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European Commissioner for Economic and Monetary Affairs
Achieving a successful and fair adjustment in Portugal
Video message for Antena 1 Conference
Lisbon, 18 October 2011
Ladies and Gentlemen,
It is a pleasure to address this conference, with the important and timely focus on the role of the states in a competitive economy. I believe it is a very relevant topic for Portugal, where the presence of the state in the economy is pervasive by international standards. I regret that I am not able to be there in person due to the intensive and hands-on preparation of the European Council of 23 October.
I am just back from a G-20 meeting. There is concern about the soft patch in the global economy and the risk of slowdown, in a context of reduced room for fiscal or monetary stimulus. Most of all, there is concern for the continuation of the financial crisis. The euro area was very much in the focus of discussions, as too often recently.
Therefore, before talking about Portugal, let me start by the Commission's view on the way forward at this very critical point, as condensed in the Communication adopted by the Commission last week. There are five critical and interdependent elements to be addressed:
First of all, we have to build much stronger financial backstops to continue the contagion effects. The more flexible EFSF agreed in July has now been ratified by all Member States, and work is proceeding apace to make the new instruments operational, including the capacity to buy bonds in secondary markets. Maximising the effective lending capacity of the EFSF to expand its firepower is also on the table, and I am confident that an agreement will be found. As Commission we also support advancing the permanent successor, the ESM.
Second, we must reinstall confidence in our banking system. An extra effort in terms of capital raising and liquidity backstops is needed to break the vicious circle between the sovereign debt problems and banking sector fragilities. The main elements of this plan are a prudent valuation of all sovereign bonds holdings, a higher ratio of high quality capital, and an ambitious timetable.
Third, we need a sustainable solution for Greece. After much work, agreement with the Troika has been found on policies to put the programme back on track, giving a positive signal for disbursement of the next tranche. We are now working as fast as possible with IMF and ECB on the compliance report and the debt sustainability analysis. It is clear that the Greek part of the 21 July deal needs to be revisited, in particular concerning the degree on participation of the private sector in restoring solvency. We need to build a solid second programme, avoiding the continuous current drama.
Fourth, we must accelerate structural reforms to enhance growth and job creation. Especially in vulnerable Member States a strategy for growth is absolutely indispensable to the social and financial sustainability of fiscal consolidation. Protecting vested interests that hinder growth is not an option anymore. The best use must be made of support from EU instruments and policies.
Fifth, based on the newly adopted so-called 'six-pack' on fiscal discipline and macroeconomic surveillance, we have to strengthen economic governance in the euro area. We may need to go beyond the six-pack, and develop a long-term vision which combines stricter monitoring and discipline with more integration.
Let me now turn to Portugal. Economic developments in Portugal are being and will be crucially marked by the economic adjustment programme agreed in May by the Portuguese authorities and the Commission, the ECB and the IMF.
This is an ambitious but realistic programme that enables Portugal to restore competitiveness and sets the economy on an adjustment path conducive to better growth prospects. I am glad that the programme received broad and clear cross-party support.
During the negotiations, it became clear that there was widespread agreement on the sources of Portugal's troubles: weak competitiveness, high external indebtedness, high public and private sector debt, and high reliance of banks on wholesale funding.
The macro imbalances can be traced back to structural problems: poor productivity growth; overextension of the state role in the economy; deficiency in the budgetary process relating to planning, monitoring and execution. Easy credit conditions probably delayed the moment of reckoning by sustaining demand, in particular private consumption.
The programme builds on three key pillars.
First, an ambitious fiscal adjustment effort to ensure fiscal sustainability. The deficit should decline to 5.9% of GDP in 2011, to 4.5 % in 2012 and to 3% in 2013 in line with the EDP recommendation. That will curb the debt dynamics in 2013. This is a demanding but realistic path. This effort must be underpinned by in-depth reforms of the budgetary framework. These reforms make fewer headlines than deficit figures or other policies, but are absolutely crucial. What has been unveiled since the start of the programme is there to prove it – think of the disclosure of the stock of arrears or of the unrecorded debt in Madeira.
Second, a wide range of reforms to enhance growth and competitiveness, and to create jobs that are so badly needed. A key target is to strengthen competitiveness in the non-tradable sector. This can be achieved by removing rigidities in the product and labour markets, by encouraging entrepreneurship and innovation, by scaling down the amounts of resources absorbed by the state and state-owned entities, and through a privatisation programme. In the labour market, this implies for instance a less stifling employment protection legislation and a reform in the wage bargaining framework. In the product markets, it includes increasing competition and reducing rents in protected sectors.
Third, measures to reinforce the stability of the financial sector. I am fully aware that in Portugal, like in the euro area at large, there is concern about the impact of higher capital requirements on the provision of credit. Certainly, we need to find a balanced approach. Let me say however that surely banks which are seen as fragile and have no access to funding are not in a position to provide credit for enterprises and households.
The delivery on the programme has been satisfactory. The government has taken full ownership of the adjustment programme and has quickly moved to meet the structural targets for the first review.
Significant first steps have been taken in other structural reform areas (removing special rights of the state - so-called golden shares, labour market and others). The government also reacted to negative surprises on the budget by taking additional measures. Importantly, it has reconfirmed its ambition to restructure decisively state-owned enterprises; which have been a drag on public finances and are a source of risk.
Perhaps inevitably, the measures taken to reduce the fiscal gap have been mainly on the revenue side. In spite of these efforts, the latest information suggests that there are risks to attaining the 2011 deficit target as specified in the programme. This is unfortunate, and underscores failures in budget planning and execution, which need to be fixed.
Looking forward, significant challenges lie ahead, which will be assessed in the upcoming second review in November.
Most prominent will be the 2012 budget, which is asking for substantial but necessary measures. A strong 2012 budget is more crucial than ever in the light of the experience in 2011.
The measures included by the Government are certainly courageous, as the situation requires. My services will examine in detail the budget in the coming days.
On the structural side, the reform momentum needs to maintained and reinforced, overcoming resistance from vested interests. This is crucial to the success and fairness of the adjustment.
From the EU side, we will continue to provide wholeheartedly all the support we can, both via the programme, which includes a sizeable and frontloaded financial envelope, but also via the other instruments at our disposal. One example is the redirection of structural funds. The Commission has also recently proposed the decrease in interest rates charged on the official EU loans to Portugal.
I believe that Portugal can rise to the challenge, put its house in order, regain investors' confidence and look to a prosperous future. It will take courage and time, and the support of all stakeholders.
Let me finish by noting that the recent events in Ireland, which started its programme half a year earlier than Portugal, provide a very encouraging precedent to Portugal.
Ireland has not only implemented significant fiscal consolidation but has also been able to handle in a determined fashion the banking sector problems, which have been much more serious in Ireland than in Portugal. Also the unit labour costs have come substantially down over the past three years refuting thus the claim that a country within a currency union cannot improve its competitiveness quickly. Given that Portugal has displayed similar determination to address the key economic challenges as Ireland, the Irish experience bodes well for Portugal.
I wish you stamina and success in meeting these challenges.