Social cohesion, youth unemployment, solving the brain drain, completing the banking union are the major priorities in post- crisis EU, before a possible new recession, according to Maria Demertzis of the Bruegel Institute. She also insists that structural reforms are really an absolute necessity for Greece

Greek Business File, April – May 2019

The policy of fiscal rectitude had negative aspects and results during the recent economic crisis in Europe, especially in countries with bail-out programs, Greece being on top of the list. In contrast, Germany seems to be the only winner. This element has already fostered euro- skepticism, which is gaining ground every day and threatens to dramatically change the status quo after the upcoming European elections. Do you think that the Berlin- Paris axe will recognize this difficult situation in time to reverse the austerity policies or not?

I think that economic policy in the Eurozone is a broad issue, there are no big winners or big losers, we are all in this together. I believe that macroeconomic stabilization must happen in a coordinated fashion. It is true that the one major mistake in the Eurozone is that fiscal policy has been pro-cyclical, when it actually should have been counter-cyclical. This is the thing we need to fix for the new business cycle, as we are about  to enter a new recession. I believe it is important to be able to use all the tools, and this tool (the counter-cyclicality of fiscal policy) is a signifi cant one. The mistakes of the past – in terms of the design of the fi scal framework – need to be reckoned with. We need to align macroeconomic policies with the challenges of the future.

According to a recent study of the German think-tank Centre for European Politics, Germany and the Netherlands recorded a big increase of GDP per capita following the introduction of the euro. On the other hand, French and Italy – two countries that are witnessing a surge in euro-scepticism – suffered a loss of prosperity. What do you think about that?

I do not think that euro was the problem here. I think that the way that the countries entered the common currency was very diff erent, and that explains in part why the crisis hit. The level of preparation was not the same. You are right that Germany and the Netherlands have gained out of this, but they were very well prepared. What I mean by that is that they were quick to adapt to the challenges. As we move south, countries were less prepared to make the required adjustments. Germany in the early 2000’s undertook an enormous structural reform endeavor that really paid off . This is the example that the southern countries must now absolutely follow.

Are you saying that there is no alternative to structural reforms?

Yes, structural reforms really are a one-way street. Especially for Greece, where there is no space for macroeconomic policy, fiscal policy and monetary policy.

How easy is it for these reforms to be implemented in an environment of slowing growth?

Indeed, structural reforms are far more difficult to implement during a downturn. That is why they should be done during economic upturns! But there we are, we don’t have the choice anymore. At this point, the urgency is so great, that we just have to pursue them.

What are the main challenges of the economic policy at EU level that the new European Commission will have to tackle?

We have spent ten years trying to put the financial side of the EU in place. During this time, there were significant losses in terms of welfare. It is time that we go back and look at the real side of the economy, the productive capacity of the economy. Most importantly, we must try to eliminate the divergences that have emerged after the global financial crisis. Social cohesion, youth unemployment, these are issues that are now huge priorities. Concrete plans to move forward require agreements and one of the problems we have in the EU is that we do not all agree on what the way forward is. So, let us find those things that we agree on, things like trade. If we were to enter a trade war, we could actually deal with that in a very concrete fashion. If there is any space in the context of the euro to help solve the brain drain, that would be my number one priority in order to ensure convergence.

There has been a lot of talk about the need to improve the architecture of the Eurozone, promoting deeper integration. Where do we stand?

It is true that under the duress of the financial crisis, the EU moved rapidly. Now that the urgency is not there anymore, I’m afraid that the ability to mutually agree among ourselves has become compromised. I would argue that the least we can do is fi nish what we have agreed upon and that is the banking union. If we could do that, it would be a positive development for the next five years. However, I am not very optimistic…

UK has always been a net contributor to the common budget. Brexit means among other issues that the common EU budget will suffer from a net loss, which will deeply aff ect member states with weak fi nances. How can EU prevent these negative consequences for the weaker member states?

The contribution of the UK to the European problem is the least of the problems, in my opinion. The most interesting aspect is the future relationship between EU and the United Kingdom. We are not on a very satisfactory path there, but I believe that at some point in time, we will reach a good relationship with the UK and indeed, we should! This would reflect not only trade considerations, but also political ones. The UK is a long-standing ally of the EU and we should not allow it to come between us. It is unfortunate that the UK is leaving Europe but it is certainly not leaving it geographically! Therefore, the alliance of the EU and the UK will remain for a very long time.


Maria Demertzis is Deputy Director at Bruegel. She has previously worked at the European Commission and the research department of the Dutch Central Bank. She has also held academic positions at the Harvard Kennedy School of Government in the USA and the University of Strathclyde in the UK, from where she holds a PhD in economics. She has published extensively in international academic journals and contributed regular policy inputs to both the European Commission’s and the Dutch Central Bank’s policy outlets.