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CNBC Interview with EU Commission Vice-President for the Euro and Social Dialogue, Valdis Dombrovskis


Following are excerpts of an exclusive CNBC interview with Valdis Dombrovskis, EU Commission Vice-President for the Euro and Social Dialogue, and CNBC's Willem Marx.

WM: Let me ask you this, your forecasts indicate that all the major economies in Europe are going to be growing at a slower rate this year than you had said 3 months ago. What are the factors causing that slowdown?

VD: Indeed, what concerns our winter economic forecast, we see some slowdown in European economy, when our winter…when our autumn economic forecast was expecting a 1.9 percent growth in EU this year, now it's at 1.5 percent. Already in our autumn forecast we underlined a number of risk factors which are affecting the EU economies, including external factors such as trade conflicts and uncertainty, slowdown in emerging economies, notably China, and we see that those risks are actually materialising to the extent and correspondingly also resulting in slower growth rates. But there are also certain domestic factors at play when we discuss structural and fiscal policies in some member states. For example, the most pronounced slowdown is in Italy, and we have been in difficult discussions in Italy over the last couple of months, on how their chosen fiscal trajectory negatively affects growth. And unfortunately we see this materialising in our winter economic forecast.

WM: How significant do you think the impact of the Chinese apparent slowdown has been, do you think it's sufficiently well understood by people here in Europe?

VD: Well there is a number of factors that we need to factor in, and indeed Chinese slowdown is one of the factors, correspondingly how much demand there is for European products in china, also the trade tensions between the US and China is affecting those prospects. So this is certainly one of the risk factors which is being factored in to our forecast.

WM: There are a number of uncertainties that your office talks about, the Commission talks about, when it comes to the economy across Europe, and I want to hone in on one of those, the concept of no-deal Brexit. What impact does that have on some of the companies — the countries, with exposure to the UK, countries like Ireland like the Netherlands. In terms of your forecast it's very difficult to predict, but what would be the impact in your mind for the economic forecast, when it comes to a no deal Brexit?

VD: Well in any case we need estimates on potential negative effect of Brexit on Europe's and also UK's economy directly after the referendum. And obviously if there is Brexit there is economic disruption and correspondingly it negatively effects growth, we see that effect is more pronounced on the UK itself and already now we see that UK is among the slowest growing EU economies. But of course there's going to be effects also in other member states, and exactly the ones which are more inter — intense trade relationship with the UK, including Ireland. But then to do exact assessment of those effects, first we need to see what kind of Brexit we are going to have, and this is still uncertain. We still don't know whether there's going to be a deal, or would no deal Brexit would happen, is there going to be extension of Article 50 period. But in any case we indicate in our winter economic forecast, this uncertainty surrounding Brexit also as one of the risk factors for economic growth.

WM: Your forecast talks about the economic fundamentals across Europe being sound. Which countries in particular do you think investors should be concerned about though?

VD: Well first of all it's worth underlining that economic growth in Europe continues and economic growth continues in all 28 EU member states. We still see positive labour market developments, positive wage developments, which all will factor in strong domestic demand, and they expect that Europe's economy will continue to grow. If we are to discuss specific countries, the slowest growing EU economy is Italy, we actually revised Italy's growth forecast quite substantially down. So our previous forecast was 1.2% growth this year, now the forecast is 0.2% this year. And this once again underlines our message that we had to Italy's government, it is important that they pursue responsible fiscal policies and they do not undo the structural reforms implemented by previous governments, to strengthen the fundamentals of Italy's economy and also to strengthen the investor confidence in Italy's economy.

WM: Given that the Italian economy has according to its own numbers slipped back into a technical recession for the third time in a decade, do you have faith that the current Italian government will be able to find the necessary funds elsewhere over the next two years to avoid problems with its deficit, to keep on track with the agreed deficit targets?

VD: Well that was the subject of our discussions with Italy's government, at the end of the last year. As you know the original budgetary plan that they presented was substantially deviating from the EU fiscal requirements and also producing problems with the confidence in Italy's economy, with increased interest rates, with potentially negative effects on investment. But we also saw that as a result of those discussions, government considerably changed its approach, reduced budget deficit quite substantially, so we see that the government is open to discussions and hopefully open to react when the economic situation is developing, and reactions from the government is needed.

WM: But even with that reduced spending, or that delayed spending, in Italy, the government there was still basing their decisions on a certain growth forecast. The one that you're putting forward in this forecast from the European Commission is very different. So given that, you're saying that you expect the government there to once again delay or reduce spending plans?

VD: Well at this stage we are not updating our fiscal forecast. As you know winter economic forecast concerns only economic growth and inflation figures. So we'll be coming back on fiscal figures in spring, European semester cycle. But indeed, the different growth forecast has implications on budget, and we will need to assess those implications.

WM: Does the debt pile in Italy, one and a half trillion euros, does it pose an existential threat to the Eurozone?

VD: Well this is something we've been underlining, first and foremost it's a risk factor for Italy itself, and something that we've been underlining in our economic forecasts in European semester documents, throughout previous years, that given the high level of Italy's public debt, and Italy has the second highest debt to GDP ratio in the EU after Greece, it's important that Italy puts its debt to GDP ratio on a downwards trajectory. And this is something which we have been consistently emphasising and we think this is important, fragility in Italy's economy which needs to be addressed.

WM: But when you look at numbers and data from the European Banking Authority, more than a quarter of that debt pile is held by banks outside of Italy, elsewhere in Europe. Is it an existential threat to the Eurozone?

VD: Well once again if you look at the developments in the Eurozone, we see that the economic growth is continuing and there is quite broad basis for this economic growth to continue, so I would say that we see Italy's public debt first and foremost as a risk factor for Italy itself, but the one which needs to be addressed.

WM: Given the move by the ECB to scale back its bond-buying programme, to end at some point in the near future, do you think that in that context the risks for Italy when it comes to its debt pile, is that much greater?

VD: Well indeed something that member states need to be prepared. It's clear that the quantitative easing programme was there to address the situation of very low or even negative interest rates and as - sorry, very low or even negative inflation, and as inflation is moving closer to ECB inflation targets, which is inflation close to but below 2%, it will mean gradual adjustment of ECB's fiscal policy, and this is something which member states need to account with, and need to prepare for. And this leads back to our consistent advice throughout the European semester, to countries with high levels of public debt, that they should be using good economic times to put the public debt clearly on a downwards trajectory, and we are already in quite a mature phase of economic cycle, we are in a sixth year of economic growth - probably we are somewhere around the peak of the cycle, so it's very important that member states are taking this action, and in most cases we indeed are seeing this happening.

WM: One final question for you on Germany. Last year we saw sales production of cars impacting economic growth there, a lot of analysts said that was in the wake of changing emission standards, but we're seeing some relatively different manufacturing data out of Germany recently, and I wondered how concerned do you think investors should be about a significant slowdown there based on your forecasts that you're releasing here?

VD: In case of Germany we see that there are certainly some short term factors in play, that you already mentioned, like meeting emissions targets in car industry, but of course there are certain risk factors which are already mentioned. If we discuss global trade tensions, if we discuss slowdown in emerging economies including China, it's going to affect economy of countries which are relying on exports to a large extent, and Germany is by far the EU's largest exporting economy, so if there are tensions and uncertainty around trade, of course it's going to affect the exports and it's going to affect the economic growth, so this is something that we need to watch very closely.

WM: Thank you very much. I appreciate your time today.


For more information contact Jonathan Millman, EMEA Communications Executive:

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