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The euro 20 years on: the debut, the present and aspirations for the future

My first words are of greeting and thanks to the Governor of Banco de Portugal, Carlos Costa and the Vice-Governor, Luís Máximo dos Santos. I would also like to extend a special mention to Elisa Ferreira, in this transition period between her vice-governorship of Banco de Portugal and the European Commission, the Board and management […]
Sexta-feira, 15 Novembro 2019

My first words are of greeting and thanks to the Governor of Banco de Portugal, Carlos Costa and the Vice-Governor, Luís Máximo dos Santos. I would also like to extend a special mention to Elisa Ferreira, in this transition period between her vice-governorship of Banco de Portugal and the European Commission, the Board and management of the Bank, as well as the audience in general, many of whom I am very used to meeting at this type of session, Nuno Alves and the other
participants on my panel.

I apologise to the foreign participants, but as there is an excellent simultaneous translation service, and having been informed that this was to be a bilingual conference, I could find no reason to speak in English, especially as there is no linguistic homogeneity and the conference is taking place at Banco de Portugal in Lisbon.

I congratulate the Governor and Vice-Governor for this initiative, the theme of which is obviously especially dear to me. Considering the importance of this debate and the quality of the talks I listened to, despite not having been able to listen to them all, I have understood the contribution this conference will make to future reflection on Economic and Monetary Union.
Above all, I should mention that Banco de Portugal has put itself in a position of particular prominence by organising this high-level conference as we mark an anniversary – the twentieth – of the euro, of the Economic Union, although the date has been commemorated discreetly, without fanfare, or those very pretentious or ambitious proposals for its future. Such ideas
normally appear on these anniversaries and it is considered appropriate to launch new proposals to put right what is wrong.
And, although the twentieth anniversary of the euro would have been a good occasion to reflect on the achievements of the Economic and Monetary Union, how it was reached, as well as what still needs consolidating.

For this we need to think about the initial goals set out for the euro and how they changed over time, particularly the weaknesses that the single currency showed in dealing with crisis situations.

On 19 February 2019, three senior figures in the Commission, Marco Buti, Maya Jollès and Matteo Salto published a state of play article in Vox on the euro and its future prospects, and I quote:
“In spite of the existential crisis in 2011-2013, membership to the Eurozone has continued to grow. In its short lifespan, the euro has become an anchor of economic and financial integration. In late 2018, the Eurobarometer survey showed that around two-thirds (64%) of euro area citizens think that having the euro is a good thing for their country and about three-quarters (74%) think that having the euro is a good thing for the EU, the highest level since the question was first asked
in 2004.”

At the same time, over two-thirds – 69% of the euro area – thought that there should be greater coordination of economic policies, giving special emphasis to the themes debated here.
I believe that in Portugal, it was Ricardo Paes Mamede, an exceptional economist with his feet firmly on the ground and of whom I am very fond, who was the first person to try to publish a state of play on the euro. In an article published in Diário de Notícias on 9 January 2019 entitled “20 years of the euro: a devastating balance”, where he writes and I quote:
“Two decades have passed since the euro replaced the escudo and various other national currencies. Despite the round number, there were no great celebrations, which is not strange.

Irrespective of the love one may have for the theory of European integration, it is difficult not to conclude that the single currency fell far short of the promises and expectations it encouraged.
Evolution of Portuguese economic indicators is clear. Since records began, there has been no 20-year period in which GDP growth was so low, the average unemployment rate so high and the external deficits so expressive. Considering purchasing power, Portuguese average income is today further from the euro area average than it was 20 years ago.”
This is certainly not a success story.
Interestingly, on the same date, 9 January, I found a text by Barry Eichengreen, on a website – Brave New Europe – called The Euro at 20: An enduring success but a fundamental failure, where Eichengreen claims:
“So the euro will stumble forward. No one will be happy with its operation. Equally, no one will leave. Progress will be minimal, since there is no appetite for the political union needed to support fundamental reforms. As a result, the euro remains vulnerable to another crisis. The next crisis could heighten the perceived urgency of fundamental reforms and lead Europe’s citizens to accept the modicum of political integration needed to implement them. So reformed and restructured,
the euro would operate better. Or the next crisis could empower anti-elite, nationalist, anti-EU – that is to say populist – politicians, making it impossible to implement even the modest reforms agreed in 2018. In which case the euro will function even less smoothly. Only one thing is certain. History doesn’t run in reverse.”
For better or worse, and both arguments are sustainable, what is a given, and in fact very curious is: the euro is here to stay. That is, the euro did not suffer the fabulous destiny of Amélie Poulain, to recall the now-classic French film, but rather had a future that was relatively disquieting whose development was difficult to determine.
But what is certain is that it has survived. And why has it survived?

