Euro Zone situation much better than reported: EFSF chief

Contrary to the mainstream media perception and market beliefs, economic situation in the troubled Euro Zone is improving on the back of significant measures taken up by the member-nations, European Financial Stability Facility (EFSF) Chief Executive Klaus Regling said here.

Stating that at the macro level much has improved since the sovereign debt crisis broke out five years ago following the fall of some leading American banks, he defended the concept of the euro and said both fiscal and current account deficits have improved and are already better than many other developed countries.

“Despite the lack of confidence of market participants and scepticism, the member-states of the Euro area, hence the European Union, have made significant progress on national level in reducing macroeconomic imbalances,” Klaus Regling said here last evening.

Klaus Regling was delivering the first International Institute of Strategic Studies (IISS)-Oberoi lecture on ‘The Euro and the future of Europe’ here. The IISS is a leading London-based institute dealing with geo-political and economic issues.

Explaining some of the measures taken up by the Euro Zone nations and their impact on key economic indicators like improving fiscal and current account deficits, moderate inflation among others, he said the indicators show sound improvement from the debt crisis.

According to the EFSF chief, fiscal deficit in the Euro Zone was only 4 percent in 2011, which is down from around 6 percent from the previous year.

“This fiscal deficit is half that of the deficit of the US or Japan. Also, the Union (EU) has projected 3 percent fiscal deficit next year,” he said, adding macroeconomic stability in member-nations like Spain, Italy, and Greece are stabilising.

Klaus Regling also said the current account deficit, which was negative for many crisis-ridden economies, is also improving and have turned into current account surplus for some nations like Ireland.

He also said the Euro Zone economies have strengthened their economic surveillance mechanisms, apart from providing more cushion for market provisions along with bridging the institutional gaps.

“Reforms taken up on the national level along with strengthening of economic governance with steps to improve economic growth at the EU-level have started to deliver results,” Klaus Regling said.

According to the EFSF head, if the adjustments and reforms are duly implemented, the Euro Zone is likely to come back to its potential growth rate sooner than being projected.

“If the adjustments and reforms are duly implemented, then the Euro (zone) will be back on its long-term potency growth path of 1-2 percent growth,” he said, adding this growth rate is sustainable taking into account the high per capita income and negative demographic dividend faced by Euro Zone economies.

Also, competitive gap between the Northern and Southern economies in the continent is also coming down, he said.

Referring to the banking system, where many were bailed out with public money, the EFSF head said bank capitalisation has improved in the Euro Zone after significant capital infusion from the European Central Bank.

“Inflation risk for the EU economy is low, which is just above 2 percent. Deflation risk is also low in my view,” he said, adding devaluation of the euro will not work in favour of the economy and reduction in normal income is preferable to put the growth engine back.

Talking about future responses of the European authority, Klaus Regling said treaties like European Fiscal Compact, provision for penalty on member-nations on not adhering to economic adjustment provisions along with strong firewalls would make the economic fundamentals of Euro Zone stronger.

“Steps in the direction of bank unions, strong fiscal union, strong economic union and political union will make Euro area stronger,” he said.

He also added the EU is working on steps like single deposit guarantee fund, one banking regulation, national supervision, single fiscal union, higher market union to make the fundamentals of the economy stronger.

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