Carlos Cavallé: "Southeast Asian Countries Could Surely Benefit from Observing the EU"

18 Mar 2015

STI President Carlos Cavallé spoke to a conference of international business-owners and executives at the Financial Club of Jakarta on “Experiences of the EU Project That Can Be of Interest to the Business Community and Governments of SEA Countries".

STI President Carlos Cavallé spoke to a conference of international business-owners and executives at the Financial Club of Jakarta on “Experiences of the European Union project that can be of interest to the business community and Governments of Southeast Asian Countries.”

There is talk about Southeast Asian countries considering some type of integration to strengthen their position in the global market. Can the EU Project serve as an example to them?

The European Union is probably one of the most important projects ever undertaken in the history of Europe, and probably the one that will have the deepest and most lasting impact.  The EU project is an ongoing one. Many objectives have been achieved, but still others remain unsolved. Southeast Asian Countries could surely benefit from observing some of the dramatic challenges that the EU still needs to face: a much needed fiscal harmonization, some important problems related to immigration, and a common foreign policy, among others. The future of the EU lies in its capacity to address and hopefully solve these problems.

Is the EU achieving its original purposes, among them: to give Europeans a single currency, growth and prosperity, along with political stability?

As is well known, in the last thousand years, European countries remained divided among themselves and fought each other almost without interruption. Countries established short-term political alliances that shifted with each country’s changing political interests. Two of the main European countries - France and Germany - have been fighting and killing each other’s citizens continually from the 11th century through the end of WWII.

Since World War II ended in 1945, the two countries - along with the rest of Europe -have enjoyed peace and stability, having joined forces in the construction of the European Union, which had its inception with the treaty of Rome in 1957.

Growth and prosperity came with peace and stability in Europe. The EU countries have become one of the world’s largest and most prosperous markets, and have improved their living standards to the highest level - including healthcare, education, housing, social security, and welfare in general. Europe has never before experienced 70 years of peace and prosperity such as it has been enjoying since the beginning of the EU project.

Why is it then that some commentators call the EU a failed project?

Probably because a number of problems remain unsolved. If they are not properly addressed they could endanger the future of the EU and of the single currency. One principal concern is that the EU, instead of achieving harmonic development of the member countries, has become a hotbed of inequalities.  

Among these are the increasing differences between the Northern and the Southern European member countries, which have been further accentuated during the recent financial and economic crisis. These differences are revealed in such indexes as their financial deficits, their public debts and their unemployment rates. Spain, for instance, which is southern Europe’s second largest country, has an annual fiscal deficit of some 5%, public debt nearing 100% of GNP, and an unemployment rate of 23%, with youth unemployment over 35% according to the last statistics. Germany, on the other hand, has a current fiscal surplus of 0.7% and an unemployment rate of 6.5%.

These inequalities derive from their capacity to increase productivity, strengthen competitiveness and propel growth. This is probably related not only to economic and social policies, but also to cultural differences in the way that citizens save and invest. Germans are better savers than Spanish and Italian citizens, and as a consequence they are also better investors. These differences are likely to persist, unless some structural measures are introduced in the EU Project. These will be one of the EU’s next challenges.

But governments of important economies do not seem to worry much about fiscal deficits. Why is it a problem in your view?

Because we must think not of a single country but of an EU project, in which there are specific rules to prevent contagion among countries. None of the southern countries meets the 3% maximum deficit required by EU constitutional principles. This means that reforms will be needed in these countries to control the fiscal deficit: which means less public expenditure, more taxes, or both. In either case, economic growth and the possibility of reducing unemployment will be impaired. And this will affect the other EU partners.

What about unemployment? Do you see it as a main challenge?

Unemployment exceeds 10% throughout southern Europe. This means that economic recovery in the aftermath of the crisis is going to be more painful for them because they must undertake the march to recovery bearing the extra weight and the extra cost of a much larger unemployed population. The task is also more difficult given that they are among the EU countries with the highest public plus private debt. And debt has to be repaid. This challenge will need the EU’s institutional support. But it will probably generate reactions with political implications among citizens of the richest EU countries, who may not like to see their taxes used to solve other countries’ problems.

Are the European banks in good enough shape to be able to help?

The European banking system is a subject of controversy. As we all know, the world financial sector was implicated in the financial and economic crisis, and still remains seriously affected after more than seven years of crisis. European banks have not yet recovered, because – among other reasons - the EU does not have in place a unified EU banking system that can effectively help European banks to recover their solvency and their liquidity quickly.  And also because the EU cannot by law count on a Central Bank with the responsibilities and the powers of the US Federal Reserve and its equivalents  in the UK, Japan and China. The EU has the determination to set up a unified banking system that can legally meet the financial challenges of the current times. The determination is there, but the political and technical problems to set it up remain an obstacle.

Are citizens and businesses sensitive to different fiscal policies within the EU?

No doubt, there is a need for EU fiscal harmonization. Without it, the free mobility of capital, which is among the primary objectives of the EU’s establishment, will be impaired.  It will be affected by the attractiveness of certain EU countries’ tax systems, to the detriment of others. By this it will make recovery and growth more difficult in the countries that most need them, and will contribute to maintaining, or even increasing, the existing inequalities.

How can you remain hopeful about a prosperous and harmonious future for the EU in the face of so many challenges?

Because the EU project is a great project. The single currency has been altogether a success. European citizens feel themselves more European since they can travel across Europe without need of a passport and carrying only Euros in their wallets. Consumers can compare prices of similar products and purchase goods and services in other countries. This becomes an advantage. 

The EU is the first project that has made possible a truly globalized society,  thanks to the  vision and the leadership of sixty years ago.  It is my hope that Europeans, in spite of the difficulties and challenges, will continue to see the advantage of joining forces to pursue the greatest and most challenging objectives of its long and rich history.