In addition, the crisis in Italy and Brexit threaten the future viability of the Union. Europe has to adjust to these uncertainties and demonstrate its ability to act:
- Brussels must negotiate hard, but fairly in the Brexit negotiations, in order to prevent that the Union continues to dissolve. The four basic freedoms - free movement of persons, goods, capital and services - must not be called into question. In the long run, London has to lose more than the EU: British prosperity could drop by ten percent in the long term with a hard Brexit.
- Italy is the Eurozone’s worry child: banks and businesses are suffering from a sustained credit crisis and are threatened to become unable to act. Financial supervision must keep up the pressure in order to solve deferred problems with non-performing loans. "Only if the banking problems are solved, the Italian economy will get back on its feet and the populist movements will be weakened," says IW Director Michael Hüther.
- There are no signs of a deflationary pressure as the euro zone continues to recover and energy prices and inflation expectations rise. The European Central Bank must now take into account the financial stability risks arising from the low interest rate phase for banks and insurance companies. Therefore, in two steps, the negative deposit rate for banks should be set to zero and the interest rate should be increased to 0.25 percent. If the economy continues to recover, the bond purchase program will have to expire in 2017 and the interest policy will have to change with gradual interest rate hikes.
The EU must also exert its influence internationally. "Brussels needs to strengthen the principles of free trade, and strongly oppose protectionism à la Trump," says Hüther. Europe is strong - and must prove it now.
Documentation of the Press Meeting