The financial crisis put the euro to the test, but the euro exited stronger. As we discuss measures to further strengthen the single currency, we are poised with the same old question. Will we be able to take the lead in good times or will we wait for another crisis to force our hand?
At the height of the crisis, it was not obvious that the euro would survive unscathed. The great recession caused hardship for many of our citizens, drove the levels of support for the euro to record lows and forced member states to pool resources.
We were caught off-guard, but in the face of real danger, European Leaders came out of their comfort zones to defend our currency. The sovereign backstop of €500 billion - the European Stability Mechanism - is perhaps the clearest example of this effort.
Make no mistake: Today’s economic expansion is our payback.
All economies of the euro enjoy solid growth. Crisis legacies, such as public debt, deficits and unemployment, fall steadily and in an unprecedentedly coordinated way. Greece - of all countries - is a proof of our resolve. After eight years of adjustment supported by €256 billion in loans, Greece is exiting its financial assistance programme this summer.
Political resolve and patience are of the essence. Patience is the best antidote to rising populisms and political extremes. Defending the euro with improved institutions is still the cheapest solution to deliver growth and economic relevance in a changing world. We have tried other solutions in the past, and those proved to be much more expensive.
Our currency union is an unfinished business. European Council President Tusk asked the Eurogroup to develop solutions to complete the banking union and reinforce the ESM. The progress in our discussions can now be translated into a set of decisions at the end of the week, when leaders meet in Brussels.
This will not be a big bang; big machinery is not the best path to reform. One of the key proposals is to make the ESM the backstop for bank resolution. This will credibly prevent troubled banks from hurting our economies and taxpayers. The ESM may get new tools to deal with sovereign crises. And we will also stand ready to pave the way for political discussions towards a common deposit insurance, to prevent bank runs.
It is possible to advance on risk sharing because we have been reducing risks in the banking sector. A recent report by the European Commission, the Single Supervisory Mechanism and Single Resolution Board notes that banks over the past few years significantly increased their capital buffers, while reducing leverage and the stocks of bad loans. The latter have fallen sharply, by a third since the start of the crisis, especially in those countries with higher NPL´s ratios. In the third quarter of last year, the average non-performing loan ratio came in at 4.4% of total gross loans, keeping the downward path of previous quarters. Early indicators show the trend has continued since then, as indeed it should.
Last month, EU Finance Ministers took another big step to reduce risks by agreeing on a common position on the so-called Banking Package. This includes a rule that sets the amount of subordinated capital banks need to absorb losses before the resolution funds are used.
In hindsight, our focusing on the banking union and the ESM was a good approach. It enabled us to set a reform process in motion and build trust. We must stay the course and be open to start discussing other areas.
In six months as Eurogroup President, I have learned that each country, including Ireland, has its own unique set of priorities in this debate. For some countries, a fiscal instrument or a euro area budget is a key one. This idea often fuels concerns about moral hazard and permanent transfers, which would need to be addressed.
The recent proposals by Germany and France, and also by the Commission, are a positive contribution to our discussion. Other countries should put forward their own proposals, in a constructive way. We cannot build trenches around red lines. The euro’s success lies on our political will and bold and pragmatic leadership.
We also need to be conscious of the costs of inaction. If we fail to deliver a stronger euro where all our countries can thrive, it will not be sustainable. And that is everybody’s business.
Mario Centeno in the Portuguese minister for finance and president of the Eurogroup