the groundwork for European economic and monetary union. Then, after a stint as managing director at hedge fund firm Moore Capital Management in London, he headed the Brussels directorate that oversees the single currency, from 2001 to 2008 leaving just before the financial crisis that would wreak havoc on the euro area.
Last month Regling, 62, took charge of the European Stability Mechanism, a new bailout fund with capital of €700 billion ($905 billion) and lending capacity of €500 billion that European Union leaders see as a fire wall to contain the blocs debt crisis. If Spain requests EU assistance soon, as most analysts expect, the ESM would be able to buy the kingdom’s bond issues, while the European Central Bank could purchase short-term Spanish debt on the secondary market. Regling discussed the European debt crisis with Institutional Investor International Editor Tom Buerkle during the International Monetary Fund’s annual meeting in Tokyo last month.
1. How significant is the launch of the ESM?
It’s an important building block in completing the euro areas institutional architecture. There’s never one miracle step that solves everything, but we have come a long way. We started in March-April 2010 with the Greek program. Then we launched the European Financial Stability Facility in May-June 2010. And now we have the ESM. The advantage is it’s a permanent institution. We have capital, the biggest of any international financial institution at €700 billion, of which €80 billion will be paid in. That makes the ESM more stable. Under the EFSF we relied on guarantees of the 17 euro area countries, and when one of our triple-A members is downgraded, it automatically affects the EFSF rating. For the ESM there’s no longer this clear link because the €80 billion is there, cash.
2. Does the ESM have the capacity to take on both Spain and Italy?
Let’s say €50 billion of the ESM would be used for recapitalizing Spanish banks, so €450 billion would be left. It would be unlikely, in particular for large economies, that countries would be taken completely off the market like we did with Ireland, Portugal and Greece. In the case of a precautionary arrangement, primary market purchases can be done up to 50 percent of the issue; it would probably be less, particularly if the ECB were to step in and bring down rates in the secondary market. Therefore the €450 billion in my view is more than sufficient.
3. Why should Greece adjust its economy inside monetary union rather than exiting and devaluing?
Everybody who looks at the two scenarios comes to the conclusion that its much, much cheaper to stay. Standards of living would not look better if Greece leaves. It would be worse. There would probably be chaos for a while. There would most likely be bank runs; there would be capital controls. Greece leaving is the most expensive solution, for Greece and for the euro area. I don’t think that one can prevent incomes from falling to a new equilibrium by leaving the euro.
4. When does Europe start growing again?
One has to realize that in an adjustment phase, particularly in cases where competitiveness has to be restored, GDP cannot grow because incomes have to be cut. The mistake analysts often make is to extrapolate short-term trends for years and years and say, Terrible debt dynamics; how can they ever grow out of their debt problems? But of course there will be a turning point once competitiveness is restored. We see early signs of that already because exports are growing in almost all of the countries in difficulties; current-account deficits are coming down. And I have no doubt that once this adjustment period has been concluded at the moment we are halfway through then the turning point will be there. Think back to Turkey in 1999. I was working in London [at Moore Capital]. The traders around me always said: Turkey, totally hopeless. They will never be able to service their debts. The markets just don’t get it. They forget that economies move in cycles and that when competitiveness is restored, there will be growth again. In Turkey now, the debt is 40 percent of GDP. It’s a big success story.
5. Has the euro been worth it?
The answer is a clear yes. I remember life before the euro. We had the last intra-European currency crisis in 1995, triggered by the Mexican tequila crisis, and within weeks the deutsche mark appreciated 20 percent against the lira. It was great for me because I go on vacation in Italy, but Volkswagen could no longer compete with Fiat. At the end of the year, Deutsche Bank estimated that Germany lost 1 percent of growth because of this. So that’s a good economic reason. Basically, the single market is protected by the euro.
