Daniel Gros : ‘Let a euro-zone member go bankrupt’

Interview with Daniel Gros, Director of the CEPS, on the old and current problems of EU economic governance and potential solutions

Daniel Gros, Director of the Centre for European Policy Studies (CEPS)

Daniel Gros is a leading political economist. His current research concentrates on European Monetary Integration, the impact of the euro on capital and labour markets, as well as on the economic transition in Central and Eastern Europe. Since February 2000 he is the Director of the CEPS in Brussels, where he has long worked as a researcher.

Besides having worked as an economist at the IMF, he has been an Advisor to the European Commission in Monetary Affairs, to the European Parliament and to several national governments and central banks for many years.

Daniel Gros has taught at various universities including the College of Europe, the Catholic University of Leuven, the University of Frankfurt and Bocconi University.

He is the editor of Economie Internationale and International Finance. His widely-cited articles have been published in numerous academic journals, he wrote several books and he regularly takes part in major debates.

Born and raised in Germany, he studied at the University of Rome and holds a PhD from the University of Chicago.

Recent statistics show that the EU27 unemployment rate has risen to 9.6% and the youth unemployment rate (under-25s) even reached 20.5% in May 2010. In your articles, you emphasize on the strong role of education in employment. How is education important in the context of the economic crisis ?

D. Gros : A high level of education makes it easier to reallocate people from one sector to another in an economic crisis. Germany is stuck in this respect. Germany has many high qualified workers in the manufacturing industry who do their job very well… But they only do their job very well. They cannot easily switch from one industry to another which makes a country more vulnerable in a crisis.

How does this fit into the whole debate of re-structuring the economy as a result of the crisis ?

D. Gros : Long term growth prospects depend on long-term strategies. In Germany, a certain type of goods may be in demand in the short-run and perhaps in the medium-run, but will soon face competition from East Asia. In turn, Central and Eastern European countries invest more in human capital and thereby focus less on pure manufacturing activities and more on the service-oriented industry, which in my view will be stronger in the future.

In the book ‘Nachkrisenzeit’ you argue that because Germany did not have to struggle as much as Central and Eastern European (CEE) countries during the economic crisis, in 20 years time it will even lag behind Poland economically. You reckon that CEE countries seem to put more focus on education than Western European countries. Can the reason be a stronger motivation to succeed in a ‘new world’ ?

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The key role of education

’The EU2020 strategy is completely empty. It’s just slogans’. Daniel Gros emphasizes on the key role of education.

Photo : Flickr Eva Freude

D. Gros : CEE countries have a very different kind of ‘education’. Germany had a very successful education model for the 19th and perhaps 20th century combining practical and theoretical education which was very good for the development of a certain type of industry. But this model is not good for ever and for all types of economies. Conversely, CEE countries started off without the heritage of a successful industry. They had too much of it, and of the wrong kind. This may be the reason why they then focused more on academic learning making their economies stronger in the long term.

You argue that the radical paradigm shift that CEE countries had to undergo in their transition to liberal market economies was part of this development. Has strict EU conditionality been the main driving force of the transition ?

D. Gros : All CEE countries had to satisfy EU conditionality but some did better than others. Two aspects were essential in the success of their transition : the countries’ willingness to undergo reforms and EU conditionality. In the 1990s, when EU accession was still very distant, countries such as Poland and to some extent the Baltic States were more open to reform and therefore underwent more radical changes than others. The shift was pretty radical and it is still ongoing. They haven’t succeeded yet but they are on a rather promising road.

Will the skills needed in the West be in the East ?

D. Gros : That could soon be very well the case, yes.

What will then happen with regards to states like Germany, Austria and the UK who tried limiting the inflow of low skilled workers from the 2004 and 2007 EU Member States ?

D. Gros : I always thought that was a mistake. The people who are coming are attracted by higher wages and accept low-skilled job often in spite of their actual qualifications. Recent studies have shown that contrary to the US/Mexican example where cheap labour force produces low-value added goods across the border, inexpensive labour force in CEE produces high value added goods which benefits Western European economies.

Earlier this year, you proposed the idea of a European Monetary Fund which has been discussed at EU level through the support of the German Finance Minister Wolfgang Schäuble. Can you briefly explain to the readers what the concept is all about ?

D. Gros : At the moment, the European Council makes funding available for countries in need of financial bail out. There is however no framework under which the funding can be dispensed. My idea would be to create a structure with clear objectives : Do we want to bail out single bankrupt governments ? Or should we rather save financial markets ? Let a euro-zone member go bankrupt and save the financial markets from collapsing in order to save the rest of the Euro-zone in the long-term !

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’people in Europe can take a lot of incompetence from their governments’

The EU27 unemployment rate has risen to 9.6% in May 2010.

Photo : Flickr, tzweppi

The framework would establish discipline because governments would know that they will not always be bailed out.

Would this mean an additional burden to tax payers ?

D. Gros : Actually, it would probably save them a lot of money because right now, tax payers just bail out Greece and soon probably Spain and Portugal. Under an ‘EMF’ we wouldn’t need to bail out governments but just save the banks from collapsing.

What is the state of play of the project ?

D. Gros : It has been accepted but its launching is still very uncertain because the European Commission doesn’t like the idea of handing responsibility over to a new institution. And in the European Council, heads of states have difficulties accepting the idea of letting a country go bankrupt.

Would you argue that the EU is bound to more or less financial failure than the USA thanks to regional integration ? Will solidarity between member states save the Euro zone or pull it down ?

D. Gros : For the time being, solidarity saves us - but in the wrong way…by creating a long term problem.

How do you consider the state of political instability in Europe with regards to ongoing protests in Greece and rising right wing populism ? Are governments losing legitimacy in the eyes of their citizens ?

D. Gros : That is unavoidable because they don’t tackle the real cause of the crisis. We have seen that people in Europe can take a lot of incompetence from their governments. Instability will remain but is unlikely that governments will fall. We don’t need to fear the 1930s !

Do you believe that the EU2020 strategy’s focus on sustainable growth through education will change current economic policies in the EU ?

D. Gros : The EU2020 strategy is completely empty. It’s just slogans. Everybody wants growth to be competitive while sustainable, ecological and equal. But nobody knows what button to push for that.

Photo : EC Audiovisual Service, EC

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