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16 April 2019

Eurogroup President Mario Centeno: A source of stability: the role of the euro in an uncertain world


Speech by Eurogroup President Mario Centeno at the London Business School, in which Centeno explains how the euro will survive a global slowdown, predicted for the end of this year.

[...]It is true that the euro area’s growth decelerated somewhat last year. This trend is expected to continue in 2019.

This should not come as a surprise. The euro area growth is ‘normalising’, which is inevitable after what was an exceptionally good year in 2017, when growth reached 2.4%.

Such rates of growth could not last for long, as it is well above growth potential of about 1.5%.

Regardless of this ‘normalisation’, the eurozone will grow for the fifth year in a row – the longest growth streak since inception.

The euro area continues to create jobs - 10 million new jobs since the crisis - and better-paid ones too, as wages are now growing across the board.

Unemployment has continued to fall for 15 consecutive quarters, and it stood at 7.8 % in February this year – the lowest rate recorded in the euro area since October 2008.

The services sector remained strong. Consumer confidence remains above long term average. We have corrected trade and budget deficits. No country posted an excessive deficit last year. The euro area has a comfortable budget position to react to any economic shock.

This was the result of sound policies after the crisis, namely a combination of fiscal consolidation and structural reforms.

At the same time, citizens’ confidence in the euro – which is celebrating only its 20th anniversary this year – has also been constantly growing, and is currently at its highest level ever: 74 % believe that the euro is a good thing for Europe. We must surely be doing something right.

*

I’ve mentioned a number of external risks. But there are some internal risks, too. 2019 will be a year of political changes in Europe. Most key leadership positions in European institutions will change. These have been good years for Europe, we must keep the trend.

This comes at a time when we see a wave of new political movements all across the western world, on the fringes of the party system. These have fragmented the political landscape and are shaking the political centre. This is weighing heavily on economic policies and public sentiment.

All these risks are mainly political, rather than economic or financial.

In a way, this is a good thing. Addressing political risks depends directly on us. In Italy it is high time for budget execution and delivery. In Germany it is time to use the leeway to foster the recovery, in particular of the manufacturing sector. We still have time to bury a trade war and to give clarity to economic agents on the Brexit process. [...]

Our banking sector is now much more robust than it was on the eve of the financial crisis. Steps were taken to repair, consolidate and recapitalise it. Our banks have more and better capital and higher liquidity buffers, which are now under greater scrutiny from regulators. The stock of non-performing loans has been steadily decreasing, improving prospects on profitability.

We realise there is still quite some work to be done to bring the euro area up to a level of integration compared to say, the dollar. And that is now our agenda.

*

Step-by-step we are getting there. I, along with my fellow finance ministers of the euro area countries, have been tasked by EU leaders with carrying out several projects related to further deepening of the Economic and Monetary Union.

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Four months ago, we have reached an agreement on how the rescue fund - European Stability Mechanism (ESM) - can be used in a broader and more effective way.

This includes using the ESM’s firepower as a backstop for the Single Resolution Fund, which is part of the banking union, and was created to prevent failing banks from being bailed out by governments. This enhances the credibility of our banking resolution framework.

An agreement has also been reached on how to make the ESM's precautionary credit lines more accessible to countries with sound fundamentals, to protect them against exogenous shocks.

In addition, we have found a way to expand the role of the ESM, supporting our capabilities of crisis management and prevention.

*

All this will help. But arguably there are two important pieces missing in the euro. One is a common European Deposit Insurance Scheme or ‘EDIS’. This is an essential piece of a coherent EMU. It will provide the system with a confidence boost, preventing bank-runs.

But this is a politically sensitive issue. And that is why we need to see small steps one at a time. That the discussion is now at a political level is a signal of confidence.

*

One of the most significant steps forward in recent years – in my view – was the decision to put in place a euro area budget to support convergence and competitiveness.

Europe’s finance ministers are currently working to define the main features of this instrument, which will complement monetary policy.

You are probably wondering about the size of this budget. It will not start as a bazooka, but over time we will be able to adjust it to our needs as it proves its merits. Both as Finance Minister in Portugal and as President of the Eurogroup in Brussels, I don’t like big machines. We should take small steps. As economists put it, we should act on the margin. So let’s look at the most effective margin to act upon and do whatever it takes on the specific margin.

What matters the most is that we are adding a new instrument to the euro area’s policy toolkit – an instrument that is undoubtedly a credible testimony to our willingness and determination to continue strengthening the currency union. And also that it will attract new members to the club. In that sense, it is a premium for euro area membership.

*

While we continue on the path of reform, the euro is already the world’s second most important currency. For the sake of the stability of the international financial system, this role must continue to grow.

The euro is used in 36% of international payments. But when you look at its effective role in the international scene, including its weight on international loans, foreign exchange turnover or its use as a reserve currency, the dollar rules and the euro punches below its weight: proportion of foreign exchange trading is 44% in dollars but only 16% in euros.

Recent developments have raised questions about the dominance of the dollar. [...]

Europe is waking up to this reality. We can only rely on ourselves, not on others. The best way to boost our global relevance is to do exactly what we are doing: deepening both the banking and the capital markets unions, and building an euro area budget. These will reassure investors and other agents in financial markets. That is why I am so optimistic.

There are so still many potential economic gains from a fully functioning EMU, and benefits to reap. And still the euro thrives. [...]

To follow this example, the Portuguese escudo, or the British pound for that matter, cannot aspire to dominate or even dispute the dominance of the international financial system, as they could centuries ago. Individually we are small, although some still think they are big.

In the future, the world is not going to become less interconnected, less digitalised or even less globalised, despite the latest populist and protectionist tendencies. [...]

If we want to continue to have a say, shaping the world financial order with our values and with a rules –based system, the euro is our best and only shot. [...]

Full speech



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