A year ago, Europe woke to a big shock. Donald Trump had been elected president of the United States. The polls hadn’t seen it coming. They hadn’t seen Brexit coming either.
Would populism and protectionism win in Europe as well? Was this the end of globalization? What would happen to everything the European Union stood for?
Many feared that the populist wave would spread to Europe, in particular, the Netherlands, France and Germany. This would have meant a real revolution in 21st century Europe.
But in December 2016, I said I did not think Europe would see a populist uprising and explained why.
A Europe from the mind … and heart
Part of the explanation came from the mind: the three countries going to the vote have created more wealth for their citizens over the past 60 years than the US or the UK.
There is less income inequality in those countries, and in Europe in general, than elsewhere.
And last but not least, the EU has brought citizens of close to 30 countries together like never before. Europe has now seen an unprecedented 70 years of peace.
The other part of my explanation came from the heart. As a Dutchman and a Bulgarian, living in Luxembourg I just did not get the feeling a populist surge was about to happen.
Speaking to my colleagues, friends or family – no one believed it. What we had built in Europe was too precious to give up.
A spectacular 2017 for Europe’s economy
While the start of 2017 wasn’t easy, it has now emerged as a very strong year for Europe. The election results were pro-European and Europe’s economy started to perform really well.
The EU outperformed the US in terms of GDP growth in 2016. It looks like this will be the case again in 2017.
But what is even more important is per-capita growth - what people feel in their pocket. Here, things look even better. The autumn forecasts from the European Commission predict that the EU will continue to outpace the US this year, and in 2018 and 2019. It already did so in 2016. If the forecasts hold, the EU will have outgrown the US in GDP per capita terms four consecutive years in a row.
A #Euroboom from global investors
This year I met almost 150 investors around the world. Their feedback was bullish. They see Europe as a safe haven.
While there is a lot of uncertainty about what the new US administration can deliver and how the UK is struggling to deal with Brexit, just after the French election, we saw that investors had started to recognize Europe’s success.
From my investor meetings, I drew three conclusions:
1) Investors have recognized that Europe is doing well.
2) They are putting their money where their mouth is.
3) They want to know what’s next for the Euro area.
What are the next five big ideas for Europe’s economy?
Common responses from investors are that markets need to become more integrated, that we need a more competitive financial sector and that we need to deepen economic collaboration.
Fortunately, a lot of the steps on the political agenda are already heading in that direction. There is real political movement in Europe’s capitals towards these changes. Reform momentum hasn’t been as good as it is now for a long time.
European citizens support it as well. The popularity of the Euro is at record highs: almost three-quarters of the people in the Euro area are in favour of the euro. This gives politicians a mandate to continue to build the monetary union.
Here are five big ideas that could secure Europe’s future:
1) Complete the Banking Union by backstopping the Single Resolution Fund (SRF)
Europe has already done a massive amount of work in this area. In record time, we established a single supervisor for the 130 largest banks and we set up a single resolution fund to wind down banks.
With these two institutions, in just a few years Europe’s system of banking supervision is now comparable to what the US took decades to establish.
But it’s not yet complete. The SRF is slowly filling its coffers, but it needs to be ready at all times, for any eventuality. There needs to be a backstop for the SRF, which would make it more credible in the eyes of the markets. The European Stability Mechanism (ESM) is considered as a likely candidate to play this role.
2) Common deposit insurance for the Banking Union
If all of Europe’s banks would guarantee deposits together, it would reduce the risk of a bank run in any country.
At the moment, depositors know that ultimately, the buck stops with their government. To know that all of Europe is behind the guarantee would be a big reassurance. Once in place, you would hardly ever need to use a common deposit insurance.
But it’s not that easy to implement. You need to clean up legacy problems with banks in certain countries, otherwise, healthy banks might end up paying for mistakes made in the past by competitors in other countries.
In general, cross-border European banks are positive about a move to implement a common deposit insurance and complete the banking union. This would provide a fairly complete framework to foster financial integration, which is needed to counter the home bias of banks that has risen massively during the crisis.
