Mending Fences New Eurogroup chief sees positive signals from Germany

As of this week, Portugal's Mário Centeno chairs the euro zone’s steering committee of finance ministers. He spoke to Handelsblatt about why Germany needs to get its act together and form a government.
Laughing with – not at – Germany. New Eurogroup chief and Portuguese finance minister Mario Centeno.

It’s no real surprise that Mário Centeno has been nicknamed the anti-Schäuble, even if the Portuguese finance minister says the label has no merit. Portugal has clashed repeatedly in the past with Germany’s long-time finance chief, Wolfgang Schäuble, who was considered a nemesis of many southern European nations during the euro zone’s nasty debt crisis of past years.

Mr. Centeno, who took over as head of the Eurogroup on Saturday and travels to Berlin on Wednesday for meetings with interim German Finance Minister Peter Altmaier, said there’s actually a lot more that unites Germany and Portugal than the public might think. He suggests a certain amount of “prejudice towards a center-left government” might have informed the skeptics of Portugal in the past.

And for his part, Mr. Centeno offers lip service to some of Germany’s more legitimate concerns about profligate government spenders since the crisis – for example talking about the need to avoid “moral hazard” when it comes to creating a pan-European budget.

As a member of Portugal’s center-left Socialist government, Mr. Centeno is not a natural ally of Germany's chancellor, Angela Merkel. And yet the two are united in their desire for a speedy resolution to Germany’s own political crisis. “We need it in Europe as soon as possible,” he said. Germany, along with France, needs to once again be a driver of European reform.

It’s not just Mr. Centeno who is looking for common ground as he begins to lead the euro zone's steering group of finance ministers. With Mr. Schäuble relegated to a role as the head of Germany's parliament, Ms. Merkel, in the middle of tense negotiations with the center-left Social Democrats to form a new grand coalition government, seems to be moving leftward on Europe in particular.

The signals we get from Germany are very encouraging indeed. Mário Centeno, Portugal's finance minister and Eurogroup president

A draft document laying out the new government’s priorities on Friday endorsed the idea of a euro-zone fund that could serve as a "starting point" for a common budget. The document also calls for a European Monetary Fund and a common fiscal backstop for banks (which Mr. Centeno backs), though it stops short of endorsing a common bank deposit insurance (which Mr. Centeno supports). The shift by Ms. Merkel was sharply criticized by some conservatives in Germany. "The euro zone is en route to becoming what Germans deride as a 'transfer union,’" Jörg Krämer, chief economist of Commerzbank, wrote in a research note on Friday.

Overall, Mr. Centeno said he is pleased: “The signals we get from Germany are very encouraging indeed ... It makes sense for a monetary union to have a budget capacity that plays a role of supporting investment,” he told Handelsblatt.

"But there are concerns on moral hazard we need to address,” he added in a nod to the conservative skeptics in Berlin, suggesting there could be conditions attached to any money handed out to member states under a new investment budget. That’s something the European Commission opposes but Germany no doubt would favor. “We have to be very serious about these, because [a moral hazard] could jeopardize the positive impact of such a budget capacity,” Mr. Centeno said.

While a new German government isn’t likely to be in place until Easter, Mr. Centeno wants to move fast in reforming the 19-nation euro zone. He’s hoping to launch the discussions at the finance ministers’ meeting later this month, and wants a package of reforms to be signed off in June. These first months offer a window to make real progress, he said, before another round of European elections muddies the political waters.

As for the tilt towards populism and protectionism in parts of Europe, Mr. Centeno insists it’s more a matter of framing the debate than about true opposition to further European integration. That, he says, is the lesson of 2017, when pro-European candidates like Emmanuel Macron of France prevailed. “European citizens are showing strong support for more European integration. We must seize this unique opportunity.”

Read the full transcript of our interview with Mr. Centeno below.

Not always on the same page: Former German finance minister Wolfgang Schäuble and Mr. Centeno's predecessor as Portugal's finance minister, Vitor Gaspar.

Handelsblatt: Minister, you overtook the presidency of the Eurogroup just a few days ago, but people already have a clear opinion on your political positions. Some call you the anti-Schäuble. Do you agree?

Mário Centeno: This label does not fit me at all, and it is totally missing the point. The Portuguese government is promoting fiscal consolidation and at the same time economic convergence to the EU. From the discussions with Wolfgang Schäuble, I know how much he praises both things: that a country should grow in a balanced way and that it should have a balanced fiscal stance. That is exactly what we have done: We have a current account surplus and we have a very strong primary [budget] surplus allowing us to reduce our debt/GDP ratio. These achievements do not fit that label.

