Mr. Regling, since 1 July 2010 you have been in charge of the European Financial Stability Facility (EFSF), which can take out loans for euro area member states facing financial difficulties. It’s your job, as it were, to hold up a “waterproof umbrella” for the euro. How successful can that be?
The EFSF provides short-term liquidity support to euro area countries that no longer have access to capital markets at acceptable interest rates. The loans are tied to strict conditions in order to balance the budget and improve the competitiveness of the country. This approach has successfully proved itself over many years at the International Monetary Fund. Virtually all the countries that the IMF has supported eventually returned to the markets. The EFSF works in the very same way. We buy time for the affected countries. However, the countries have to do the necessary homework to regain their creditworthiness themselves.
It is your task to gain the confidence of investors. What are your arguments in favour of the euro? And what confidence is there in the currency outside the euro area?
The euro symbolizes the highest level of integration in Europe. Additionally, the common currency has been an enormous success during its first decade. It has protected the European internal market and promoted trade. On average, inflation has been lower than during the deutschmark era in the preceding 50 years. Furthermore, today the euro is the world’s second most important reserve currency. That reflects the international confidence in the common currency. In concrete terms, where EFSF loans are concerned, these have received the best possible evaluations of the rating agencies. Investors’ interest in EFSF bonds is very large worldwide.
Which countries have sought your help so far? What is the maximum amount of support that the EFSF can provide? For how many countries would the money suffice?
Until now Ireland has been the only euro area country to apply for financial assistance from the rescue fund. In the coming two years the EFSF will grant Ireland loans for a total of 17.7 billion euros. That does not even equal 10% of the total assistance that the EFSF can mobilize. Accordingly, sufficient funds are available for the time being.
You recently said: “Borrowing money from us should not be cheap.” What do investors and ordinary citizens gain from that?
Policymakers have rightly decided not to dispense cheap money to stricken countries. It is the responsibility of every country to maintain its access to capital markets through solid budget management and an ongoing policy of reform. If it loses creditworthiness in spite of that, then the rescue fund is available as a last resort. The margin that we add to our refinancing costs enables us, on the one hand, to build a cash reserve, which is necessary for an AAA rating, and serves, on the other, as a bonus for the guarantor countries after the EFSF has paid back all the debts. The German federal budget will also benefit from this.
There was criticism in Germany and internationally about the setting up of the EFSF. Was the EFSF absolutely necessary? What would have been the alternatives?
European economic and monetary union was launched over ten years ago without the safety net of a crisis resolution mechanism. In the course of the debt crisis this has proved to be a problem, since unlike the USA and Washington the euro area with its 17 individual sovereign states does not have one fiscal rescue centre. That’s why the EU heads of state and government decided in mid-December to establish a permanent crisis resolution instrument, the European Stability Mechanism (ESM), which will be built on the EFSF. The talks about the concrete shape of the ESM are scheduled to be completed by March.
When the permanent crisis mechanism starts work in 2013, will – to put it bluntly – everything be back to normal again?
The crisis management mechanism is only one element in a comprehensive package of measures with which Europe is responding to the debt crisis. In addition to improved economic governance, i.e. more stringent budgetary coordination and systematic economic policy monitoring, the EU is tightening up numerous rules governing financial markets. Since the beginning of the year three new European regulatory authorities are monitoring the banks, insurances and share markets in the internal market. At the same time, the European Systemic Risk Board (ESRB), which is based at the European Central Bank, will be keeping an eye on the stability of the entire finance system. All this facilitates crisis prevention, even if it cannot completely rule out the possibility of a renewed financial crisis in the future. It integrates numerous security precautions that will significantly hinder the development of turbulences in the economy and on the markets.////
Interview: Martin Orth
Klaus Regling
The senior European official has been CEO of the European Financial Stability Facility (EFSF) since July 2010. The EFSF assists euro countries in financial difficulties and is planned to become a permanent crisis resolution mechanism in 2013.
