August 18, 2018
Finance

Q and A with Philippe Martin, former economic adviser to Emmanuel Macron

PARIS — Philippe Martin heads Frances Conseil dAnalyse Economique (Council of Economic Analysis), a body of economists tasked with advising the government on policy matters. He was an adviser to Emmanuel Macron during his 2017 presidential campaign. Martin teaches economics at Sciences Po and is a research fellow at the London-based Center for Economic Policy Research. He is one of the co-authors of the French and German academics joint policy paper on eurozone reform, published earlier this year.

Your policy paper was notable because it was written by major economists from both countries, indicating that at least in academic circles the old French-German divide can be overcome. What happened then?

My personal view is that the political debate in Germany ended up being very disappointing. There seems to be too little effort on the part of German politicians to try to explain to their public what we need and why we need it. Among academics, there is an understanding that we have to move forward, whereas in the political sphere, those who always say “nein” stop there with the excuse they dont really see the need for serious reforms.

Is that because the old fear of “moral hazard” is taking over any other consideration?

There is an obsession in some German conservative circles with “moral hazard,” which sometimes is a valid concern and sometimes an excuse for intellectual laziness. What our German academic colleagues understand is that you have to go further and discuss the mechanism and institutions that are necessary to deal with moral hazard. We cant just stop there. Our paper addresses this issue. You must, of course, make sure bad policies arent rewarded. But serious crises can stem from many other reasons other than bad policies.

So do you think the EU summit at the end of June could prove a damp squib?

Im afraid it wont be the great eurozone reform that was still talked about last year, but that doesnt mean we should discard what will come out of it. There may be an agreement on a joint backstop for the bank resolution fund, which is important to stabilize a country like Italy.

Furthermore, the summit could also agree on the principle of a [European Stability Mechanism] precautionary credit line that could be extended quickly by the eurozone bailout fund to countries that are encountering difficulties on financial markets but not yet in full-blown financial trouble. [European Central Bank President] Mario Draghi alluded to this last week. There would be fewer conditions attached in terms of economic programs, just some pre-qualification conditions — on fiscal rules, for example.

But we still are a long way from a pan-eurozone bank deposit guarantee scheme or from the proposal of financial transfers in case of serious economic disruption — what we economists call “asymmetric” shocks. Current policymakers in Berlin seem to deny such shocks exist (save for, say, earthquakes). But the idea, of course, should be much broader: what if, for example, Ireland is hurt disproportionately by the consequences of Brexit or by a bank crisis? This would be a case where financial transfers can be envisioned.

Does that mean the eurozone reform chapter will close on this disappointing result after the June summit?

I think that, for one, you will see Macron keep pushing his agenda because he truly believes this is the key to eurozone sustainability. Hes likely to say: Lets keep debating this in the months leading to the European election in May next year. There may also be frustration in France, after all that was done over the last year — in terms of fiscal discipline, of reforms — to see that Macron is not being paid in return with a serious discussion on eurozone reform.

But nothing in theory would prevent eurozone leaders from identifying the necessary steps and targets to progress further. We need a clear vision of the steps to be taken and of what needs to be accomplished to get there. Even if you dont agree on the deposit guarantee scheme overnight, you could have, say, a five-year agenda stating that under specific conditions — in terms of cleaning up the banks, non-performing loans, etc. — youll get there gradually.

Isnt one of the problems the fact that no one sees where the next crisis could come from, and that the awareness of imminent danger isnt here?

Youre right. The danger is to wait until the next crisis to have this discussion. We could draw a list of potential shocks: The Argentinian crisis which is unsettling bond markets; the possibility of some skeleton in a bank balance sheet that we failed to spot; political instability in Italy; a hard Brexit going seriously wrong for everyone.

But mostly, Im concerned that in spite of some recent progress, our societies are more fragile than they were 10 years ago at the onset of the financial crisis. First of all, both monetary and fiscal policies would be very constrained — theyre running short of ammunition. Second, our societies are socially weaker and more divided politically, as shown by the rise of populism everywhere. So it may require just a little recession, just a slight increase in unemployment, to trigger a serious flare-up.

This interview was edited for length and clarity.

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