Fiscal union not enough to save eurozone, warns ex-IMF chief Blanchard
Published 12/10/2015 | 08:37
The euro will be consigned to a permanent state of malaise as deeper integration will bring no prosperity to the crisis-hit bloc, according to the former chief economist of the International Monetary Fund.
In a stark warning, Olivier Blanchard - who spent eight years firefighting the worst global financial crisis in history - said transferring sovereignty from member states to Brussels would be no “panacea” for the ills of the euro.
The comments - from one of the foremost western economists of the last decade - pour cold water on grandiose visions for an “EU superstate” being hailed as the next step towards integration in the currency bloc.
Following this summer's turmoil in Greece, leaders from France's Francois Hollande, the European Commission's Jean-Claude Juncker, and European Central Bank chief Mario Draghi, have spearheaded the drive to create new supra-national institutions such as a eurozone treasury and parliament.
The plans are seen as essential in finally "completing" economic and monetary union 15 years after its inception.
But Mr Blanchard, who departed the IMF two weeks ago, said radical visions for a full-blown "fiscal union" would not solve fundamental tensions at the heart of the euro.
"[Fiscal union] is not a panacea", Mr Blanchard told The Telegraph. "It should be done, but we should not think once it is done, the euro will work perfectly, and things will be forever fine."
Although pooling common funds, giving Brussels tax and spending powers, and creating a banking union were "essential" reforms, they would still not make the "euro function smoothly even in the best of cases", said the Frenchman.
Any mechanism to transfer funds from strong to weak nations - which has been fiercely resisted by Germany - would only mask the fundamental competitiveness problems that will always plague struggling member states, he said.
"Fiscal transfers will help you go through the tough spot, but at the same time, it will decrease the urge to do the required competitiveness adjustment."
The creation of a "United States of Europe" has been seen as a necessary step to insulate the eurozone from the financial contagion that bought it to its knees after 2010.
It is a view shared by Mr Blanchard's successor at the IMF, American Maurice Obstfeld, who has championed deeper eurozone integration as the best way to plug the institutional gaps in EMU.
Mr Blanchard, however, said no institutional fixes would bring back prosperity back to the single currency.
Without the power to devalue their currencies, peripheral economies would forever be forced to endure "tough adjustment", such as slashing their wages, to keep up with stronger member states, he said.
In this vein, Mr Blanchard dismissed any talk of a growth "miracle" in Spain - which has been hailed as a poster child for Brussels' austerity diktats. He added he was "surprised" that sluggish eurozone economies were not doing better in the face of a cocktail of favourable economic conditions.
"When people talk about the Spanish miracle, I react. When you have 23pc unemployment and 3pc growth, I don't call this a miracle yet."
"I thought that the zero interest rate, the decrease in the price of oil, the depreciation of the euro, the pause in fiscal consolidation, would help more than they have", he said.
In a sign of the deep structural problems that still beset monetary union, growth in the eurozone is only expected to reach 1.5pc this year, according to the IMF's forecasts - far below the 2.3pc average growth of the pre-crisis era.
Britain and the US are expected to expand by 2.5pc and 2.6pc this year respectively.
Mr Blanchard, 66, rose to prominence in the UK after he warned Chancellor George Osborne was "playing with fire" with the British recovery in 2013.
He now said he had a "gut feeling" a UK exit from the European Union would prove damaging for the economy and the financial sector.
"I think Brexit would be very costly to Britain and costly to Europe as well.
"I can see how some people are very fed up with Brussels, but that would be a very superficial reaction to just leave Europe because there are technocrats that you don't like."
For all his misgivings about the single currency, Mr Blanchard said the EU as a whole remained a "fundamentally good construction".
"It requires compromises, and sometimes countries don't get exactly what they want. But the benefits exceed the costs - the European Union is more than Brussels."
During his reign as chief economist, the IMF came under severe criticism over its handling of the Greek debt crisis. The Fund has yet to formally commit itself to a new €86bn bail-out as they push the likes of Germany to relent to significant debt relief for the battered economy.
Mr Blanchard maintained that IMF calculations show "some decrease in debt, whether through haircuts or long rescheduling, is absolutely needed".
Should the Fund fail to gain guarantees that Greek debt is sustainable, it is poised to withdraw its involvement altogether.
During his final months as chief economist, Mr Blanchard made two personal interventions in blog posts which called for mass debt relief at the height of Greece's woes. He said he was motivated to do so because the IMF's position on Greece was being "misrepresented".
But European creditors are set to ignore the Fund's recommendations for repayment extensions of up to 40 years. They will instead propose to "cap" the amount the government pays to reduce its debt to 15pc of GDP a year.