In fact, the downsizing of current accounts can be attributed to both public and private sectors. This means that aggregate demand was affected for a longer period, and measures to stimulate it, when the economies experienced negative output gaps, were needed. Despite very low interest rates, credit was not a main driver of the recovery; and public investments, as the report outlines, are on average 2 percentage points of GDP lower than their pre-crisis levels. Although it is nowadays a demand-led recovery, we do not have sufficient demand-push inflation, with the notable exception of countries that have closed the output gap – and these are the New Member States. This justifies the report recommendation of further accommodative policies from the ECB. However, as Mr. Thomsen highlighted in his presentation, policymakers need to seize the good times to advance further with fiscal consolidation and structural reforms. But the low rate environment and the strong sovereign-bank nexus are feeding the beasts and provide the wrong incentives for reforms. This is where policy trade-offs step in. Monetary policy has been overburdened in times of crisis, trying to address the market failures and the pro-cyclical fiscal policy. Yet, monetary policy is not a universal medicine, and it cannot work in isolation. Jens Weidmann, the President of Bundesbank, once made an analogy between monetary policy and Coca-Cola’s all-round curative properties: monetary policy is also currently being branded as a cure for assorted ills.
Nevertheless, these non-observable variables become visible, sooner or later, in two indicators that eventually separate oil from water: the twin deficits. Let me start with the case of Romania. In the aftermath of the global financial crisis, we had one of the largest adjustments of the budget deficit in the EU: from 9.5% in 2009 to less than 1% in 2015. Romania exited the excessive deficit procedure in 2013 and also in 2013 reached the Medium Term Objective of 1% of GDP structural deficit, down from 8.8% of GDP in 2009. Since I was the Budget Minister in 2013 and for most of 2014, and I was responsible for the IMF and EC negotiations, I can praise the role played by the IMF and the EC in the three successive agreements (2009–2015). The current account adjustment was also impressive, from –13% in 2007 to just –1% in 2013–2015. However, in the last couple of years, the trend of fiscal consolidation has been reversed. This has also impacted the current account, which has deteriorated by 2.2% of GDP, of which 2.1% of GDP came from the budget deficit widening. The main advantage of the country is its low level of public debt, but this can be reversed in the medium term unless a prudent policy mix is implemented, including a gradual return to MTO. Broadening our perspective, all EU countries have adjusted their budget deficits over the last 10 years. Most of them also adjusted their current account deficits.