DNB-boss Knot: without further integration the euro is unsustainable in the long run

Growing economic inequality between the euro countries, more debt crises, more emergency aid, lower prosperity and a euro that will eventually die. According to the president of De Nederlandsche Bank (DNB) Klaas Knot, that is the price if euro countries do not integrate further and share risks.

Knot, who gave the HJ Schoo lecture tonight, fears that “ordinary people” will pay that price. An important message from Knot to politicians is to increase support for further European integration. He outlines the advantages of the internal market for the Netherlands, but also sees that they are unevenly distributed.

“The benefits of the internal market for the Netherlands have previously been calculated at between 6,000 and 10,000 euros per household per year,” says Knot. If you deduct the Dutch payments to the EU budget from that, it remains more than positive. “In the Netherlands we earn a good living thanks to the European internal market

Entrepreneurs’ party

But it is Dutch businesses in particular that have benefited greatly from free trade, from the internal market and from the euro. This applies less to the working population, which is a problem according to Knot. “If a large part of them start to regard ‘Europe’ primarily as an entrepreneurial party whose benefits they see only to a limited extent in their own pockets, then that will undermine support for the European project

Support for the European project is also a problem in southern euro countries, but for a different reason. Countries like Greece and Italy have benefited much less from the euro. They cannot depreciate their currency in order to keep their products competitive with Dutch products. This happened regularly before the introduction of the euro.

In summary, according to Knot, the euro is generating considerable prosperity, but it also tends to lead to economic imbalances in Europe. The corona crisis reinforces that and “if we do nothing, we run the risk of ending up in a new euro crisis again and the support for European integration may come under pressure”

How further?

But what should be done, according to Knot? This summer’s large and politically hard-won European Corona Recovery Fund calls the DNB President an important first step. The corona package contains 750 billion euros, of which 360 billion euros in loans and 390 billion in grants that countries can receive if they meet certain conditions and implement reforms. Heavily affected countries such as Italy can make the most use of this.

As a second step, Knot believes that countries should coordinate their budgetary policy better. In better economic times, countries with a high debt should do their best to reduce it than countries with a low debt.

And thirdly, Knot mentions that other parts of economic policy also need to be better attuned to each other. Weaker countries must reform in such a way that their competitiveness improves. “That is good for their exports, for their growth and employment, and for the sustainability of their national debt,” says Knot.

At the same time, strong countries like the Netherlands must ensure that households have more to spend. “This is not only pleasant for those households, but also ensures that the stronger countries import more Specifically for the Netherlands, the DNB president mentions the flexibilisation of the labour market. “This has gone too far. Friend and foe have agreed on that by now.”

Knot says he realizes that his route to a stronger currency union means that countries lose freedom of movement and that this requires political courage. He wishes politicians a lot of courage.