Luís Máximo dos Santos: Time for reform
Speech by Mr Luís Máximo dos Santos, Vice-Governor of the Bank of Portugal, at the 2nd
International Conference of the Economic Chamber of Greece, Athens, 31 May 2018.
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The conference had the central theme of "The Greek Economy after the closing of the 3rd
adjustment programme", and took place in Athens on 31 May with the high patronage of the
President of the Hellenic Republic, who also addressed the conference. Vice-Governor Luís
Máximo dos Santos was invited to speak by the President of the Economic Chamber of Greece
and the Vice-Governor of the Bank of Greece, John (Iannis) Mourmouras. His address took
place during the first panel session, taking as its theme: "The experience from countries that
have implemented adjustment programmes".
I would like to start by extend a greeting to the distinguished members of the panel and thank
1.
the Economic Chamber of Greece, namely its President, Konstantinos Kollias, and Deputy
Governor Iannis Mourmouras, for their kind invitation to be part of this magnificent Conference. It
is a great pleasure to be in the mythical and unique city of Athens and to be able to address such
an illustrious audience, sharing with you a few thoughts on the experience of the countries that
have implemented adjustment programmes.
The timing of this conference could not have been more appropriate against the background of
the conclusion of the third adjustment programme for Greece and the ongoing debate on the
future of the European Union, in particular concerning the reform of the Economic and Monetary
Union.
Obviously, the experience gained from the adjustment programmes does not concern only the
Member States that have implemented them. In a union with the level of integration of the
European Union and, even more, when we speak of the Eurozone, a severe crisis in one
Member State poses a risk to the other Members and also for that should be a common concern.
The soundness of the whole is dependent on the soundness of each Member State.
Furthermore, as Professor Joseph Weiller rightly said, the European Union was created to be a
"community of destiny". If this is forgotten, its problems will only tend to worsen.
2. Following the global financial crisis, from 2010 to 2013, Greece, Ireland, Portugal and Cyprus
were subject to adjustment programmes. Spain also benefited, in 2012, from considerable
financial support to its banking sector.
All of these programmes have long since been concluded and the third Greek programme is well
on its way. However, they gave rise to consequences so intense in the economic, social,
financial and political domains and in the mutual trust among Member States that their effects
have not yet dissipated.
In the spring of 2011, Portugal lost access to the markets at sustainable interest rates and had to
request external assistance. Consecutive years of economic stagnation or low growth, a severe
imbalance in public finances, a high external deficit, a banking system with imbalances, all
amplified by the effects of the international financial crisis, made this scenario unavoidable.
The Economic and Financial Assistance Programme to Portugal was implemented from 17 May
2011 to 30 June 2014. A post-programme surveillance phase is currently in place.
The purpose of my presentation is not to conduct a detailed analysis of the programme. There is
considerable institutional and academic literature on the subject and the opinions and
assessments are widely different.
It is a fact that from 2011 to 2013 Portugal experienced an economic recession without
precedent in its recent history. The unemployment rate grew abruptly, reaching 16.2% in 2013,
with severe social consequences.
However, at the end of the programme, Portugal regained access to the markets. The financing
rates of the Republic fell significantly and the confidence of economic agents was gradually
restored. We all know that the non-standard monetary policy measures, introduced courageously
by the European Central Bank, were decisive to this. But there were also other very important
factors both at Portuguese and European level.
Growth returned, still very timidly, from 2014 onwards. But in 2017, domestic product grew by
2.7% in real terms, the highest rate since 2000. The main sectors of activity made a positive
contribution to this momentum, with manufacturing recording its largest growth since 2010.
Exports and investment were the drivers of the Portuguese economy's acceleration in 2017,
which will be important for correcting some of the structural problems.
These results must be seen in the context of the euro area's positive business cycle and more
contingent factors such as a very dynamic tourism sector.
The good performance of Portuguese exports was chiefly due to external demand for
Portuguese goods and services, in particular from euro area partners. However, Portuguese
exports also increased their share in external markets.
The construction sector was one of the major drivers of an increase in investment, boosted by a
rise in demand by non-residents and the strong growth of tourism and related real estate
activities.
In this environment, the unemployment rate started to follow a clear downward trend, reaching
8.9% in 2017 and according to the latest data in 2018, at less than 8%. Employment rose by
3.3%, which was the highest annual growth since Portugal's participation in the euro, especially
in the youngest and oldest age groups.