It has survived thanks to the general inertia of the forces opposed to the euro which fail to offer a realistic proposal to replace it; through the perception that people have of an enormous void that would replace it, even at the worst moments of its crisis. And then we must not forget that there is always the “devil you know” that keeps us together. A 20-year marriage is quite long even if it is somewhat unequal, so why bother going through the nuisance of a separation.

The euro is here and, in a generally held view, it is here to stay, so the question should be, under what terms?
In the difficult times that followed the recent crisis, there was an incredible increase in eurooptimism, which is now felt by about two thirds of citizens concerned.

A Lisbon university revealed real enthusiasm for the euro, when in a survey, in nine qualitative questions on the European project, the Portuguese answered that they did not want to leave either the European Union or the euro, 90% in the first case. They do want the European Union to have great decision-making capacity in economic terms, and above all, to have greater political integration, and feel closer to the creation of a United States of Europe than the fragmentation of the European Union. Only in one question were the Portuguese dissatisfied with the European project: they consider the EU undemocratic, and they are right.

The European Union has hitherto been more a club of democracies than a democratic club. And note that calling it a club of democracies involves some generosity of spirit or ability to look the other way.

It is interesting that, in Portugal, the euro is seen this way by public opinion. Because if the euro has created winners and losers, Portugal is clearly on the list of the losers.
If, for example, we look at the effects of the introduction of the euro on gross domestic product, we can see a spectacular increase in Germany, and then a slightly less spectacular but nevertheless an increase in the Netherlands and thereafter almost everyone has lost money: gross domestic product has fallen in most countries. Unfortunately it is impossible to demonstrate solidly that economic outcomes in the absence of the euro would have been as certainly negative as suspected.

In a recent study Alessandro Gasparotti and Matthias Kullas, Centre for European Policy, conclude that the euro brought much differentiated gains and losses among Member States.

On the winners side, the greatest beneficiary was Germany, with gains of about €23,116 per capita (€1.9 trillion) with such gains being particularly high following the sovereign debt crisis.
On the side of the losers, Italy stands out, with a loss of €73,605 per capita (€4.3 trillion).
Likewise, Portugal is a loser: €40,604 per capita (€424 billion), that is more than eight times the sum of the loan conceded by the European authorities in the scope of the 2011 bailout granted to the country (€52 billion).
The country has lost uninterruptedly since 2003. Between 2011 and 2014 (during the “successful” Economic and Financial Assistance Programme), Portugal lost the cumulative sum of €19,716 per person; and from 2015 to 2017 (years in which the structural reforms hitherto unleashed were to produce their “desired” effects), lost a further €16,348 per capita.

It is therefore natural for Germany to be very comfortable with the euro. The euro is a currency that makes it possible to ask the question posed by one of the great figures of German culture, Thomas Mann. Was he not right to ask whether one should want a German Europe or a European Germany? Robert Skidelsky, in a curious exercise available in Project Syndicate, compared the treatment of countries in financial difficulties with the identical treatment that Germany had received almost a century earlier with the Treaty of Versailles, stressing that a fair agreement between creditors and debtors is not possible, and that there is a need to preserve political and social peace.

The euro area needs to learn this lesson anew. Supporting his own opinion, Skidelsky recalls the position taken by his mentor, Keynes, a particularly Keynesian position, and quotes: “The policy of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable”, adding that, in Keynes’ analysis, austerity is theoretically wrong: cutting income in one country causes lower income in others by spreading depression and
ensuring that any recovery will be delayed and weak.
When we think of the reasons leading to this sympathy, this tolerance of the Portuguese for the euro, we find a factor that should be noted, which concerns the effects of the euro on Portuguese public debt. In recent years, and as a result of the European Central Bank’s quantitative easing programme, the average interest of Portuguese debt dropped significantly from 3.6 in 2014 to 2.6 as estimated for 2019.
That is to say, to put it simply, instead of €43 billion in interest and costs that might have been paid over five years, if the average interest rate had continued to be that of 2014, the Portuguese Treasury was estimated to have paid €35.6 billion. The ironically so-called Ministry of Debt substantially reduced its budget. It is not very common for ministries to reduce their budgets. Only by virtue, as we all know, of some quite involuntary measures.

The 20th anniversary of the euro ends on a sad note with Mario Draghi’s departure from the European Central Bank. Mario Draghi was the man who saved the euro, as he himself often points out and has said in several interviews. And so he should, for one should not tolerate injustice.

