Pedro Passos Coelho, Prime Minister of Portugal.
Ladies and Gentlemen,
Seventy years ago a terrible war in Europe ended. Decades of divisions and hatreds led to a human catastrophe that should never be forgotten. The lessons were quickly learned. It was on the ruins of a devastated continent that the European peoples began walking the path of peace and unity.
In order to live in peace and prosperity together Europeans decided to build a common house. Gradually, almost all European democracies joined the project. Not all Europeans who dreamed of being partners in this great project were able to do so, for they were under the yoke of dictatorships in the East and in the South. But then in the seventies a great wave of democratization began.
First, my own country became at last a true democracy; then, Greece and Spain quickly followed. After that, the Berlin Wall fell and Europe became reunited again in a Common House of freedom and democracy. It was in this atmosphere of great hope and unity that we decided to create the euro. And the creation of the euro was a landmark of our resolve to stand united. This was the path we followed.
Then the crisis came. It brought much economic and social pain, particularly in countries such as my own, where the least work had been done towards a more competitive and fair society and the necessity of adjustment was biggeer. But the crises also put to the test our determination to stand united and share a common destiny together.
Under great duress we put in place a number of emergency measures and devices to respond to the crisis, and a painful learning process began. We didn’t respond as quickly as we should have. We didn’t avoid frustration nor did we avoid costly uncertainty. We didn’t avoid mutual recrimination and misunderstandings. But in the end we were able to put the crisis behind us.
However, this is not the time for complacency. On the contrary. This is the time to move forward with determination and a common vision. It is the time to make choices. And I mean long lasting, workable, choices. Until now we have been living under a rules-only framework. Now we must adopt an institutions-centered framework.
Now it is time to learn all the hard lessons, confront our challenges and reestablish the euro zone on stronger foundations. I propose, then, that we should now enter without delay into a second phase of reform of the Eurozone. In order to do that, we must revisit our founding principles. We must once more look to the common purposes that made the European project an object of admiration all around the world.
In my view, at the core of our project lies the ideal of convergence among our peoples: convergence of prosperity and convergence of freedom. This is what unites us all. We cannot afford to lose sight of this ultimate purpose. Just as we stand for equality of opportunity within our societies so we must claim equality of opportunity for all European peoples to grow and prosper.
This is what the next phase of reform must deliver. If we fail, then we will see ever increasing forces for division and conflict. We will see disappointment and frustration. In the end, many will start wondering if they will not be better off outside Europe rather than inside.
The rise of populist, extremist, and sometimes even outright anti-European political movements should be taken as a warning to the risks of political fragmentation in the European Union. Should we ignore the frustration and lack of trust in the future shared by so many all across Europe? I don’t think we should.
A long-term, future-oriented, reform of the Eurozone architecture is therefore crucial to face these challenges successfully. We need clear rules and functional institutions. And we need predictable, accountable and timely decision-making.
In preparation to the European Council in June I am sending a paper with my proposals for reform to the President of the European Commission, the President of the European Council and the President of the European Central Bank. Let me now sum up the reforms I am putting forward for discussion at the European level.
The second phase of reform that I am proposing is about smart and deeper integration in key areas. And it reflects the undeniable specificity of the Eurozone in the broader context of the European Union. The promotion of balanced prosperity in a monetary union where a single monetary policy applies to countries with wide-diverging growth paths, and coexisting with national fiscal sovereignty, requires specific Eurozone reforms. However, given the close relationship between the creation of the euro and the deepening of the Single Market, these proposals should be viewed as a call for common responsibility and an opportunity by all Member States, both within as well as outside the Eurozone.
– First, we need a more coherent framework for structural Policies. This involves the refocus and simplification of the European Semester. We should make the European Semester more operational and effective. Namely, it should propose flagship indicators. And it should render country specific recommendations more focused on a limited number of policy priorities and more centered on policies with positive spillover effects to all Member States. The Recommendations implementation should be underpinned by a much higher level of political commitment, thus ensuring a much leaner process and an earlier impact on national policy choices. In parallel, it would be a big improvement if the European Semester reflected Eurozone specificities and recommendations – in a word, if it delivered a European Recommendation.
Additionally, we have to take a deeper look into fiscal coordination. We know that fiscal coordination is a requirement to avoid negative spillovers from bad national decisions. But in the same vein we must conclude that fiscal coordination is also required to explore positive spillovers. Now, genuine fiscal coordination implies that we take into account, not only each individual country’s fiscal situation, but also the overall fiscal stance of the Union, and especially of the Eurozone.
