Known as the ‘Brains Behind the Banking Union’ Wieser is also a former President of the Economic and Financial Committee of the European Union. The US-born Austrian economist sat down with GLOBSEC to discuss current developments in the European Union and the bloc’s economic world, as well as about Slovakia’s experience in the EU, the Banking Union, and the future of Europe.
As GLOBSEC is based in Slovakia, we would like to kick off with a question related to the country in the Eurozone. When it joined the Eurozone in 2009, there were many promised benefits. Which of these materialised? Back then, was it a good idea for Slovakia to join the Eurozone?
Let me first say that I think Slovakia has been one of the huge economic success stories of the new Member States. I remember going to Slovakia in the early 1990s…20-25 years later, the differences are mind-blowing. Things have improved tremendously. I think membership in the European Union and the Eurozone has been beneficial to Slovakia. The Euro is of course not only a monetary phenomenon or only an economic project. It is also a political project. For me, having worked for so long in and with Brussels, it is clear that those countries which joined the Euro, joined the political core of the EU as well, in monetary terms, also implies in political terms.
The first 10 years of the Euro brought about quite staggering growth rates in the southern Member States of the Eurozone. In retrospect, these were worrying because to a large extent, they were based on credit bubbles as we saw in Spain, Greece, Cyprus or more to the north, in Ireland. Fortunately, Slovakia did not go this route.
I think it has brought about monetary stability and more certainty for investors in Slovakia. Moreover, it reduces transaction costs. But I think all these things have very long-term effects and you cannot measure them from one year to the other in GDP growth rates.
Purely in the economic field, the Euro increases stability and efficiency and is therefore good for foreign direct investments. In the case of significant monetary turbulences, the Euro is a very strong umbrella over all our economies. In summary, I would say Slovakia has profited enormously, both politically and economically, from joining the Eurozone.
The Euro has known significant turbulences the past years. You have been at the centre when these developments took place. You are often called “the brain behind the Banking Union”, can you explain to us what the banking union currently exists of and what future steps are to be taken? Why has it been beneficial in fighting the economic crisis?
In 2008-2009, the financial crisis hit the banking sector and a crisis unfolded in Europe. The CEO’s of banks went to their respective Prime Ministers and Ministers of Finance and asked for government support. Although national governments were willing to give government support, the banks would not want this as they would be forced to change their business model by the competition authorities of the European Commission. European banks were capitalised to an unsatisfactory degree and everyone was dealing with this on a very national basis… Newer Member States were less affected by this as the ownership of their banks was often still with countries from the older Member States.
In the US, the problem was more rapidly dealt with. They have one Treasury and one Minister of Finance, who could swiftly make decisions that take effect immediately, without much argument. Banks in the United States were thus forced to adequately recapitalise, write off their non-performing loans and restart lending to the economy. In the European Union, we had 28 supervising authorities, 28 Ministers of Finance, and one Central Bank for the Eurozone. The crisis lasted so long because we did not have a banking union.
In 2012, we fixed this as we set up the Single Supervisory Mechanism under the umbrella of the European Central Bank – at least for the Eurozone. We have tightened regulations of the financial markets. We have switched around the financial responsibility for resolving banks. Before it was the taxpayer who was supposed to pay, nowadays, as a rule, it should be the owners, the bondholders, who are supposed to financially contribute to feeding a bank.
Moreover, we have set up the Single Resolution Authority for the Eurozone. It is seated in Brussels and financed by contributions from banks. In its full financing, it should have around €55 billion to contribute to such resolutions.
The one thing still missing is a Joint European Deposit Insurance Scheme or Network. I am quite confident that in 2018, we will find an agreement, in principle, to set it up under certain conditions over the next couple of years. With that, I think we will have put the final cornerstone into the European Banking Union. It will help us significantly in lessening the risk of such future crises, which stem from the interaction of bank balance sheets and sovereign balance sheets which could go wrong and mutually affect each other.
Many mechanisms have been implemented to prevent or reduce the risk of a future crisis. Nevertheless, some of these mechanisms have already been breached a couple of times. What would you see as guarantees that the banking union and its several mechanisms will not remain unenforced?
There is a fundamental difference between the European Union and its Eurozone and federal states such as the United States, Switzerland, Germany, or Australia. In federations, there is a political union with joint institutions, which are joint by constitutional powers and the Constitution. The European Union is and will remain for the foreseeable future a Union of sovereign states, with very strong constitutional powers remaining with the individual Member States.
If you look at monetary policy and the Maastricht Treaty, the European Central Bank has a strong, central, and single mandate for a single monetary policy. The Maastricht Treaty also already had a provision that if a single supervisor for the banking sector were to come about, it would have to be under the umbrella of the European Central Bank. There are provisions and primary laws for setting up such central institutions that make them democratically legitimised. Another policy area that remains very firmly anchored with the individual Member States: the budget. The fiscal authority – both on spending and taxing – are the cornerstones of the constitutions of economic policy of the Member States and will stay so for now.
This creates tension between those different policy areas. That is why we need rules. Rules, if well understood, are fine. They are even better if everyone sticks to them. In the area of fiscal governance, there are precise instructions in the Treaty on what to do if the Member States do not stick to their obligations. This has been further refined in the so-called Stability and Growth Pact, which over time, has got more and more complicated. I do not understand it anymore.
The system has become too complex because it is so rules-based. However, we will not sweep things thing away and have one central Minister of Finance, we will not have one central spending authority in Brussels through which everything could be controlled, we will not have one central tax authority in Brussels through which one could ensure that there is an absolute level playing field between the Member States. So, we will have to continue to rely on the fact that these things are based on rules.
