25th May 2022

EU made 'mistakes' in euro-crisis response, says Polish minister

  • EU finance ministers took measures in the wrong order, says Rostowski (Photo: Friends of Europe)

EU ministers made a "mistake" when pressing for investors to take a loss in the second Greek bail-out and obliging banks to boost their cash reserves before a substantial bailout fund was in place, Polish finance minister Jacek Rostowski said Tuesday (20 December) while rounding-up his six months at the helm of fellow finance ministers' meetings.

"The mistake was to engage in private sector involvement (PSI) without a proper firewall. If we had a proper firewall in place, PSI would have achieved the aim of reducing moral hazard in the private sector without the risks that it created," Rostowski told this website after talking to MEPs in the economics committee.

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A failed experiment, private sector involvement was formally buried at an EU summit on 9 December, after much wrangling and negotiations with bondholders on accepting a 50 percent loss on their Greek investments in an upcoming second rescue package for the troubled euro-state.

Fears that similar "haircuts" will be forced upon investors in other countries have contributed to sky-rocketing borrowing costs for Spain and Italy, which only aggravated the current crisis. Obliging private investors to take a loss was pushed strongly by Germany.

"Our first approach to private sector involvement, which had a very negative effect on the debt markets, is now officially over," EU council chief Herman Van Rompuy wrote on his Twitter page after the summit.

European Central Bank chief Mario Draghi said in an interview with the Financial Times on Monday that private sector participation in the Greek case was a "political answer" rather than the "ideal sequencing" which should have started with the "firewall", then moved to enforce bank recapitalisation and only at a last stage considered private bondholders to take losses.

The other mistake, asking banks to secure a certain level of capital during the current crisis while again having no "firewall" in place risked creating a "vicious circle", Rostowski told MEPs. Cash-strapped banks would then have to turn to governments, already struggling with large deficits, which in turn would increase the costs of government debt and make it even harder for banks to lend to one another.

"This mistake was made, we should have put the firewall in place first. It was a wrong order and we should not go around trying to pretend we have not done this mistake," he said, while admitting that "ad-hoc measures" are still better than nothing and that EU processes take too long, forcing countries to struggle in their response to the crisis.

As for the new inter-governmental treaty currently being drafted by 26 member states except for Great Britain, the Polish minister said it is "to a large extent what the "sixpack" was intended to be," in reference to six pieces of economic governance legislation that came into force earlier in December.

Rostowski expressed scepticism about the need for treaty change, arguing that the European Central Bank can step in and salvage the eurozone under the current rules. He also said the new inter-governmental treaty raises question marks related to the democratic oversight, as well as the extent to which EU institutions can be used if Britain does not agree to it.

"I think there is a real problem with democratic legitimacy. If there is to be a mechanism for disciplining eurozone states - almost a purely automatic one, the problem is that rules cannot anticipate everything. If it's discretion, then authority to hand out sanctions has to be given to some EU institution, which requires democratic legitimacy."

He insisted that the upcoming Danish EU presidency be given "full participation" in the meetings of finance ministers and euro-area meetings - something Poland, also a non-euro country, unsuccessfully fought for.

"We had this problem, on occasions, that we couldn't say what the discussion was like in the Eurogroup, because we were not in the room," he told MEPs.

Rostowski also defended his previous comments about a "war in ten years" if the eurozone was to break up, explaining that the Polish presidency "felt the need to infuse the sense of that danger."

"Unity and stability of the EU are not just an economic issue, they are also a national security issue for us," he stressed.

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