Response to the interpellation on euro crisis management and the Greece situation
Prime Minister Alexander Stubb Published in English on 6 February at 12.05
(subject to changes)
Finland has participated in managing the European economic crisis to save our common currency, the euro. Representatives of seven parliamentary parties have, during two parliamentary terms, been in the Government and made decisions on the crisis in order to defend Finnish jobs and the Finnish economy.
In the euro area, the financial crisis first came to a head in Greece. Correspondingly, Greece is the last member state on the road to recovery.
The other euro area states that needed help – Ireland, Portugal, Cyprus and Spain – have left their financial support programmes behind and have returned to the bond markets. Credit ratings have improved. Public finances have been balanced and deficits have been reduced. Unemployment is slowly improving, and economies have turned to growth.
Programme countries have been compelled to make structural reforms that have yet to be done in many other European countries.
Ireland is a good example of the positive effects of the reforms. The country’s economy is growing, and the fiscal balance has been improved. An oversized banking sector has been revitalised. Unemployment has been brought down to the EU average level. The country is repaying its debt to the IMF ahead of schedule.
Portugal’s economy is also growing moderately. The unemployment situation has improved. Local agreement has been increased in the labour market. Business permit procedures have been cut. State property has been privatised even more than was required in the programme. The pension system has been made more sustainable.
Cyprus is achieving the targets it was set in the financial support programme. The banking system has recovered, unemployment has begun to fall more quickly than anticipated and the economic downturn has slowed. Cyprus made a successful return to the markets 18 months ahead of schedule and will not necessarily take up all of the financial support it was allocated. Cyprus’ programme also includes an action plan against money laundering.
In exchange for bank support, Spain was only required to make financial reforms. The country itself stated, however, that more extensive reforms were necessary in order to balance the economy. Financial discipline in regional government is supervised by a new independent authority. Labour market flexibility and local agreement has been increased and the threshold for business start-ups lowered. Spain has already initiated loan repayments to the European Stability Mechanism.
Such progress in stabilising the euro area has been achieved with the help of Finland’s temporary financial assistance. We have reason to be satisfied with this.
The interpellation enquires about errors made in handling the crisis. In crises, big decisions often have to be made in historically unprecedented situations, under pressure and on the basis of the information available at the time. The possibility of error always exists. Contrary to what is claimed in the interpellation, the IMF has not said that serious errors were made in handling the crisis.
Monitoring aimed at correcting errors is an important part of economic adjustment programmes. Their implementation is monitored through regular interim assessments, in connection with which necessary changes to the programmes can be made. Particularly in the case of Greece, the breadth and depth the economic problems has become clear only over time. Here the IMF’s assessment team has drawn attention to the excessive optimism of forecasts.
The biggest errors were made, however, during the establishment of the Economic and Monetary Union as well as in the good years of the 2000s. The economic development of the euro area was favourable from 1999 right up to 2008. Unfortunately, growth was based on the growing indebtedness of a number of member states – in both the public and private sectors. The EMU was not prepared for times of crisis.
The financial crisis that began in 2008 and the subsequent crisis of the real economy as well as the debt crisis revealed the shortcomings of EMU structures. The euro area member states accordingly took steps to rectify the faults and strengthen the monetary union.
The fatal link between states and banks that prevailed in the European financial markets was revealed to be a frighteningly effective channel for spreading crises. This has been addressed by reforming financial market legislation. The EU banking union increases investor responsibility and harmonises banking supervision and crisis resolution. In 2012, Greece succeeded in achieving a debt restructuring with private investors in a controlled way such that no problems for other euro area member states arose from this.
At the same time, economic policy coordination was strengthened, because the efficient operation of the Economic and Monetary Union requires a responsible fiscal policy. The two-pack and six-pack legislative packages brought to the EU table the assessment of member states’ budgetary plans and monitoring of macroeconomic development.
The crisis convincingly showed that the existing rules were being interpreted in various ways and were not in all respects honoured. It would be important for the guidelines published by the Commission in January on the interpretation of the Stability and Growth Pact to clarify the situation.
I cannot, however, over-emphasise the fact that rules and the guidelines for their interpretation will only help if the political decision-makers respect them. Even when it is awkward and politically difficult. This is essential for the credibility of the Economic and Monetary Union.