How does one assure that? There is no certainty or true method of doing just that. What I think has been missing over the last 10 years is a better interaction between the people sitting in Brussels, the President of the Eurogroup, the European Commission and others in national parliaments. The people in Brussels…they all talk to each other. When Ministers of Finance talk amongst each other, they are all in favour of fiscal discipline. It is only when they go back and are confronted with the rest of their government, that these things tend to evaporate. In some countries even more so than others.
I strongly believe that there is a need to reinforce a strong dialogue with national parliaments and with other parts of civil society in order to create a larger political awareness to ensure that there is more support for fiscal discipline, especially within the eurozone, because the negative and positive spillovers of fiscal policy within the monetary union are that much larger than outside.
Is creating this political awareness a possible solution for preventing future crises from happening or for dealing with some of the current issues in the European Union?
I think there are currently a couple of things missing in Europe. Firstly, a productive debate within societies of what one expects from the European Union. Secondly, the wider engagement of Brussels with a wider civil society within the individual Member States.
Thirdly, focusing more on those issues which are really troubling the populations. The past decade, I have been working heavily on issues such as deepening the economic and monetary union and doing this and that within the Eurozone. But if you go out in the streets and ask a person passing by: “What do you think about the Banking Union?“ This person would look at me and say: “That is not my issue.“ And I would say: “So, what is your issue then?“ and this person would probably respond with internal security, external security, job security, how do we deal with a migration crisis in Europe, or how do we deal with the cohesion of our societies? These are the big things. If the European Union as a whole has no time to explain to individuals and their societies what it can contribute, then that is a massive communications failure. We need to show that together we are stronger, and it is much better than standing alone.
I talk about Austria, there are many people who criticise the European Union here. I usually say: “Look, the British are leaving the European Union and there will be an EU of 27. What if the remaining 27 Member States would leave the European Union? Where does that leave us individually?” The answer would be that it would be disastrous for Austria. In a world with the Americans retreating from multilateralism and both the economic and non-economic North Atlantic security concept, with the rise of very strong powers in East and South-East Asia, with the uncertain future emanating from the areas east of Slovakia, we can only tackle these risks and uncertainties jointly as Europe and as a European Union. In all this, the European Union as a whole is a small player. And if the EU is a small player… I have got news for you: what kind of player would Austria or Slovakia be?
As the European Union and its slogan say, ‘United in diversity’, we will hopefully be able to tackle these challenges united. However, there have been various divides within the European Union. The North-South divide, the West-East divide and others. What do you see as the most challenging divide to overcome within the European Union?
People tend to think they are at the centre of a dividing line. I can think of at least a dozen different divides within the European Union: North-South, East-West, large countries vs. small countries, non-Franco-German vs. Franco-German, etc… this is something which is to be expected in a union: it is not a divide, but more a difference of interests.
In the EU of 6 in the 1950s and 1960s, you had a fairly large similarity in income per capita. You had a huge similarity or identity in interest even, that the European community was something which overcame the divisions of the World War II. The more Member States the EU had, the more diverse the membership became. You had Greece, Spain, and Portugal who joined after Fascist dictatorships had been abolished. There was a very strong element of strengthening democracy and democratic institutions, but these countries were considerably poorer than any of the existing Member States. You had the UK, Ireland, and Denmark joining in the 1970s. The ‘free traders’ were already at the time very sceptical about any kind of deal or deepening that will be on more than free trade. You had the neutrals – Austria, Finland, and Sweden – joining in the 1990s, who essentially joined because they wanted to be inside of the internal market. You had the post-2000 memberships, which had everything to do with re-joining Europe, overcoming the old divisions and partitions on the European continent, security and strengthening democratic institutions. It then seems only intuitive that a European Union of 27 or 28 is much more diverse and different within itself than an EU of 6, 9, 10, 12 or 15.
The question is if diversity means divisiveness. Of course, that is not necessary. We need to find the ways and means to ensure that everybody articulates what he or she is expecting from the European Union, that the North and South somehow can have a similar or joint approach to economic policies, that the East and the West have a joint approach to how they articulate their concerns and non-concerns about deepening cooperation within the European Union. We need to jointly manage the black hole of €10 billion per annum which is left by the British. Will this be covered by spending less, or having more revenues or spending what we have more intelligently? Can we do it with policy reforms or will it be a shady last-minute deal between Prime Ministers at 4 am which will ensure that the status quo is largely maintained?
But I think that there is a more public debate about how divided we are than how the divisions are in reality. Needless to say, there are very different approaches to how one runs a government and what one’s attitude is towards outsiders. But the differences between let’s say the Hungarian and the Dutch government are probably smaller than the differences between how Mississippi and California are governed. We need to find solutions that do not paper over differences but let us live creatively within the differences.
Finally, do you have any advice for young Europeans who would like to contribute to a stable, secure and prosperous Europe? What can they do? What should their role be?
My son is studying abroad, and I would say two-thirds of his classmates are studying all around the EU. I think that is probably the big thing. Young people should go out and be curious, learn to embrace things that are new and sometimes strange or incomprehensible. Young people should approach this with tolerance and interest and not with an attitude of rejection. That is why I think that the younger generation will be better Europeans than my generation. If you look at the attitude towards things that are unknown and foreign, they are much more considered a threat to my generation than by the younger generations. Although it may sound general advice, I would say ‘do not be afraid’ be curious, engage in debates, travel and work all around the continent. I think this will make Europe a fantastic place to live in, to work in and to prosper in for the next dozens and hundreds of years.