But you have described yourself as an anti-austerity politician. What does that mean?

That is another misconception. I have never described myself with such labels. When the government came in office in 2015 it had a very clear message: It was time to introduce an element of social cohesion in Portugal. We had had a very pronounced migration outflow especially of young workers. This was quite detrimental for our potential growth. Our measures vis-a-vis minimum wage were targeted to promote a stronger social cohesion and increase internal confidence. But this was coupled with the implementation of structural reforms and a very rigorous expenditure control program. These are still being implemented in order to meet our ambitious fiscal targets. We brought the budget deficit from 4.4% in 2015 to around 1.2% in 2017.

The German government criticized you for some of these measures. Mr. Schäuble even warned that Portugal could need a second bailout program. This didn’t happen, as we know now. Is it time for a German apology?

Many observers have been very wrong about Portugal in these last couple of years. Perhaps there was some prejudice towards a center-left government, or only a lack of information. What I know is that these views were not based on any concrete measures that the government has implemented. The results are here to show it.

Will we see a shift away from austerity towards financial solidarity in the euro zone under your presidency?

I lead a group of ministers from 19 democratic countries. The policy strategy of the Eurogroup is not determined by the choice of president. These countries are sovereign and have distinct political views. But we all share a common desire to make the euro area more robust and resilient to crises. This is not about more or less austerity. We all want to keep our deficits under control in order to allow us to have a buffer for cyclical downturns. The EMU is very young compared to other currency areas. We still need to work for quite some time towards greater harmonization. This requires not only national reform efforts but also joint decisions in the euro area. The lack of a joint policy can be very detrimental for all member states. Completing the institutional architecture of the euro area will benefit to all member states and everyone needs to understand that.

After a long period of resistance, Germans seem to be approaching this view. In their first coalition paper, Angela Merkel’s CDU/CSU und SPD are for instance suggesting a common investment budget for the euro zone. Does this make you happy?

The signals we get from Germany are very encouraging indeed, also on the issue of an investment tool. As an economist, I would say that this makes sense. It makes sense for a monetary union to have a budget capacity that plays a role of supporting investment and can serve as a stabilization tool. But there are concerns on moral hazard we need to address. We have to be very serious about these, because they could jeopardize the positive impact of such a budget capacity.

Concerns about permanent transfers are quite understandable. It cannot be seen as a replacement for reforms.

Moral hazard means that money transfers from a euro budget could ease the pressure on governments to tackle difficult reforms?

Concerns about permanent transfers are quite understandable. They are not the purpose of such a euro budget capacity and no one is asking for it. It cannot be seen as a replacement for reforms.

So you would like money transfers from this budget to be subject to conditionality?

This is an option under consideration. In the framework of the European semester, there are necessary reforms identified for each member state. Some kind of conditionality related to these policy recommendations could be envisaged. There are several options on the table.

But the European Commission suggested a fiscal capacity without conditionality….

We are in the middle of a debate. There are different views and different levels of ambition. We do not have a [fixed] solution yet.

Should the euro zone budget be located within the EU budget or outside?

At this stage, both options are available. Before deciding, we need to determine the purpose of the budget capacity. It could be designed as an automatic instrument acting as an economic stabilizer in a crisis situation. At the same time, we also need to define precisely what “investment” means in this context.

That was a diplomatic answer…

As I said, I chair a group of 19 countries’ ministers. We are still collecting ideas and discussing them but we will reach a stage, when we have to decide. There is already a lot of consensus around the table.

What is your time schedule?

By the European summit in March we need to be clear about our agenda so that we can deliver in the June summit. Between now and March we need to set the parameters of the discussion and then up to June fill in those parameters. By then, we need a comprehensive reform plan and a clear roadmap for delivery.

Are you going to start the reform discussion at the next Eurogroup meeting in January?

The Eurogroup has been discussing this for some time. As we approach crunch time the discussion will intensify in the meetings in February and March. It will be a very busy period. In June we should be able to take decisions. We have to use this very fortunate moment of time. In several major countries we had elections recently and a new political cycle has started. We are also observing a very positive economic cycle with balanced fiscal positions and economic growth in all euro area member states. And despite some controversies, European citizens are showing strong support for more European integration. We must seize this unique opportunity.

But there is still no government in Germany. Isn't that a problem for your ambitious time schedule?