The public accounts have been showing fairly positive developments, in line with the
consolidation targets agreed at European level.
In terms of the external accounts, the current and capital account surplus was 1.4% of GDP in
2017, similar to the surplus recorded since 2014.
In parallel, a set of policies designed to eliminate some measures applied under the adjustment
programme were put in place from 2016. The purpose of these policies was to improve the
social environment and contribute to better living conditions for some of the lower income
segments of the population, but also to certain parts of the middle class.
The Portuguese banking sector also strengthened its position. It is today more stable and
capitalised, with higher profitability levels, undergoing restructuring to face the various challenges
from regulation to the rise of the digital economy. The resolution measure applied in August 2014
to Banco Espírito Santo - at that date the third largest bank in the Portuguese financial system -
was completed in October 2017 with the sale of the resulting bridge bank. The non-performing
loans (NPL) portfolio has been considerably reduced, although it still remains high.
To strengthen and sustain these positive economic developments, past mistakes must not be
3.
repeated at national and European level.
And it is crucial that growth is also inclusive, not only in individual Member States but in the
European Union as a whole. Adjustment programmes did not include explicit social objectives
nor monitoring requirements on the social impact. However, they could have and should have
done so.
Article 3, number 1, of the Treaty on the European Union states that, together with the
advancement of peace and its values, the Union's aim is to promote the well-being of its peoples.
Likewise, number 3 establishes that the Union "shall work for the sustainable development of
Europe based on balanced economic growth and price stability, a highly competitive social
market economy, aiming at full employment and social progress" stating also that the Union
promotes "economic, social and territorial cohesion, and solidarity among Member States."
The Union's policies should be globally consistent, given that the rules established by the
Treaties are all equally binding.
4. In the beginning of January 2019 we will celebrate the 20th anniversary of the European
Monetary Union although euro banknotes and coins only began to circulate in 2002. Portugal was
among its eleven founding Member States. For millions of young European citizens the euro is
the only national currency they know.
It is common knowledge that the establishment of the Economic and Monetary Union was the
most far-reaching political step in the history of European integration. Likewise, we have always
known that the architecture set up in Maastricht was incomplete and risk-inducing, particularly
due to the absence of mechanisms to cope with asymmetric shocks. Its architects implicitly
admitted that the missing components would sooner or later be added, as a result of the
integrationist momentum. However, History has repeatedly proven that determinism can be a
mistake...
Up until the onset of the financial crisis, we lived under a kind of 'spell'. In many countries, the
decrease in interest rates boosted indebtedness, while there were illusory improvements in living
conditions. Neither the economic agents nor the authorities managed to clearly perceive that the
monetary union would necessarily entail a new economic regime: the centralisation of monetary
and foreign exchange policies warranted a completely different policy mix. Fiscal and income
policies acquired greater importance, but, in fact, fiscal policy was also subject to heavy
constraints.
When the international financial crisis broke out, it progressed rapidly, quickly exposing and
enhancing the accumulated imbalances within the Union.
The response to the crisis focused on strengthening the coordination between fiscal policies, the
development of new financing mechanisms, and the establishment of the banking union and, of
course, non-standard monetary policy measures. This was far from insignificant, but, in some
cases, it was perhaps a little late and surely was not enough. In many ways, we were entering a
new territory as it was with the implementation of adjustment programmes, which pose unique
challenges in countries within a monetary union.
We need to drive the Economic and Monetary Union reform forward. It is indeed time for reform.
Part of this reform merely consists in finalising the previous cycle of reforms by completing the
banking union with the implementation of its third pillar and by endowing the Single Resolution
Fund with the adequate financial resources to fully accomplish its mission. No debate is more
sterile than the one on whether to reduce or to share risks. In truth, we must do both. And, in
some ways, we have been doing just that.
As many contend, it is human nature to only make important decisions when faced with
necessity, during critical situations. Let us hope that it is possible to dispel that perception, by
taking full advantage of the existing proposals and ongoing debate - which should be open and
inclusive - to adopt the necessary measures to improve the working of the European Union and,
in particular, the Economic and Monetary Union. In fact, we should avoid doing so under pressure
from a new crisis.
Only the future will show if we are able and willing to make the necessary decisions so that the
European Union will be the "community of destiny" as Joseph Weiller put so well, and as its
founders intended.
Thank you for your kind attention.