Hans Timmer - Europe must open up
February 5, 2014
PMI January data for Western Europe turns out to be very good; it seems that economic recovery in the euro zone is stepping up. How strong do you think it can be?
Indeed, we are witnessing a recovery in the euro zone. It has been approaching for a while, and now we can see it clearly in economic data. Its strength, however, is a big question mark at present. A lot will depend on the reforms carried out in the European Union. In our view, Europe might still be facing a long period of slow, post-crisis growth. It is obvious that the EU needs reforms, including the reforms of economic relations with the rest of the world.
What kind of reforms?
In many countries, labor market should become more flexible. Continued re-modeling of European institutions is needed as well. Some steps in the right direction have been made in the field of the banking union, but there is still much to be done in scope of the fiscal union. Furthermore, I believe that Europe will not succeed without closer integration with international markets. This aspect was somewhat neglected in recent years, when internal problem issues were given most attention.
I understand that, in your opinion, the negotiations concerning the transatlantic free trade area between the U.S. and the EU will support EU economy...
Yes, I expect them to be useful, but the most important thing is the continued trade integration with Asia. After all, Asia has the biggest development dynamics and this is where further progress in trade negotiations should be made. It is a very bad sign indeed that China is currently not involved in the process of creation of two great free trade zones. i.e. the transpacific and the transatlantic zone.
But some economists, for example Paul Krugman, a Noble Prize winner, say that China is guilty of currency protectionism which has adverse impact on other economies. Therefore, if trade barriers between Europe and China were to be reduced, the impact on Europe would be detrimental...
I have outmost respect for Paul Krugman, but I cannot agree with this scenario. Already five years ago it was not true that China was building its economic power based on currency exchange rate manipulations. It is simply not possible for an economy to grow over a period of 30 years at a rate close to 10 percent annually just thanks to currency exchange rate manipulations. The true reason underpinning the success of China is the fact that Chinese economy was opened up and integrated with global markets, not only in terms of exports but also imports, and efficiency improvements were made inside the country. Chinese people have benefitted from this policy, and so has the world. At present it would not be fair any more to say that Chinese currency is significantly undervalued. In recent years China reduced its surplus on the current account and this country tries to open its capital markets to the outside world, which will result in greater capital outflow from China.
Chinese Government is now trying to transform the economy towards the model more strongly based on internal demand. How much time can this transition process take?
Two years ago I was involved in the development of a study entitled: ‘China 2030’, prepared by the World Bank and Chinese Government. I was particularly impressed by the determination with which Chinese Government has been reforming the economy. The Government believes that they need a new model of development that will pave the way for success in the future. They realize that they have to change the structure of their economy, open their capital market, reform or sell many state-owned companies and implement many other reforms. China does not want to get stuck in the so-called ‘middle-income trap’. Transition process will be difficult due to, among other factors, the presence of many powerful groups of interests which might try to deter the transition, but I am optimistic. I am confident that China not only will succeed in boosting internal demand and the size of the service sector, but it will also limit the role of the state in the economy and will become more integrated with global markets.
Is China going to become the biggest economy in the world in the next 10 years?
If it does not happen in the next 10 years, it will happen in 15 years’ time. It does not matter when they will get there, but they will, sooner or later. Even now China is the leading trading power and the number one investor in the world – three fourths of global investment growth is thanks to China’s investments.
There will be serious changes in Europe as well. Euro zone not only managed to avoid disintegration, but it actually expanded. On January 1, 2014, Latvia entered the euro zone, and Lithuania might well follow suit next year. Should we expect more euro zone members in the next few years?
At present, the European Commission is rather cautious as far as rapid expansion of the euro zone is concerned. This is due to the many problems that remain to be solved within Euroland. In the long term, however, it can be anticipated that euro zone is going to expand and more countries will benefit from single currency.
It seems rather unlikely that Poland will enter the euro zone in the next few years. In that context, do you believe that Poland should do this in a more distant future?
Immediately after the crisis accession might seem less appealing than it used to be in the past. It is true that during the crisis depreciation of zloty was helpful for Polish economy. However, my opinion is that in the long term Poland will benefit from entering the euro zone. I come from the Netherlands, a country that has strong ties with German economy. Before euro was created, many Dutch people were thinking about tying the guilder with German mark. Given the strong ties with German economy, having a national currency seemed to them to be rather disadvantageous, in view of business costs and currency exchange risk. Nowadays Poland is also closely linked with Germany and Western Europe, in economic terms.
Many economists believe that euro zone is not an optimum area for monetary union due to excessive economic discrepancies between its member states, say Germany and Greece. Do you disagree with these views?
I disagree. Let’s take the USA – looking at individual states we can see that economic differences between them are actually greater than those observed between euro zone countries. This, the mere fact that there are differences cannot represent an argument against euro zone as an optimum monetary union. The other issue is whether this union has been implemented in an optimum way. For a monetary union to be created, its members must meet certain requirements. In the case of euro zone some of these requirements were not satisfied.
According to many analysts, euro is now too strong to support the recovery in Europe.
You have a point here. For the recovery prospects it would be much better if euro was a bit weaker. On the other hand, strong euro was helpful because it quickly became an important international reserve currency, broadly used in financial transactions. As a result, the costs of market financing for Euroland countries have been reduced. One of the reasons underlying the creation of euro was to establish an important reserve currency. In the next ten years the Chinese will attempt to do the same with the yuan.