In this respect, I would like to recall one of the great figures of Portuguese culture, Jorge de Sena, who would now have reached his hundredth birthday and was, as is widely known, extremely vain.
He would always praise himself lovingly in any interview, and when asked “Why are you always praising yourself?” he would answer: “Because I do not get enough praise from others.”
I could say that Mario Draghi finds himself in a similar situation, as although he does get more praise, he also gets also a lot of criticism at the same time.
And how astonishing to think about the simplicity with which Mario Draghi saved the euro after successive meetings and summits meant to solve the problem for good.
What did Draghi state in a rather firm voice? “The ECB is ready to do whatever it takes to preserve the euro” and proceeded to announce the quantitative easing programme, which means that such determination is sufficient to achieve remarkable results.
Emmanuel Macron, much to his credit, one of the heads of state or government committed to finding balanced and fair solutions for the European Union, awarded Draghi the Légion d’honneur and raised him to the heights of Jean Monnet and Robert Schuman, the founding fathers of European integration.
This is a very interesting development, for one because he foregoes several figures that have featured prominently throughout these decades, and second because it really marks something I believe to be strictly true: the two major novelties are in fact the European Community or, if we prefer, European communities and the Economic and Monetary Union.
Before leaving… and I don’t know if because he was not very sure about his successor, Christine Lagarde, a very nice and charming lady, who has such unstable points-of-view that I am sometimes left perplexed. For example, on austerity, I have already heard her say one thing and its opposite so many times that I am unable to understand her. On inequality, again the same, one moment she worried about inequality the other she totally disregarded the matter. And, therefore, I do not
know if for this reason or if to make her life easier, Mario Draghi only left after guaranteeing that the maximum intervention measures would continue, that the quantitative easing programme would continue. And he also pointed out that it was time for governments with more expansionary fiscal policies to work with the European Central Bank to reduce the risks of recession in the economy. Draghi warned that not everything is positive in the euro area. The highest risk is a contraction of the economy and what the monetary union lacks the most is a central fiscal capacity.

I believe that many of us agree with this assessment.

A return to the expansionary policies of the European Central Bank is therefore justified and so I find it a sensible decision. Now, a very unusual thing: if I were a political leader of a Member State of the European Union, were I Minister of Finance, I would rejoice with the ease with which the European Central Bank was lending, becoming an ally for more expansive fiscal policies, especially to those that need it most. But the Eurogroup has reacted angrily to Mario Draghi’s proposal.
Maybe some of it was caused by the idea that economists have no business teaching politicians, something I would generally agree with. But when no politicians are able to make timely and appropriate decisions, then bring on the economists!
In particular, Mário Centeno explained that, although countries are ready to act, this will only happen if risks materialise and things get worse. But why? Why is it necessary for things to get worse? Why don’t we prevent things getting worse, with enormous sacrifice from everyone, as recent history teaches us?

The latest views of the European Central Bank, moreover, point out that the risk of recession has increased significantly: this message was conveyed two or three days ago by the European Central Bank.

Returning to the question of political legitimisation and democratic legitimisation – much of what is happening in the Economic and Monetary Union and in the European Union is, in some way, a result of this lack of determination –, I would like to say that were I able to do so, or had I powers to bestow decorations, I too would decorate Mario Draghi.

And allow me, as I finish, to remind you of something that maybe only a few recall: at the moment of euphoria, when the euro started to be an everyday currency, then Prime Minister António Guterres used a sentence that became famous and enthralled Europe. Borrowing from his Catholic education, he remembered the words of Christ: “That thou art Peter, and upon this rock I will build my church”, and said: “Your name is euro and on this euro we will build our Europe”.

A matter of faith is surely not always one which gives complete results, because at the first sign of crisis the faith of the markets, the faith of the population, disappears.

Ten years after the euro entered the scene, the stage of, say, enchantment had disappeared and a new phase of protests began, which was somewhat similar to the one that welcomed the euro.
My dear friend and Professor, João Ferreira do Amaral, has published two books with grand titles:
Porque devemos sair do Euro [Why we should leave the euro], and Em defesa da independência nacional [In the defence of national independence], with him, it is all or nothing.
In fact, the euro failed to show this capacity to sustain the European Union.
The cause returns to the biblical field, but this time I am talking about Vítor Dias, as you know, a former communist politician who left active duty long ago. Vítor Dias went back to the Bible to quote Matthew and say: “Let them alone: they be blind leaders of the blind. And if the blind lead the blind, both shall fall into the ditch.”

The idea that the euro would be the fundamental basis is, of course, an idea that makes sense.

Jacques Rueff, in the 1950s, said: “Europe will be created by means of a single currency or not at all”.
I would tend to think that nowadays the idea is that it is being created despite the currency.
There are still a few things I wanted to talk to you about, but I will save them for another occasion.
I am sure there will be one. I wish only to resume the religious tone of these interventions to say that the euro, like the Catholic Church, is in need of a deep reformer. Francis was called by the church.

And in the euro, after Draghi, who will come and restore our trust in the European currency and our faith in its future?

Thank you all for your patience.