Let me underscore that this objective of an aggregate stance for fiscal policy does not require a budgetary union. It stands rather for the determination of the budgetary situation of the Union as a whole – and that can be reasonably accomplished via national budgets. However, without taking the budgetary situation of the whole into account we may find ourselves with adequate national budgetary situations but with an inadequate aggregate fiscal stance. This is a particular case in which the whole can be different from the aggregate sum of its parts. And it points to an additional layer of discussion regarding the question of flexibility and resilience in fiscal policy – namely, guidance on the overall fiscal stance of the European Union and the Eurozone in particular.
– Second, we must create a Financial Union for Growth and Stability. Since 2012 that I have been making the case for a full Banking Union, and it seems to me that without it financial fragmentation would eventually destroy the Monetary Union. Since then we have given important steps towards a Banking Union in Europe. But I must insist that we still lack a full Banking Union that can promise us more stability, more growth, less bank bail-outs, and less perverse feedback loops between sovereigns and the financial sector.
A truly European and integrated banking system is the only way to boost trust in the euro irrespective of individual political decisions or choices. For that, we should urgently move forward with a common deposit guarantee scheme and with a jointly funded backstop that upholds both the common deposit guarantee and the single resolution fund.
But a Financial Union is more than that. Our financial markets need to be widened and deepened, with instruments that enable investors to invest funds in Europe, in securities issued by European financial and non-financial companies. The objective is to give European businesses, especially small and medium-sized enterprises, access to different and cheaper forms of financing in order to increase investment and create more jobs. The increase in scale, as well as the availability of new instruments, would be a great step forward in creating a level-playing field for European businesses regardless of their geographical location. For that we have to make visible progress on the Capital Markets Union.
– Third, and this is my main point, to foster convergence we need a fiscal and institutional framework we can trust. we need a European Monetary Fund.
In my view, this new institution will be central to a reformed, future-oriented, Eurozone’s architecture. It is a necessity dictated by common sense; by economic and political sense. If we truly want to coordinate monetary and economic policy, then the monetary arm of the Eurozone must find a genuine counterpart on the economic side. Otherwise, we are creating a new imbalance within the Monetary Union. In other words, as we stand, action from the monetary arm is not matched by equivalent and coordinated action from the economic arm, undermining the positive effects expected from both. This is a serious loophole in our institutional arrangement and we must quickly address it. The European Monetary Fund is the way to do it.
Let me start by saying very clearly that the European Monetary Fund, as I see it, does not comprise univocal and permanent transfers between countries. Nor does it remove the need for fiscal discipline at the national level. There can be no doubts about any of these questions. Instead, the Fund would be an instrument of common responsibility, greater credibility, and economic soundness.
In my view, the EMF should have three main functions. Our experience in the last five years, or so, tells us that we need a permanent financial adjustment mechanism to provide technical and financial support to individual Member States facing unsustainable situations, under obvious conditionality. This mechanism should be more autonomous from national governments in terms of decision-making. And it should be equipped with technical ability and financial capacity to act quickly and in an informed way.
Moreover, it would allow for a single institution to supervise and monitor the progress of adjustment programs, which means that the European Central Bank and the International Monetary Fund would be dispensed with the mission that they have had so far. This would represent a maturing of the European approach to crises such as those we have had in the past. And it would remove the European Central Bank from an awkward and legally challenged position as a monitoring institution in this sort of national assistance programs. In practice, the creation of the Fund requires the integration of the European Stability Mechanism.
But the European Monetary Fund goes beyond this. The EMF has to be endowed with enough financial capacity in order to finance national structural reforms with positive spillovers to the Eurozone as a whole, as well as investment projects focused on modernizing the infrastructure upon which the Single Market depends. With this investment vocation, and working along with the European Investment Bank, the EMF would be an important institution to foster internal rebalancing within the Eurozone and therefore to a more symmetric macroeconomic stance.
Finally, and in the longer term, the EMF would also have to support limited shock-absorbing functions in order to improve the resilience of the Eurozone as a whole, prevent contagion across the Union, and reduce the economic and social costs associated with adjustments.
Everyone agrees that the Eurozone lacks a smart and permanent economic mechanism that performs a stabilization role in the face of idiosyncratic shocks or asymmetrical effects of common shocks. While some of these shocks result from bad national policies, others do not. A shock-absorbing function would allow some sort of cross-border risk-sharing to help reduce adjustment costs for the countries affected, limit the need to resort to financial assistance and prevent disruptions in social cohesion. This could take the general form of an insurance-type mechanism between Eurozone countries and would require a greater degree of harmonization between economic policies and institutions of the participating Member States. The most obvious example of such a function would be a European complement, or partial substitute, to national unemployment benefits, or even partially europeanising active labour market policies.
