An Interview with Daniel Gros

( Daniel Gros is Director of Center for European Policy Studies in Brussels. http://www.ceps.be/)

Q: Many people around the world now have different views towards the economic future of Europe. Some say it will stagnate for a decade, in the words of some Chinese, like a "bankrupt landlord", but others argue that it will grow ever faster.  What is your view? Why?

A: Most probably Europe's growth will slow over the rest of this decade.  This will be only partially due to the euro crisis, but even more to the demographic slowdown which Europe is experiencing during this decade.  The lingering effects of the euro crisis will keep growth low (close to zero) in the periphery, but this affects only about one third of the euro area.  During the crisis attention was focused on public debt, but the excessive debt of the banks is much larger and even more difficult to deal with.

Q: In your opinion, what are the most important factors that will determine the future of the European economy?

A: The deleveraging in the oversized European banking system will be essential to create a more efficient allocation of savings.  Deleveraging at first slows down growth, but in the longer leads to healthier growth because it leads to better investment and more resilience against future shocks.

Q: In a globalized world, as you know, Europe's future is influenced by some external factors. What role will the rise of China and other BRICS play?  Can we say that, because the economies of China and other BRICS are quite promising, Europe's economy will be benefited in a certain way? Do you agree with this observation?

A: Europe benefits from the rise of the BRICS.  Europe's exports have grown quite healthily (more than those of the US) over the last decade.  Europe seems to provide the medium tech machine tools and luxury goods Asia wants.  The euro zone has actually a growing trade surplus because the periphery now starts to export more.  The eurozone economy thus benefits particularly from more growth in the BRICS.

Q: A coin always has two sides.  What are the biggest challenges for the European economy in the future, either in a short-term or long-term perspective?

A: Deleveraging in the banking sector remains the biggest challenge in Europe.  A challenge which policy makers are reluctant to take up because they fear a 'Lehman II' and because banks are very close to politics in most of Europe.

Q: Finally, what lessons has Europe learned from the debt crisis?

A: Two lessons: That excessive debt accumulation leads to trouble and that systemic financial stability requires a common effort and common institutions.  Europe thus has now the Fiscal Compact which should keep deficits under control and is creating the institutions for a 'banking union', which hopefully will allow us to stabilize our banks.