European Commission Vice-President Valdis Dombrovskis is wary of US moves to deregulate the banking sector, saying the main lesson from the 2008 financial crisis is that international finance needs international rules. But he was positive about Greece’s fiscal adjustment and called on Athens and its lenders to give a “final push” to break the stalemate on the country’s bailout programme.
Valdis Dombrovskis is Commission Vice-President for the euro, also responsible for Financial Stability, Financial Services and the Capital Markets Union.
He spoke with Euractiv.com’s Jorge Valero and Sarantis Michalopoulos.
In its winter economic forecast, the European Commission gave a positive assessment of the fiscal situation in Spain, despite a significant deviation from the budgetary target. Is the adjustment process really on track?
The Commission’s opinion is that the budget for 2017 is broadly in compliance with the Stability and Growth Pact (SGP). When it comes to the nominal targets, what we see now is that they will be above what was projected before.
In an excessive deficit procedure, if the fiscal targets are not met, the next thing we look at is whether the necessary structural effort has been made. This is our assessment in the case of Spain. We expect the country will correct its excessive deficit according to the deadline set by the Council .
Are you concerned about the fact that the Spanish budget has not been approved by the Parliament yet?
We are currently working on the basis of the figures which have been provided so far. If there is any new development, of course we will need to take it into account in our projections and assessment. Of course we are aware of the political situation in Spain.
With regards to Greece, is it technically possible for the EU to support the bailout programme without the participation of the IMF?
We are working on the basis of the European Stability Mechanism Treaty. It says that the Commission is working with the European Central Bank and, whenever possible, in close cooperation with the IMF.
In addition, intense negotiations are currently taking place to ensure that we can successfully conclude the second review of the bailout scheme and also the IMF’s participation in the programme.
Eurozone and IMF officials met with Greek Finance Minister Euclid Tsakalotos this afternoon (10 February) to overcome the stalemate in the bailout programme after the lenders agreed to request an additional €3.6 billion in cuts by 2018.
Do you think all EU member states need to make it clear that they trust the Commission’s projections?
As the European Commission we certainly stick to our figures. If you look at the actual results in terms of economic growth and fiscal performance, Greece has over-performed on its targets. It was the case in 2015, in 2016, and we expect growth this year as well.
In 2016 Greece over-performed quite substantially regarding the primarily surplus target. We have every reason to expect that Greece is on track to meet this year’s primary surplus targets of 1.75% of GDP. In addition, it could bridge the gap toward a 3.5% surplus next year.
Do all the EU member states recognise those figures?
Discussions are currently ongoing. One of the elements is to bridge the gap between our forecast and the IMF’s projections, which are more pessimistic. We want to see how exactly to address this issue.
Eurogroup chief Jeroen Dijsselbloem recently said that, without the IMF’s participation in the bailout scheme, Greece would go bankrupt. Does the Commission share such a view?
As I said, the Commission is working within the ESM Treaty which foresees IMF participation whenever possible. That is our basis. I will not paint any negative scenarios because, at the current stage, when you see Greece finally returning to growth and over-performing on its fiscal targets, it is important all sides give a final push, including the institutions, the IMF, the Greek government, the parliament itself, and the Eurogroup, to come to a conclusion.
Are you optimistic about reaching a deal during the 20 February Eurogroup?
To be very clear with you, I would not put any dates on this. Given the circumstances, there is a need for a final push to reach an agreement without attaching specific dates. Substance is more important than deadlines.
Do you think that a ‘bad bank’ in the European banking system could be a valid solution to solve the issue of non-performing loans (NPLs), in particular in Italy? Is it time to create a European solution to a national problem?
NPLs are one of the concerns we have regarding the banking system. Overall, the system has substantially improved in terms of capital ratios and liquidity. But in several member states, including Italy, NPLs are an issue. We are working with those member states in the context of the European semester to facilitate the workout of those NPLs.
Currently we are assessing what kind of coordinated action could be done at European level. I expect these issues to be discussed during the informal Ecofin Council in April.
What is your opinion about setting up a European ‘bad bank’?
Right now we are putting the emphasis on coordination. We need to bear in mind that loans are issued in most cases under domestic laws. They are subject to domestic solvency laws and domestic court procedures.
We cannot expect a sudden harmonisation of all the domestic legal frameworks. We see quite substantial differences in NPL workout possibilities in many member states. In some countries it is more straightforward. In others it is more complicated, as it takes more time, and eventually return rates are quite low.
The question of benchmarking our insolvency frameworks, looking at which practices work and which don’t, or working with member states to make their insolvency frameworks more efficient could also facilitate addressing the NPLs. In addition, it could help the assessment of creating a secondary market for NPLs.
But once again, in this case laws governing those loans are mainly domestic ones.
Could this secondary market for NPLs represent an intermediary solution towards a fully-fledged European system?
I would not jump to conclusions. We are assessing the situation and possible solutions. Probably our discussion in April would provide more guidance.
Are you more concerned about Italy or Greece?
I would not draw this kind of comparison because each country is facing its own challenges.
Greece is a programme country. Debt is almost 180% of GDP and so on and so forth. Italy is under the preventive arm of the pact. It is not a programme country but public debt is the second highest in EU, above 130%. We had an exchange of letters with the Ministry of Finance to ensure compliance with the SGP this year.
The Italian authorities committed to delivering another 0.2% of GDP of structural measures to ensure broad compliance. We expect they will deliver by the end of April. The report on Italy’s compliance with the debt rule (article 126) will also be part of a package to be published next week.
You said the international financial system does not need deregulation, echoing ECB President Mario Draghi’s comments in the European Parliament. Trump wants not only to deregulate but to put American interests first in international negotiations. Are you concerned?
From the EU side, what we are emphasising is that there is a need for continued cooperation in international financial governance and supervision. We are willing to do this.
When we see signals going in the opposite direction, it raises certain concerns. It is one of the lessons of the crisis: international finance needs international rules and standards. We are not supporting deregulation or scrapping post-crisis financial frameworks. We will need to see the results of the review of the Dodd-Frank Act announced, and the practical steps the new administration intends to take.
What is clear is that Trump’s executive orders don’t add stability to the current framework. Does he represent a threat to the international financial system?
As I said, we have certain concerns. That is why we are sending the message of the need for continued international cooperation in this area. We need to see what these initiatives will mean in practical terms.