This bias means banks cannot benefit from the economies of scale that cross-border banking brings, making European banks less profitable.
Having fragmented banks also means fewer economic ties in the Euro area. A single currency would mean converging to one banking sector. The banking sector is the gear stick for the economy and you can’t drive a car with 19 different gear sticks.
3) Europe needs to further harmonize its financial markets
It needs to be much easier to invest from one country into the other. At the moment, bankruptcy laws, for instance, vary massively between European countries. The same differences exist in corporate law, and in tax law. If it took less time to figure out the laws in the country you wanted to invest in, it would open up investments abroad, helping venture capital and the private equity market. That’s good news for companies, who would have a new financing channel. Pushing the Capital Markets Union in Europe forward is, therefore, a must.
4) A limited fiscal facility
You may have heard people talk about setting up a rainy day fund in Europe. Poor European countries can get support from the EU budget. But the EU budget is small, just 1% of the size of Europe’s economy, compared to 17% in the US. For the European countries receiving support, the transfers can be large, up to 4% of their GDP. Overall, the system works well.
We also have a system in place for when the entire Euro area is hit by a severe economic downturn. In that case, countries are allowed to spend more taxpayer money than is normally the case.
Normally, there is a cap on budget deficits of 3% of GDP, but during the Euro debt crisis, countries simultaneously exceeded this, which was a big help in stimulating the economy at a time when this was badly needed.
But what if a single country is hit by a crisis, and its neighbours aren’t? For instance, think of a case where Ireland is hurt if the Brexit negotiations fail to produce a good solution?
In this situation, there would be no fiscal leeway for the country. Economists call this an asymmetric shock and it would be good to have a limited fiscal facility in the Euro area to do something in response. People talk about setting up a rainy day fund and this is a related concept.
Of course, the ESM can already address problems in individual countries, but that’s when it is too late and they have already lost market access. Different models are being discussed. One strict condition is that countries will always need to repay any funds they receive. There will be no permanent transfers between countries, and there will be no jointly issued debt.
If you want to know how it can work, we can look to the US. Most states have rainy day funds and later, when they have recovered, they simply repay the money.
There are also other models, which work on the basis of complementary unemployment insurance.
Politicians are also trying to simplify the fiscal rules. The rules set by the Maastricht Treaty and the Stability and Growth Pact, which impose fiscal discipline in Europe, were made tougher after the crisis. But now, they have become too complex, reaching hundreds of pages, and are very hard to understand, even for the experts. Making them simpler would make them more credible.
In some countries, people are scared that all this means “a lot more Europe”, but that’s not the case.
For a limited fiscal facility, we do not need a full fiscal union, with extra transfers between countries, and we certainly don’t need a full political union. If that were the case, we’d be the United States of Europe.
5) Toward a European Monetary Fund
It is a reality that the role of the IMF, our global counterpart, in Europe has gradually become smaller.
When the crisis first started and Ireland and Greece needed financial support, the ESM did not have the expertise or enough money at the time to help.
Over time the financial firepower of the ESM has grown and so has our expertise. The role of the IMF, at least financially, has become less prominent. In the current Greek programme, they have not, so far, contributed any money.
Have you read?
I believe there is now a consensus that in any future crisis in Europe the IMF will probably no longer be involved in our programmes.
This means that rather than having four creditors – the IMF, ECB, ESM and the European Commission – you’d just have two. The ESM would run the programmes together with the Commission. Exactly how we would divide the labour is now also being considered.
These steps are no longer vague ideas that may or may not happen. They are concrete steps on the political agenda aimed at making the markets stronger, supporting the recovery of the financial sector and making the monetary union more robust and the economy more resilient.
Will 2018 be as good as 2017?
In Europe, we live in a society where multilateralism is a tradition, where international cooperation is a habit and where our neighbours have become good friends.
In 2017, European citizens truly spoke with their minds and their hearts - and investors showed their strong trust in our continent. The ideas discussed above will make Europe’s economy even stronger.
I hope at the end of 2018, we can reflect on the year again and look back at the steps that Europe took to secure its future, create more jobs for citizens and outperform in economic terms.