Governor Olli Rehn
Bank of Finland
Interview in de Volkskrant, by Marc Peeperkorn (the English version)
Published on 16 June 2020
Olli Rehn chuckles, a laugh by Finnish standards. The question was whether the crisis virus does not start to tickle as European government leaders this Friday start fighting over hundreds of billions of euros in an attempt to halt the biggest recession ever. But Rehn, who helped to roll the euro off the brink between 2010-2014 as European Commissioner for Economic Affairs, does not feel any urge to pull strings or emergency brakes again in Brussels.
Olli, as everyone invariably addresses him, is a crisis authority. As the prime minister's political advisor he experienced the severe Finnish banking crisis in the 1990s. In Brussels he successively faced the financial crisis, the euro crisis and the Greek crisis, tropical years. He wrote a book about these years in Brussels, Walking the Highwire, to be translated as Balancing above the Abyss.
"I would have liked some quieter times," says Rehn from Helsinki where he is chairman of the Finnish national bank. However, as a member of the board of governors of the European Central Bank, he has been in crisis mode since the end of February. Together with Klaas Knot and the other national bank presidents he supported a major support program from the ECB (EUR 1350 billion by now) to deal with the corona crisis. In Finland he is working closely with the government to turn the expected economic contraction (over 6 percent) into growth. "The ECB and therefore me too are very intensively involved in crisis management again."
-Is the corona crisis bigger than the euro crisis?
"It is sharper, the economic contraction is even bigger than during the financial crisis. But crises are no twins. They always have different properties and causes although you often have to fight them in the same way. The rapid spread of the coronavirus was an external shock that equally affected the health of European citizens and economies. The economic recession follows from the necessary lockdown.”
“The euro crisis on the other hand was a shock from the inside due to the excessive financial risk taking by banks, investors and governments. Seen in this way they are different crises. Fortunately, the eurozone and the EU are now much better off than in 2010-2012. The ECB supervises all major banks; banks have firmer buffers; the rules have been tightened. With the right measures we can mitigate the blow and pull ourselves out of the swamp. "
-How does the EU usually respond to a major crisis?
"Muddling through can prevent you from tumbling down", I write in my book. This approach applied to the euro crisis in which we had to fall back on decisions by the leaders each with a veto. If you have to build a life raft in the midst of the crisis, with an emergency fund, banking supervision and billions of loans, this approach is too slow. During the euro crisis it was very difficult to take timely measures, let alone take preventive action. That made the euro crisis unnecessarily expensive and burdensome. "
-You write in your book: we can no longer afford to muddle through.
"The lesson from the euro crisis was that you have to remove the risk from the market with one blow. That you have to put in an overwhelming fist to stabilize the financial markets. That bazooka only came with Draghi's "whatever it takes" speech, including the promise of the multibillion-euro government bond puchase if needed, which was the turning point in 2012. From that moment on economically weak Member States were no longer the playing ball of the unpredictable markets. I believe that lesson has now been applied: by both the ECB and the FED. Note that many people saw the corona crisis as a supply shock, production collapse due to the lockdown. It is now clear that we are also dealing with a demand shock, the loss of demand due to uncertainty and rising unemployment. Demand shocks lead to a much more dramatic recession. And there could have been a third shock, that of the financial markets, with bank runs, one that hits the economy amidships. That has been prevented so far, knock on wood. Central banks are doing everything to nip that financial crisis in the bud. There is a good chance it will work. "
-So this time the EU has responded better?
"At least faster. But it is still not optimal. The recovery fund proposed by the European Commission is an indispensable building block. The leaders do well to approve this quickly. It would take some of the burden that the central banks carry now. It provides a fairer division of labor between monetary aid from the ECB and fiscal policy of the Member States."
-In 2008 the EU countries came with a recovery fund of 200 billion euros, now the European Commission advocates 750 billion. The lesson has also been learned here?
"It is dangerous to say that because complacency is luring, but yes: the necessary bazooka to calm the markets and boost the economies is on the table."
Rehn is very aware of the recent poisoning of the political atmosphere in the EU. Finance minister Hoekstra who rubs in the southern member states' lack of savings, the Portuguese prime minister who replies that the Netherlands should leave the EU, it is familiar to him. "I was attacked from two sides at the time: North and South." He points to his head, which was jammed between hammer and anvil. "Many articles about corona separations are currently published in the media. That illustrates how crises put pressure on relationships. This is no different in political relations. Quarrel, name calling, blaming, it doesn't solve anything, it only takes time. Time that leaders don't have. "
Rehn is happy that his country is not part of the Frugal Four, the "stingy" club of the Netherlands, Austria, Sweden and Denmark that pulls the money brake in Brussels. "It is up to the Finnish government to communicate on this but I am sure that Finland does not want to slam doors to other capitals. Finland must be a bridge builder. Building the EU is more useful than blocking it. "
- Leaders will talk about recovery plans for the first time on Friday, with two marathon summits following July to reach an agreement. What kind of result does such a battle of attrition lead to?
