The eurozone’s southern members have done enough to reform their economies and reduce risk in their financial systems for the bloc to speed up banking union, the vice-president of the European Central Bank has said, in an implicit criticism of German foot-dragging.
But, in a farewell interview after a 34-year career in central banking, Vítor Constâncio expressed concern that an EU summit next month would provide only disappointing progress on the issue.
“Enough risk reduction has been achieved to justify introducing common elements of risk-sharing in the banking union project,” Mr Constâncio told the Financial Times, referring to steps taken by southern states such as Spain, Greece and his native Portugal, as well as by Ireland.
“The periphery countries have undertaken huge adjustments; they’ve gone from big deficits, both in the budget and the external current account, to complying with EU rules.”
ECB officials and many international investors back a French-led drive for far-reaching reform, including a eurozone-wide deposit insurance scheme, as well as a common budget and finance minister, to strengthen the region’s economic defences.
But Germany and a group of smaller northern European states remain worried that such measures could transfer resources to what they see as more profligate southern European countries.
Berlin is particularly wary of backing more economic and monetary union at a time when non-performing loans in some member states — notably Italy — remain high. The possible formation of a government in Rome by the populist Five Star Movement and Northern League has only increased German scepticism.
Mr Constâncio, who served as both finance minister and central bank governor in Portugal, countered that the risk of banking or economic crises in periphery countries was now much less than before.
“This is not about lower imports and weaker demand [in these countries], it is about the improved performance of exports and structural adjustments,” he said, arguing that banks’ capital ratios were higher, with the consequent lower risk of bailouts by the taxpayers.
The amount of bad loans had also fallen, though he acknowledged that for “around 30” lenders in the eurozone non-performing loans remained too high.
The battle over the economic reform agenda is set to come to a head at an EU summit in Brussels on 28-29 June.
On the deposit insurance scheme, Mr Constâncio said that he expected that the summit would only commit to “some kind of long term promises” — rather than a firm decision to forge ahead with the plan.
“I hope I am wrong, but unfortunately I am not expecting much from the next summit,” he said. “The European economy is going through a good patch of growth. That, of course, always reduces government’s motivations to take bold decisions.”
But he added that he did expect leaders in June to move ahead with creating a fiscal backstop for the eurozone’s bank rescue fund, the Single Resolution Fund, to draw on.
The ECB vice-president called for a much more ambitious “type of macro stabilisation fund, along the lines of a rainy-day fund” to which all member states would contribute, receiving payouts once unemployment rose far above its normal level.
Such a plan is also backed by the International Monetary Fund and by ECB president Mario Draghi, Mr Constâncio’s boss for most his eight-year stint at the bank.
The ECB is concerned that without meaningful reform, it will be left with too much to do when the next downturn comes.
Mr Constâncio acknowledged that the bank may have little ammunition to fight the next downturn through traditional measures such as cuts to interest rates, which are in any case expected to remain at record lows until deep into 2019.
But he argued that the ECB could also continue to target longer-term interest rates by keeping its balance sheet large and buying and selling financial assets.
He added that if “such a stressful situation” as the financial crisis recurs, it would “be virtually impossible . . . for the ECB to ignore” the possible use of extraordinary measures such as the bank’s huge asset purchases and promises to buy government bonds. Such measures helped counter market speculation that the euro would break apart at the height of the eurozone crisis.
Mr Constâncio, who will be succeeded by Spain’s finance minister Luis de Guindos, blamed too much austerity for a second wave of recessions in 2012 and 2013.
“The adjustment programme [for Greece] was indeed too harsh. And . . .[it] didn’t foresee the total collapse of hope and expectations,” he said. “At the same time, all countries in the euro area were reducing deficits, consolidating. That is the cause of the double-dip we had in 2012, 2013, which should not have happened.”
He sought to quash speculation that more hawkish central bankers would be reluctant in the future to take similar steps to the measures the ECB has tried this decade: “People are important of course, but this transcends people.”
Mr Constâncio himself will leave the bank in June, as part of a series of high profile departures that will culminate with the end of Mr Draghi’s term in October 2019.
He plans to return to academic life, the career he had originally intended to follow before the Portuguese Revolution of 1974 brought him into the political fray.
He will teach postgraduate economics in Madrid and hopes to see changes in the discipline. “Macroeconomics is not just the aggregation of individual decisions [made by] optimising agents. We should not just assume everything moves towards a general equilibrium of competitive markets,” he said.
Mr Constâncio will set up an economics blog, a similar move to former US Federal Reserve president Ben Bernanke. “I always hoped I would have the opportunity to be a free intellectual,” he said wistfully. “In my career, I never had that luxury.”