Portuguese Eurogroup boss wants EU debt, deficit rules rethought

  • Lusa
  • 7 July 2020

Mario Centeno advocates a rethink of the current rules limiting debt and deficit in the EU.

Still president of the Eurogroup, Mario Centeno, advocates a rethink of the current rules limiting debt and deficit in the EU, warning that they could lead to a new recession after the pandemic crisis.

In an interview with the Financial Times days before the end of his term at the head of the Eurogroup on Monday, Centeno argues that EU governments should take advantage of the pause imposed by the Covid-19 pandemic in applying the budget limits to rethink these rules and avoid reapplying them “blindly,” including the 60% ceiling on GDP so far imposed on national debts.

“The important thing for Europe, in terms of taxation, in the coming months and years is how the return to the application of tax rules will be managed, in order to avoid the eruption of a recession,” says the former Portuguese Finance Minister.

This year, public debt in the eurozone is expected to rise to 102% of GDP as a result of public funds injected into the economy during the months of economic stalemate resulting from the lockdown.

According to Centeno, who in June was proposed by the government to take over the post of governor of the Bank of Portugal (BoP), “this crisis will lead to significant increases in public and private debt” and “require high levels of investment” in all countries: “Applying the rules blindly could be unrealistic in these circumstances and call into question the credibility of the system,” he considers.

He argues that the European Commission, which last year started a consultation on the Stability and Growth Pact, should continue to work on ideas for overhauling the current rules that EU ministers could discuss after the summer.

According to Centeno, while ongoing negotiations on the 750 billion euros package of aid for European economic recovery are “the immediate priority”, finance ministers should also try to set “realistic targets” for the restoration of tax rules.

“We should not rush, but we know that we will have to comply again with fiscal policy rules”, he said, maintaining, however, that “it makes no sense to try to determine unrealistic paths to resume the Stability and Growth Pact, given the enormous uncertainty surrounding the evolution of the virus and its impact on European economies”.

“We must first overcome the difficulties,” he said.

Measures to combat the pandemic have paralyzed entire sectors of the world economy and led the International Monetary Fund (IMF) to make unprecedented predictions in its nearly 75 years: the world economy could fall 3% in 2020, dragged down by 5.9% in the United States, 7.5% in the euro zone and 5.2% in Japan.

 

For Portugal, the European Commission forecasts that the economy will shrink 9.8% of GDP in 2020, a contraction above the previous projection of 6.8% and that estimated by the Portuguese government of 6.9%.

The government expects the economy to grow 4.3% in 2021, while Brussels anticipates more optimistic growth of 6.0%, up from 5.8% in the spring.

The unemployment rate is expected to rise to 9.6% this year, and to fall back to 8.7% in 2021.

As a result of the strong recession, the budget deficit is expected to reach 6.3% of GDP in 2020 and public debt at 134.4%.