Mário Centeno, the Portuguese finance minister and president of the Eurogroup of eurozone finance ministers, visited London on Tuesday.
A leading member of António Costa’s socialist government – a success story that surprised many – Centeno, an academic economist by profession, has overseen an anti-austerity programme that has obeyed the terms of the EU’s strict fiscal rules while increasing state pensions, the minimum wage and public sector pay (as well as slashing taxes and increasing benefits for the worst off).
Since last year he has also led the Eurogroup, and is overseeing the formulation of the eurozone’s first budget – a key plank of Emmanuel Macron’s plans to radically reshape the EU.
The New Statesman met Centeno before he addressed an audience at the London Business School, to discuss how Portugal’s mainstream left party avoided the fate of its counterparts elsewhere in Europe, the future of the eurozone, and how European governments should tackle inequality.
NS: There’s not as much interest as one might expect in the policies of your government, given that it’s led by a mainstream left party pursuing an anti-austerity programme. The fate that’s befallen centre-left European parties hasn’t befallen you. From your experience in government in Portugal, how do you think the eurozone – and the Eurogroup – might use its powers to respond to crises of inequality between and within European countries to combat the rise of populism?
Mário Centeno: We can discuss whether austerity policies were suitable to tackle the difficulties of the financial crisis and a very severe economic crisis we have gone through. I would rather focus on the post-crisis period.
The policies we have implemented in Portugal sought to address the dilemmas you have mentioned, including inequality, and which are common across Europe. I think it is key for policymakers to respond to what our citizens consider to be their fair share in the economic recovery. It’s been quite a long recovery in the euro area, with more than 10 million jobs created. But we’ve seen very timid wage increases so far.
Policy should respond to those ambitions and change gears. This requires us to increase social spending in a very targeted way, changing direct taxes levied on the poor, increasing the minimum wage when we were overly restrictive before.
We implemented all of these policies in Portugal and they generated a boost in our economy – a boost of confidence, of job creation and of investment.
In my opinion, our success stems from the combination of policies designed to increase disposable income with a very rigorous budgetary policy, intended to reduce the deficit and put public debt in downward trajectory. These two things generated a boost in confidence and credibility. Everyone realised we were not jeopardising the equilibrium between the social and financial dimensions of the economy.
This also increases confidence trust among member states. And this is absolutely key for us to give concrete steps – or more concrete steps, I should say – towards deepening the EMU, in particular towards creating a budgetary instrument for convergence and competitiveness for the euro area.
Convergence is needed to address the very significant differences in inequality between regions and countries in Europe, which still persist today and which are much larger than in other, more mature monetary unions, such as the United States. A fiscal instrument aimed at promoting convergence is the economic mechanism that does the trick.
We agreed to build such an instrument in December. This was a major step. The instrument is only an embryo. But it’s there and it’s part of our institutional landscape. We are still deciding on the governance, the sort of expenditure that will be covered, and the initial size of the budgetary instrument.
But these are the features! We are no longer discussing whether we are going to have one.
NS: What do you envisage that budgetary instrument looking like, and, in a Europe where the crisis of inequality is driving some members of the eurozone to assert their national sovereignty, how can you build a consensus around it?
We must all be convinced that this is a debate to be taken at a European level. Seldom do Europeans, especially leaders of the European Union, use the expression “inequality” in the context of the European economy and society as a whole. The reason is that we don’t see inequality as a European problem yet. We see it much more as a national problem.
It is telling that the Eurostat measures inequality within each country and calculates the weighted average of inequality measured that way, but doesn’t provide indicators of inequality for the euro area or the EU as a single unit. For as long as we don’t measure it, we cannot deal with this issue. It’s very important that everyone understands that convergence is the mechanism to do so. Convergence is the weapon to fight this sort of inequality.
We must be aware that this can be another engine of integration in Europe. I very much believe that rising populist and Eurosceptic movements benefit from the fact that we have yet to acknowledge these problems and tackle them seriously.
NS: Is it possible to sell convergence to governments that are in the hands of populists, though?
We’d better implement those measures before populist movements take over power across Europe! My expectation with this instrument is that it will get us to a level that we can really show its benefits in practice, so that everyone can be convinced – if not in theory, then at least in practice – of its power.
To reach out to our citizens, to take decisions – which is something that we’ve been very unwisely postponing – is the best way to fight the tensions that are impinging on the functioning of our economies and political systems.
Prior to being minister of finance, I was a scholar. I think that part of the explanation for the rise of populism is that we let our societies become less and less demanding with politicians. Politicians have also become less demanding with themselves and about the policies they introduce. We let the quality of politics go down in the last decade, and populism is a consequence of that.
