Germany’s status as the ideological and financial driving force toward greater European unity has been shaken by the hard line over a bailout for Greece adopted by Chancellor Angela Merkel. But for Thomas Mirow, the German president of the European Bank for Reconstruction and Development, the work of building Europe continues apace. Since taking over at the EBRD in 2008, Mirow, a former top German Finance Ministry official and onetime adviser to Merkel’s predecessor, Gerhard Schröder, has boosted aid to the countries of Central and Eastern Europe as part of the so-called Vienna Initiative that includes the European Union, the International Monetary Fund and the World Bank. He spoke recently with Contributing Writer Vita Bekker.
Institutional Investor: To what extent has the Vienna Initiative been successful?
Mirow: It’s always difficult to know what would have happened if something would have gone differently, but there haven’t been major bank runs in the region, and none of the systemically important Western banks have withdrawn. It’s fair to say that the Vienna Initiative has considerably contributed to this.
Assuming governments agree to increase the EBRD’s capital, how do you see the bank’s investment evolving?
The immediate necessity to secure liquidity is no longer at stake, but we think that deepening local capital markets will play a very important role. In terms of the real economy, we would like to support countries’ efforts to diversify and modernize their economies. We are strongly engaged in the areas of energy efficiency, energy security and climate change mitigation, and as a fourth area, I would name food and agribusiness. With the capital increase, which now seems to be almost certain, we will be able to invest between E8.5 billion ($11.3 billion) and E9 billion annually up to 2015.
What is your outlook for economic recovery in Central and Eastern Europe?
Overall, we predict growth of an average of 3.4 percent for 2010 after a decrease of about 6 percent last year. We see relatively strong growth in raw material–exporting countries. Russia will probably do fairly well; some Central Asian states will too. Poland continues to be very strong in Central Europe. On the other side, we see Lithuania and Latvia still having big troubles. Hungary will probably do not much better than zero.
What is your outlook for the region’s banking sector?
Liquidity is available, but banks are being much more cautious in taking risks; much activity is about restructuring existing credit lines. We will probably see small and medium-size companies that don’t have access to capital markets having difficulties if they apply for long-term financing. So all in all, the sector is stabilizing but on a relatively low level, and certainly not supplying long-term financing to the degree necessary.
What lessons has the EBRD drawn from the financial crisis in Central and Eastern Europe?
That probably the institution-building capacity in many countries is even more important than we might have thought. It’s not solely about creating markets but really looking at all the elements that make the difference between markets and well-functioning markets.
What is your outlook for Central and Eastern European countries joining the euro zone?
We will see how the European Central Bank and the European Commission assess Estonia. It’s certainly the case that the very difficult situation that the euro zone has to go through does not make things easier in terms of willingness to welcome new members. What is necessary is that, as was agreed upon in the accession treaty, everyone sticks to the commitments taken in advance. That means the Maastricht criteria have to be taken into account to a full degree, and this includes an assessment on the sustainability of the economic situation in the respective country. But if they comply with the Maastricht criteria, then I think it would be a mistake not to let them in.
Do you believe Angela Merkel’s hard line on EU support for Greece was justified, or does it threaten the cohesiveness of the euro area?
You need, on the one hand, to make very clear for a country that gets into that situation that it has to do its homework and that it cannot just rely on others to be bailed out. But at the same time, it was important to demonstrate to markets that the euro-zone countries will show the necessary support and the necessary degree of solidarity so as not to leave a country at risk.
What is certainly needed is to improve economic coordination, which would go beyond the fiscal side. This, in principle, has also been agreed upon. It will be very interesting to see how this will now be fine-tuned and concretely formulated.
