Versions of this opinion piece were published in Negocios, Politico, Kathimerini and La Repubblica.
Dear Mr Eurogroup president!
Congratulations, you are taking on a challenging task. Not only will you have to look after the Portuguese budget as Portugal’s finance minister, you will also preside over the monthly meetings of the euro area’s finance ministers: the Eurogroup – arguably the most powerful and decisive body for the euro area. Don’t just mark your calendar for the monthly trips to Brussels! Also put in your diary the countless calls with key ministers as well as with leaders of European institutions to forge consensus.
So, what will be your key files? The first case that will keep you busy is concluding the third Greek financial assistance programme by the summer. Most ministers will be eager to finally have Greece off the agenda. But the funding costs for Greece in the market are still quite high so that existing the programme is difficult. You could try to convince Germany to go for another programme that you would have to broker. It would allow Greece to have the necessary funds to pay back maturing debt, in particular that owed to the International Monetary Fund and the European Central Bank. But even if Germany with a new “Grand coalition” was on board, I doubt this would go through. The Netherlands, Slovakia and many others will be highly sceptical in giving another programme to Greece.
The alternative would be no programme but enough reduction of the effective debt burden so that market access is affordable. Again this will be unpopular but perhaps you can broker a compromise in which you get a commitment from the Greek authorities to finish some of the crucial reforms (like tax reform) that have so far not been implemented in exchange for conditional easing on the debt burden. Ultimately, the key task is to have more growth in Greece, which would be facilitated by a lower primary surplus. I would also advise you to explain to the Eurogroup that to lower the primary surplus earlier means more growth earlier. While that means some short term funding needs, growth pays off in reducing the debt burden and should therefore also be in the interest of the creditors. Your experience from Portugal can help you explain that.
The second file you should consult covers the reform of the euro area. While I do not share the optimism of the European Commission that there is wind in our sails to achieve major advances on fiscal integration, there is a need to act – and once there is a German government, there should be some concrete actions.
Your first overall priority should be to complete banking union, a topic missing in the German coalition pre-agreement. You should remind the new German finance minister of the importance of finishing the job started. While the respective laws on the European Deposit insurance will have to be passed in the council, much will depend on the leadership you can provide in bringing the banking sector back to soundness. Much progress has been made, but many of your interlocutors will insist on accelerating the disposal of non-performing loans – in particular, in Italy. You should encourage the single supervisor to act independently and not internalise national political constraints.
You will then have to broker a carefully designed deal that simultaneously increases capital requirements for large exposures to national debt while gradually introducing European deposit insurance. Don’t fall into the trap of thinking that a deposit reinsurance would be enough to break the vicious doom loop that is at the heart of the euro-area crisis, which the Northern members of the Group will tell you. The end should be a unified insurance. But also don’t fall in the trap of believing that increasing capital requirements on large exposures would bring havoc on the bond market. Bond markets are more stable if banks are covered by European insurance.
You should push the Commission to make bold proposals on the reform of the fiscal rules that are opaque and lead to erroneous recommendations. It’s a crucial topic that the Commission neglected in its last reform proposals thinking that political interpretation of rules is enough. The new rules should have the primary objective of ensuring debt sustainability, while they should also ensure good stabilisation policies at the national level. When interest rates are at zero, you and the rules should make a case for coordinated fiscal action. Finally, you will oversee a reform of the European Stability Mechanism (ESM). The key issue here is whether we can move from unanimous decision-making on programmes to supermajority voting and to enlarge the ESM’s scope so that it serves as a fiscal backstop to banking union. You should also ensure that the ESM managing director has some line of accountability to the European Parliament.
Finally, let me turn to your job itself. After a few months, you will appreciate that your workload is that of two people – especially if any negative developments occur, which is perfectly possible in your term. Your position should be turned into a full-time position, allowing you to dedicate all your energy to the euro area. You should have time to regularly testify in front of the European Parliament, to which you should be also accountable. I wish you the very best of luck in your new and important role.