From adhering to rules and a responsible economic policy, it is natural to turn to discuss the situation of Greece.
Greece has experienced an exceptionally deep recession. Its GDP fell by 25% between 2009 and 2014. The Greek economy has shrunk and unemployment has increased. The crisis has had a harsh impact on ordinary Greeks.
It should be noted, however, that the pre-crisis Greek economy was not sustainable. It was based on debt, a bloated public sector, corruption, tax collection deficiencies and inefficient domestic services protected from competition. Greece had consciously circumvented the rules of the Stability and Growth Pact through incorrect statistics.
The economic adjustment programme required in exchange for financial support from Finland and other euro countries has meant an overhaul of the entire Greek economy. This has been a hard price to pay, but Greece’s economic situation is now clearly better than in 2010.
The country’s economy has shown a structural surplus since 2013. A nearly 20% structural deficit has in five years become a surplus of more than 1½%. Such rebalancing is virtually unmatched in economic history.
At the same time, public debt has started to decline. The interest payable on public debt is also low, thanks to the very favourable lending terms granted to Greece.
The external balance has improved, and Greece’s current account is currently in surplus. Unemployment has finally begun to fall.
Although the Greek economy is now smaller than before the crisis, it is clearly more stable. It has been funded through work, not by debt, and is based on significantly strengthened competitiveness. According to economic forecasts at the end of last year, Greece would be among Europe’s fastest growing economies in the next few years. Greece must continue on this path.
The alternative to financial support and the economic recovery programme would have been “turning off the taps” and a comprehensive debt restructuring in 2010. This would have been considerably the worse of two unpleasant options.
If Greece had defaulted on its loans after the outbreak of the crisis, its economy would probably have collapsed. The Greek banks would have fallen, depositors would have lost their savings and wages would have remained unpaid. At worst, Greece would have pulled down with it the whole euro area, which was unprepared at that time.
The support given by Finland to Greece consisted on a direct loan as well as funding guarantees under the joint European Financial Stability Facility. The loans will be paid back in due course. The Government will adhere to this principle.
The impression created by the Opposition that cash has been granted imprudently by Finland to Greece and other crisis countries is absolutely incorrect. Finland has not suffered any credit losses from its financial support programmes. Taxpayers’ money has not been lost. Not a single cent.
The Ministry of Finance publishes semi-annually a report on the Finnish State’s liabilities, commitments and receivables arising from the euro area financial support programmes. According to the report, the Finnish State’s liabilities were no longer rising significantly last year, because the stabilisation trend in the euro area continued.
In 2010 Finland granted Greece a EUR 1.0 billion bilateral loan during Prime Minister Vanhanen’s Government.
With respect to Finland, European Financial Stability Facility commitments valued at EUR 6.61 billion, including interest and over-guarantee, are in use. This covers the EFSF’s funding guarantees given in the Irish, Portuguese and Greek programmes. Finland’s imputed share of the loan capital of Greece’s second programme is around EUR 2.74 billion.
Finland paid its EUR 1.44 billion capital contribution to the European Stability Mechanism in one instalment in 2012. Finland’s capital contribution is considered to be a state asset item.
Via the EU budget, Finland also has imputed liabilities of around EUR 900 million. Of the financial support programmes granted by the IMF, Finland’s imputed contribution is around EUR 350 million with respect to euro area financial support programmes.
The commitments and contributions are significant. That is why they have been discussed in-depth in Parliament. And why it is the Government’s duty to look after these commitments. To ensure that the beneficiaries act in the agreed way.
Particularly in the case of Greece, it has been necessary to intervene repeatedly in the implementation of the programme. Interim assessments have been late in arriving, and instalments have been postponed when reforms have been delayed. In Finland, too, we certainly know how difficult it can be to decide on structural reforms. Under external pressure, Greece has, however, made the necessary adjustment decisions, if perhaps late in the day.
The early elections held in Greece on 25 January have increased the political and economic uncertainty surrounding the country. Before the decision to hold the elections, Greece was on economically good path.
In the discussions that preceded the Greek elections, the question was asked in Finland, too, whether Greece ultimately can cope with its debts. It has been suggested that it can never pay back its debts.