I don't think this is an issue. We all understand that the coalition talks in Germany take some time. There are some positive signals from the documents that were released of the new potential coalition. We see in France a strong push for ambitious reforms. My expectation is that this energy is going to be matched by the new German government. There may be differences but we need ambition and initiative on both sides. These countries have always been the drivers of European integration.

Would you appeal to your fellow center-left Social Democrats to have a new government as quick as possible?

I obviously hope it will be possible to deliver a new German government. We need it in Europe as soon as possible. I understand that Chancellor Angela Merkel is working on this.

We will have elections in Italy in March. And some important Italian parties are not in favor of further European integration. Aren’t you concerned about the situation in Italy?

I am not going to speculate about the potential election outcomes in Italy. But what we have been observing in previous important elections in Europe is: When citizens see that there is a way forward in the European construct, they have picked governments that are committed to that process. We saw that in the Netherlands, in France and in Germany, too. We all have gained a lot from being part of the euro area. As politicians, we need to identify and continue to explain these gains to our citizens.

In a banking union it makes a lot of sense to have a common deposit insurance.

The draft coalition agreement in Berlin mentioned the possibility of upgrading the European Stability Mechanism to a kind of European Monetary Fund. What should such an EMF do that the ESM doesn’t do today?

This is an institutional discussion that is also linked to the completion of the banking union, namely to the question of where to locate the backstop for the Single Resolution Fund or, in the future, the European Deposit Insurance Scheme.

Should the ESM be embedded in EU law, and controlled by the European Commission and European Parliament. Or should it be kept under the control of euro zone finance ministers and national parliaments?

With the IMF losing importance in future euro area crisis management, it is logical to look at the future ESM role. There is an ongoing debate about the future legal framework it should operate on. I prefer to look at policy issues first. We should decide first what to add to the current ESM functions. Then we can talk about the ESM’s governance.

Your predecessor as Eurogroup chief said clearly that ESM funded by member states should be controlled by member states, and not by EU institutions…

This is an understandable argument for any finance minister. But first we need to discuss what we want the ESM to do. If we want the ESM to play further roles in banking union, we may also need to adapt the governance framework.

The discussion of a common deposit insurance in Europe, known as EDIS, is very controversial. What could a compromise look like?

In a banking union it makes a lot of sense to have a common deposit insurance. This would benefit all citizens and provide a safety net to our banking system, prevent bank runs that may have systemic repercussions across the euro area. We have a process established for EDIS. It is very important to trigger stage one and then discuss under which conditions we can advance to stages two and three. If we do this, we can generate a new wave of confidence in the markets. And that can also make it easier to take the following decisions to reduce legacies and risks.

When could a decision on the first step of EDIS be taken?

Ideally, this will be one of the measures in the package that will be decided by June.

Are you aware of the stiff resistance from the German financial sector?

It is a challenging discussion but we have been having it for some time now and we should continue to do so.

Common deposit insurance involves sharing risks, which should go along with risk reduction. In this context, the Bundesbank has asked for capital requirements for sovereign debt. Is there a need for such a measure?

I don't think that this is needed now. We have already made huge progress in risk reduction in recent years. We have launched the banking union, set up a single European supervisor, reinforced capital requirements, banks across Europe have raised capital by over €560 billion after the crisis hit, we established bail-in before using public funds. In several countries there is a pronounced reduction of non-performing loans and we will reduce it further. We have done a lot of risk reduction since the crisis started. Moreover, we have done a lot [of work] on a capital markets union, and we need to go further to reinforce our internal market, which is already the biggest in the world. We need to improve conditions for investors in Europe. This is more pressing when looking at market developments in China and in the US.

The progress Europe has achieved in the last few years came under the pressure of the crisis. But that is gone now. Now, you are a chair of 19 countries with very different views on the remaining reforms needed for euro zone. What makes you so optimistic that you find common ground?

Status quo is not an option. We have to find compromises out of these very different ideas. I have a positive way to look at this: There have been very good developments in all euro-countries. We have reduced the risks substantially, this needs to be acknowledged by all. I am confident that the next steps of euro-integration will emerge under a much more coherent process. We are not starting from scratch. It is true that not all ideas are compatible. But we have a bargaining set what is rich enough to find good solutions.

Handelsblatt's Brussels bureau chief Ruth Berschens and senior Berlin political correspondent Jan Hildebrand conducted the interview. Christopher Cermak adapted this interview for Handelsblatt Global. To contact the authors: [email protected], [email protected] and [email protected]