Thus, deepening the Economic and Monetary Union will require some kind of fiscal capacity. This need has become obvious during the crisis. Fiscal capacity for the Eurozone alone is justified by the fact that euro-countries have fewer instruments to deal with necessary adjustments. But also because making the bulk of adjustments depend solely on internal real depreciation undermines economic real convergence. It is not acceptable that the reaction to country-specific shocks, and the legacy it leaves them with, ends up delaying the convergence process for many years or even decades – not to say that it may even reverse it permanently. We should keep in mind that deeper convergence is in the interest of everyone in the Eurozone because it diminishes considerably the risk of sovereign crisis and the need for financial assistance in the first place.
So, how would this fiscal capacity be funded? In my view, not the way we have been funding European programs so far. I mean, not by pooling national financial resources and not by national transfers to a European budget or facility. Rather, this fiscal capacity should be funded by own resources, according of course to previously set rules and limits.
Why should we go for own resources? If we continue to link European funding to national financial resources, we won’t be able to overcome the political stalemate we have had so far. We will keep transforming every single European intervention into a zero-sum game. We will continue to turn every financial action by the Eurozone into a form of resource redistribution of some States to other States. The national resources transfers approach breeds political bitterness between Member states and ultimately hinders our capacity to act effectively. We are left in the worst possible situation: we end up delaying much needed action and undermining the social and political foundations of European unity. Unless we detach Eurozone own resources from national contributions, we won’t be able to take the discussion on the policies to be funded by such resources to a new and higher level. This way alone will allow us to legitimate common responsibility on any meaningful and lasting basis.
I have said before that a well-functioning Monetary Union requires a genuine economic policy counterpart to the ECB. That seat of decision must be responsible for economic policy in the Eurozone. This means, in turn, that it must have sufficient political authority and be accountable before all parties involved.
The Eurogroup Presidency is the obvious place where we could put such an authority. But not in its present form.
In this context, we would need the President of the Eurogroup to become permanent. By increasing the responsibility of this office – which would include among other things being in charge of the European Monetary Fund – it becomes more difficult to accumulate with the job of being a national financial minister.
Most importantly, we cannot forget the question of legitimacy and accountability.
Following this, several options could be considered. One would be a structure headed by a permanent President of the Eurogroup appointed by the European Council, and subject to a hearing by the European Parliament.
Another way would be again to have a permanent structure headed by a President of the Eurogroup appointed by the European Council, but in this second option he would be at the same time Vice-President of the European Commission. And he would also be subject to a hearing by the European Parliament.
Other options could be considered. But whatever option we might take, it would have to be adequate for the purpose of improving coordination between economic and budgetary policies, increasing consistency in monitoring national budgets and reform programs, along with deepening the legitimacy of the office. And all this could be done within the range of the existing Treaties.
Ladies and Gentlemen,
I am fully aware that the proposals I am making are quite ambitious. But they are workable and can be the subject of a new European consensus. Obviously, they can be improved, but they address real problems and necessities that we cannot afford to ignore.
It is my deep belief that we have an opportunity to act decisively now before it becomes too late. It is in times of economic recovery that we should reform the institutional edifice of the Eurozone and bring it closer to our citizens’ aspirations. And I don’t mean just Portuguese citizens or Southern European citizens. I mean men and women across Europe who look into the future with the legitimate expectation that we should never go through the same ordeal again.
Risks of economic and financial disintegration, of social breakdown, and of political fragmentation are all real. We should not be waiting for another emergency to hit us before we deal with them.
I say this to you as the Prime Minister of Portugal, a nation that in the last four years has been a credible and trustworthy European partner. With great sacrifices, we in Portugal have earned this credibility. We knew that new political walls between North and South, or between East and West, were harmful to Europe. We played our role in building bridges where political and social forces were bringing European countries apart. And we did that with words and deeds both at home and at the European level.
Since 2011 we have fully lived up to the national responsibility principle. And since then we have been pushing at the European level for this reform agenda in the name of common responsibility. It is time for both to meet together in a concrete and meaningful way.
But I have to emphasize that, at the end of the day, the success of the European project will always depend upon the assumption of national responsibility: responsibility in respecting common rules and keeping one’s own house in order. If we lose that from sight, there will be no reform purpose, no institutional improvement, that will make our Union stronger.
This is not a call for solidarity. It is a call for common responsibility. It is a call for determination and wisdom in facing challenges that affect us all without exception. And I say this because I truly believe that people around Europe understand that we should stand united. Not at any price of course, but by living in a common house which architecture we can all trust.