This claim should not be left unchallenged.
The restoration of debt sustainability for Greece is the objective of the financial support programmes. It is for this reason that the terms of the loans have been set such that Greece can cope with them. Debt sustainability is impacted by economic growth, the fiscal balance and debt servicing costs, and the ability to refinance maturing loans at a sustainable level of interest rates.
Concessions have been made to loans of countries recovering from the crisis to ensure that their return to the bond markets would be possible. Greece’s debt ratio is still high, but its ability to manage its debt is being restored. The interest rate on the debt is so low and the repayment period so long that attending to the debts does not require from Greece on an annual basis any greater efforts than from other indebted euro countries.
The economic programme approved by Greece includes increasing the public primary surplus to just over 4%. This would be sufficient to start reducing the debt ratio.
The first actions of Greek’s new government, however, have raised questions as to whether the country is still committed to that which it has previously agreed. Changing the programme would require a new agreement with euro countries. This cannot be decided by a unilateral announcement.
Let me say this as clearly as possible: Greece and the Greeks are not victims of the adjustment programme and support loans. The difficulties encountered by the Greeks were not caused by the indifference of Finnish or German taxpayers. They were caused by mistakes made in Greece over the years and decades.
For its own future, Greece must continue to rebalance its public finances and reform its structures. There is no shortcut, as we know from our experiences in the 1990s.
If the Greek government shows its commitment to strengthening the country’s economic situation, Finland is ready to discuss the details of the programme. Also, an extension of the programme can be taken for consideration, provided that the completion of the fifth interim assessment is an objective. This issue should be settled during February.
A disorganised exit of Greece from the programme would not be in anyone’s interests. The Government wants to avoid any such uncontrolled situation. The keys to a solution are in Greece’s own hands, however. It would be unfortunate if the sacrifices made by the Greeks in recent years now flowed into sand as a result of precipitous decisions made in Athens.
Finland and the other euro area countries have no grounds for treating Greece differently from the other countries covered by the support programme. Especially not when Ireland, Portugal and Spain have proved the effectiveness of the adjustment programmes by their success in leaving them behind. It would not be very fair to these countries to give Greece special treatment now.
This principle means that, after the concessions previously made, there is no longer any possibility of significant additional decisions. I have also stated this to the new prime minister of Greece.
A cut in debt like that suggested in public debate is not acceptable to Finland. It would not support the objectives of the financial support programme, nor would it be according to EU rules.
A review of loan conditions has been compared in Finnish discussions to a debt cut. Even though Greece’s loan terms have been revised on three occasions, the issue is still about a loan that will be paid back – even if repayment begins after a longer period and an interest rate cut reduces the imputed net value of the loans. Debt forgiveness would mean abandoning hope of receiving money back. This is the point at which the limit of this Government’s solidarity lies.
Politics and the economy are often examined from a very domestic perspective. It is thought that the decisions of other EU countries do not affect us. One of the lessons of the economic crisis is that yes, they do. We are in a common union and a common currency. If they had no effect on us, this interpellation would not have taken place.
Now four successive Finnish governments have had to make decisions relating to Greece. It seems that the next government, to be formed after the April parliamentary elections, will also be unable to avoid discussion of Greek affairs.
Therefore, it is still opportune to underline the principles that have guided Finnish decision-making in the management of the euro area crisis.
A stable and sustainable euro area is in the interests of Finland and the Finns. The euro has brought us stability that we could only dream of during the time of the Finnish markka. Interest rates are low, and inflation has been moderate. The Government is committed to the euro and to strengthening the Economic and Monetary Union.
The Government has had to invest time, effort and political capital in handling the euro crisis, because we wanted to safeguard Finland’s economic growth and employment. We have done so, even if the solutions have not always been easy or popular.
We are now returning to the path of stabilisation. The Economic and Monetary Union had been strengthened to ensure that we can prevent and resolve crises that threaten the euro area much more effectively in future.
We are not yet in safe waters, however. Economic growth is weak, and debt levels are high. Confidence is fragile. Patience, perseverance and unyielding determination are still required. They are required both from the Greek government and from the decision-makers elected by the Finnish people – the Government and Parliament.