Populism in the European Union will lower political support for the EU if member countries exit from the pandemic crisis at notably different speeds, according to Carlos da Silva Costa, governor of the Bank of Portugal.
In an interview with OMFIF marking the end of his 10 years as Portugal’s central bank chief and member of the European Central Bank governing council, Costa underlined the need for complementarity between ECB easing and EU-wide fiscal measures. And he praised Christine Lagarde, ECB president, for her handling of the turbulence, describing her as ‘the right person for the right moment.’
Speaking of the two other ECB presidents with whom he has worked since 2010, Costa said Jean-Claude Trichet (2003-11) undertook a ‘patient’ approach after the DECB’s formation in 1998 under Wim Duisenberg. ‘It was necessary to build from scratch.’ Mario Draghi (2011-19) was ‘clairvoyant’ and ‘understood very well the rapport de force… when there was a majority behind him.’
Lagarde, at the helm since November, who has tried to integrate council members’ varying monetary views to repair squabbles under Draghi, combines her predecessors’ characteristics – ‘giving enough attention to take steps forwards, but at the same time ensuring that the links stay close and strong’.
Costa, who hands over the gubernatorial reins on 20 July to Mario Centeno, Portugal’s finance minister for five years up to June, said he was ‘very concerned’ about disparities in EU countries’ emergence from the pandemic downturn. He warned of ‘a lasting problem. If countries exit from the crisis at a different pace and with different levels of social cohesion and economic force, it will have a great impact in political terms, because it will feed populism – a big risk to the acceptance of the EU.’
Costa, a veteran of the 2011-14 International Monetary Fund programme for Portugal to heal post-financial crisis damage, stressed the importance of the EU recovery fund under discussion at the 17 July EU sum. ‘Solidarity will be cheaper than the opportunity cost of breaking supply chains, breaking the internal market and breaking social solidarity.’
The ECB with its massive bond-buying action, notably the €1.35tn pandemic emergency purchase programme decided in March, should no longer represent ‘the only game in town’, he said. After the 2008-09 disturbances, the ECB was in the vanguard, ‘because the problem flowed from the financial sector to the real economy. Now, we are facing a different problem. The problem flows from the health side to the real economy and after that to the financial sector. We need to ensure that the real economy stays alive after the sanitary crisis.’
He described the possibility of ending PEPP before the current end-June 2021 cut-off date as ‘a nice idea, because it means that we were credible in what we are doing. Our objective is to do what is necessary to avoid fragmentation of the monetary union.’
‘We need to create confidence that the economic actors will not be abandoned, that the national public authorities commit to the funds that are needed… European decisions are needed to support the national authorities on the debt side.’
Asked about the possibility that Portugal could turn to the European Stability Mechanism, speaking as a Portuguese citizen rather than as a central banker, Costa said, ‘We need to be realistic.’ Europe’s bail-out fund was created to lend with considerable economic policy conditionality, which has since been greatly watered down. Costa termed the ESM ‘a real advance in the right direction. But is in some ways suffering from some sins coming from the way it was born.’
Costa commented on whether the PEPP represented an attempt to close spreads between different countries’ bond yields – which Lagarde on 12 March, in a subsequently toned-down comment, said was ‘not the ECB’s job’. Costa said, ‘We are trying to determine whether the yield curve is the result of normal market functioning or is it the result of mistrust. If it is a result of mistrust, we need to act. If it is the result of a normal market working, then we need to let the market to do the job.’
Costa sought to clarify an internal ECB discussion on the role of different ECB bond-buying measures. The PEPP is being run separately from the five-year-old public sector purchase programme, for technical and legal reasons connected to the EU ban on monetary financing of government debt. He affirmed that both programmes helped fulfil the bank’s target to bring inflation close to, but below, 2%.
‘You need to ensure that the monetary policy is transmitted appropriately. There are two risks to the transmission: overall fragmentation, and monetary and banking transmission. We need to act on the two … There is no nominal stability if there is no transmission of monetary policy. And if there is no transmission of monetary policy, there will be no recovery. And if there is no recovery, there will be no revival.’
He defended the move in recent years for EU finance ministers such as Centeno to join the governing council directly from government. Some, both within and beyond the council, see this as weakening the ECB’s independence from politics. ‘The culture of the institution is already very established. Also, we have several lawyers coming from the [ECB] committees to the governing council,’ Costa said. ‘So, you have the servants of ECB themselves, very proud and very independent. And you have the independence among the governors. No one wants to be seen as a political puppet.’
David Marsh is Chairman of OMFIF.