Dear Mr. Eurogroup president,
Congratulations! You’re taking on a major challenge. You’ll preside over the Eurogroup — arguably the most powerful and decisive body for the euro area. Besides meeting monthly with the currency zone’s 18 other finance ministers, you’ll spend countless hours on the phone with European leaders to attempt to forge consensus on highly sensitive issues — all while keeping up your duties as Portugal’s finance minister.
Allow me to give you a little advice, as you take on this balancing act and navigate the different currents within the Eurogroup.
Your first key test will be the Greek financial assistance program that was authorized last year and must be brought to a close by the summer. Most ministers will be eager to finally take Greece off the agenda and for this disbursement to be the last. But the borrowing costs for the Greek government in the market are still prohibitively high, so it will be difficult for the country to leave the program.
One option will be to try to convince Germany to accept another financial assistance program, which you would have to broker. This would allow Greece to have the necessary funds to pay back maturing debt, specifically what it owes to the International Monetary Fund and the European Central Bank. But even if a German “grand coalition” were to get on board, the proposal would likely get shot down by the Netherlands, Slovakia and other skeptics.
Your first priority when it comes to reforms should be to complete Europe’s banking union.
The better alternative would be to reduce Greece’s effective debt burden so that market access becomes affordable. This, too, would be unpopular, but it could be pushed through if you work out a compromise in which Greek authorities commit to finishing some of the crucial reforms that have so far not been implemented (such as tax reform) in exchange for conditional easing on the debt burden.
Ultimately, your key task will be to bring about more growth in Greece. That can be done by lowering the primary surplus. Use your new role to convince the Eurogroup that allowing Athens to do so earlier will mean seeing growth earlier.
This will require some short-term funding. But the subsequent growth will counteract the costs by reducing Greece’s overall debt burden. Draw on your experience of having done something similar in Portugal to explain how this will work — and why it’s in everyone’s interest, including the creditors’.
Next, you should turn your attention to reforming the eurozone. I don’t share the European Commission’s optimism that there is “wind in our sails” to achieve major advances on fiscal integration, but it’s clear that something must be done. As soon as a new German government is ready to take over in Berlin, it’s time to push for concrete action.
Your first priority when it comes to reforms should be to complete Europe’s banking union, a crucial policy that Germany’s potential new coalition glaringly omitted from its coalition pre-agreement. You should remind the new German finance minister of the importance of finishing the job it helped to start.
Putting in place the Commission’s proposed European Deposit Insurance Scheme (EDIS) to protect savings in banks across the eurozone will need the approval of the Council of Ministers. But there’s much you can do by providing the leadership needed to restore the banking sector back to health.
Many will insist on accelerating the disposal of non-performing loans — particularly in Italy. You should encourage the eurozone’s single supervisor to act independently and not feel bound by national political constraints.
You will then have to broker a carefully designed deal that both increases capital requirements for large exposures to national debt and gradually introduces the scheme.
Don’t let the eurozone’s northern members convince you that simply putting in place a re-insurance scheme will be enough to break the vicious doom loop that is at the heart of the euro-area crisis. The end goal should be a unified insurance scheme.
And don’t fall for the idea that increasing capital requirements on large exposures would bring havoc on the bond market. To the contrary, bond markets will be more stable if banks are covered by European insurance.
You should push the Commission to reform the opaque and sometimes misguided fiscal rules governing the eurozone. The new rules should first and foremost ensure debt sustainability, and lay the groundwork for good stabilization policies at the national level. You should make sure that national fiscal policies work together to counteract a severe recession affecting the entire euro area.
You’ll also oversee the reform of the European Stability Mechanism (ESM). The key issue here is whether we move from unanimous decision-making to supermajority voting on programs, and whether or not to enlarge the ESM’s scope so that it serves as a fiscal backstop to the banking union. You should also ensure that the mechanism’s managing director has some line of accountability to the European Parliament.
After a few months, you’ll appreciate that your workload is that of two people — especially if anything goes wrong in your term, which is, of course, perfectly possible.
Ultimately, you should push to convert your position into a full-time job, allowing you to dedicate your full attention and energy to the eurozone, while somebody else takes care of what’s needed at home. You should have time to regularly testify in front of the Parliament, to which you should be also accountable.
I wish you the very best of luck in your new and important role. You — and the rest of eurozone — are going to need it.
Guntram Wolff is director of Brussels-based think tank Bruegel.