"Nightly deals are risky, they are certainly not always the result of rational preparation and logical thinking. More second-rate, suboptimal. What I expect is that leaders will set stricter conditionality on using money of the recovery fund. The Commission proposal is not particular clear on this point. The money should be used for investments that help combat climate change, in renewable energy. But also to strengthen the productivity and competitiveness of the economies. "
-The Commission wants two thirds (500 billion) of recovery fund to be provided as grants, the Frugal Four demand it to be mere loans. Is that wise from an economic point of view?
"Loans maintain a ‘skin in the game’ for every member state to use the money effectively but they also lead to an even higher public debt for the countries most affected by the corona crisis. That is not useful. Gifts are appropriate in response to immediate needs, just as the Red Cross and the UN do in times of natural disasters and violence. Loans are better when it comes to economic recovery, as provided by the IMF and the World Bank. So it is looking for a balanced mix of gifts and loans. "
- What is your advice as a crisis expert to leaders for the upcoming EU summits?
(Deep sigh) "Usually the compromise comes at the last minute. But the corona crisis does not allow any delay. There must be a driving force. This is often Berlin and Paris, but this is not enough. As I write in my book, the EU is too valuable to be left to Germany and France alone. All leaders must make their red lines pink, otherwise there is no agreement possible. "
-Can leaders afford a no deal?
'No. Europe is at a critical stage. The recovery fund is an essential building block for the response to the crisis. "
-As in your Brussels period there are also now economists, EU watchers and politicians who predict the end of the EU. Is there cause for concern?
"There is often exaggeration and not always useful exaggeration. Columnists paint the image of: a European federation or death. Eurobonds or euro exits. That's fake news. There is a third way: that of Member States that increasingly pursue common policies when useful. Form follows function. There is a real danger that without a recovery fund, dissatisfaction with the EU will increase, populism will gain momentum and politics will further fragment. That is not good for Europe. We have suffered from so many crises in the last decade. The EU is not in a good condition. She has shown stamina, the EU still exists, but we are all better off if we avoid further fragmentation and populist responses. We need a healthy dose of EU in these times. Let's not end up in the danger zone before we take action."
-Climate change is melting glaciers, the political climate is eroding support for the EU. Can that be stopped?
"We see that in some countries, that the support is melting away. That is precisely why prompt action is required. Let us not slip into a dramatic crisis again, such as in 2012 when the euro really skimmed on the brink. Belatedly, very belatedly leaders and the ECB woke up much. And even after they opened their eyes, it was not a Sunday walk in the park. The biggest lesson is: don't let it derail. Give up your veto in time knowing that a compromise is needed to preserve the EU. "
-The Stability Pact with its budgetary discipline has been temporarily suspended. Should the pact be completely abandoned?
"The Stability Pact is an anchor for national budgets. It gives confidence and credibility. In the first, acute phase of the corona crisis, everything focused on emergency financial aid for healthcare, then you suspend the rules. The second phase is about the support for investments, for unemployment schemes, then you should not use corona as a cover up for permanent increases in expenditure. The third phase is that of stabilization, which requires the Stability Pact. The pact is much smarter than many think. It offers guidance to limit debt. The lesson from the corona crisis is that countries that had built up financial buffers are now deploying them and come better out of the crisis than countries without buffers. "
-Should all countries build buffers, as Hoekstra suggested?
"In the medium term for sure. Interest rates are now very low and will remain so for a while. It is highly desirable for euro area countries to use this breathing space to restore their economies and budgets. "
-You are a big music fan: what's on your corona playlist?
"As Commissioner Behind Blue Eyes of The Who was high on my list. At that time I learned not to take everything at face value what people told me about their reforms and savings. At the beginning of the corona crisis, there were all time favorites like Paint It Black from the Stones, Bad Moon Rising and Who'll Stop The Rain from Creedence Clearwater Revival. Recently my wife and daughter introduced me to the Finnish rap scene, but you probably don't know these songs. For the recovery phase I tip Get On from the Hurriganes, a Finnish band that won the European Pop Jury prize in 1974. They had a great guitarist, Albert Järvinen, of Eric Clapton level. Really, listen to it! "