NS: What do you think the balance between tax and spend should be, if governments are to properly combat inequality across Europe? The issue of harmonising corporate tax rates is a very sticky one within the eurozone. Where do you think the burden should fall, and how do you confront that issue?
We should focus on agreeing on a common tax base and discuss a minimum tax rate. This would ensure every firm would pay, at least, a minimum level of taxes.
We debated this quite substantially in Washington last week, at meetings of the IMF. There is a broad agreement that we should move in a coordinated way because otherwise things do not work. But the pressure to move in that direction exists, and the debate will continue.
It’s very important to also show citizens that we think this is important – to reassure them and build a sense of fairness in our societies.
NS: It’s a big issue here: small firms look at the amount of corporation tax that Amazon and Starbucks pay in this country, and find that they are paying more than the mutlinationals. That is what drives populist sentiment, isn’t it?
Fairness is one of the key values in our culture. If people perceive that there is lack of fairness, a backlash follows. So far we have lacked a substantial political process to address this matter. We need to be quite demanding with that. We cannot let people think the process is controlled from the outside.
NS: It could be a hard political choice for countries like Ireland, one of whose unique selling points as a destination for international capital and business is that an incredibly low and competitive rate of corporate tax.
Let me put things into perspective. Before going into Europe, let’s look at the experience of the United States. You also have tax differences across US states, where there is a much more mature process of economic integration. We don’t need to get to a stage at which you have a complete degree of tax harmonisation across Europe. Frankly, I am not sure if that would be the best thing to do.
But we should build a level playing field in Europe. If member states started fighting each other on taxes, we would see a race to the bottom. Again, I don’t think the final goal will be to have a completely harmonised tax landscape. But we have a lot to gain from the debates we are having today, on a common corporate tax base, or the minimum tax rate.
NS: How does Brexit make tackling European inequalities harder, if at all?
Brexit is not a good idea, let me be frank. At least from my point of view. It will undermine the prospects of many firms, many families and of a united Europe that can fight those challenges together. But it is what it is. It’s there. It’s a structural change. We have to adapt to it, and we must give time to people to adapt to it.
This uncertainty, and the fact some of the time we had to find a solution has been wasted, is certainly putting a drag on growth. This is evident in the UK: the figures for GDP growth for the UK are rather low in historical terms. It’s of course a price we’re paying because of Brexit.
But this is also happening in Europe, given that we are very much connected economically and financially with the UK. This is not good. It certainly would help everyone if the UK, and then the UK and Europe, established a very clear way forward. We have more time now. The only thing we can ask is for UK politicians to use this time wiser than before, and for the House of Commons to agree on a common approach.
NS: Would the best outcome, in terms of reducing inequality Europe-wide, be for the UK to remain an EU member?
The UK is a very important country for Europe. We have learned and will continue learning with each other irrespective of the outcome of Brexit. But surely it’s not the same thing if the UK’s not in the European Union.
If you ask me as a European citizen, I would it would be better if the UK stays. But it’s a democratic choice. That’s something we need to respect at all times.
NS: What can your colleagues in the Eurogroup, in the EU27, and indeed in Britain, learn about stemming the tide of populism from your experience in Portugal?
We’ve been successful in different policy areas. We had a huge reduction in unemployment. We shored up banks and our financial sector. The markets recognise this, so we pay much lower interest than before.
I think this is recognised by colleagues at the Eurogroup and in the European Union. That’s why I got elected as president of the Eurogroup, something that was pretty much unexpected, coming from a financial assistance programme [bailout] country that was still struggling, a few years ago, with an excessive deficit and things like that.
But credibility was achieved as we delivered on our commitments internally and externally. We delivered a policy mix – from the minimum wage increase, to the reduction in direct tax for families – especially the poorest families –and implemented it cautiously, but resolutely.
We are implementing further reforms in 2019. These show all economic and social agents the credibility of our strategy. This enables us to move away from the previous policies in a controlled manner and in very clear and scrutinised way.
We are not damaging the overall process that the Portuguese economy went through. On the contrary, we are strengthening it in the dimensions that we believe are key after such a difficult period: reaching out to the people, helping those with more difficulties in the labour market and in society. We actually created a new benefit for disabled people in Portugal, which did not exist before. It was a very inclusive sort of policy and it is a model for others.
NS: What do you think of the prospects of a Jeremy Corbyn government in the UK – both as the head of a successful socialist government, but also from your perspective as Eurogroup president? Do you think he can achieve similar success?
Governments should address the policies that are identified as bottlenecks in their economies and societies. We must learn our lessons from the crisis and move away from ineffective policies, but in a way that shows also that the general trends in our societies are resilient across political cycles and economic cycles.
People in our societies have become averse to politics-induced turmoil and naturally so. My advice is yes, do change the policies – but do that in a way that does not generate risk aversion from our citizens.