Economy

The European Union cannot afford to have losers, because if We find losers, there is no cohesion,” Carlos Costa emphasized in an interview with the Focus Brasil platform, which hosted a debate on “Europe in the New Global Economic Order.” At 10:45 PM on Sunday, August 3, 2014, the then-Governor of the Bank of Portugal, Carlos Costa, announced the resolution that marked the complete of Banco Espírito Santo. “The Board of Directors of the Bank of Portugal today decided to apply a Resolution Measure to Banco Espírito Santo SA. The majority of BES’s activity and assets are being transferred to a new bank called Novo Banco, duly capitalized and purged of problematic assets,” would become the statement remembered for decreeing the end of BES.

Carlos Costa, former Governor of the Bank of Portugal, was interviewed by the Focus Brasil platform, focusing on the challenges, strategic choices, and transformations of the European continent in a changing global scenario. Costa began by acknowledging that “Europe is in a phase of structural challenges, because it is simultaneously under construction, because there is an ongoing process of integration and at the same time it is being confronted with three major challenges in its environment and from within.” The economist continued, stating that the first challenge is technological. “Europe has lost ground to the US in terms of technological innovation.” The second challenge concerns its weight in the world industry, where Europe “has lost weight relative to the Chinese industry and today is a large market for the Chinese automobile and electronics industries (and even some industry linked to the energy transition).”

In third place, Europe is facing a demographic decline, the economist said. “Europe needs to generate growth to finance the Welfare State that is necessary to maintain social cohesion,” Costa stated. He then highlighted an internal challenge, referring to the fact that “the EU has been a success in terms of integrating countries with different levels of development, promoting the recovery of development levels, particularly in peripheral and Eastern European countries. But this process of recovery implies a great effort of cohesion.”

“These were the challenges Europe was facing until an additional challenge arose, linked to the disappearance of the previous international order based on trust in security, trade rules and multilateralism,” he added. Costa said that Europe must now think about its strategic autonomy, but for this, it necessarily needs to recover economically and strengthen its internal cohesion, as well as strengthen its capacity for political action.

The economist believes it is important for the EU to find new trading partners to reduce dependencies, so that it can compete with the major world blocs. This can be interpreted as a defense of the EU agreement with Mercosur. “Space must be created on both sides, which implies that South Americans create space for European exports and Europe create space for South American exports, because it is in this context that both parties will win,” he said, adding that this implies “adjustments” on both sides. According to the economist, “this agreement [which took 26 years to make] is irreversible” and is favored by the context of Europe’s necessitate for strategic autonomy.

Europe needs “alternative markets and alternative suppliers because it has shortcomings in energy, rare earths and agriculture and naturally diversifying sources of supply is reducing its vulnerabilities,” he argues. Costa also defends that “Europe needs an adequate institutional framework, it needs to frame its internal relationships in practices, institutional rules that guarantee cohesion.”

“Europe has a monetary union which is the driving force of its integration process and has a political process in germination in terms of deeper economic integration. It has a political process in coordinating economic policies and is organizing itself to respond to a vital issue, which is the organization of a European security pole in the context of NATO, to ensure that we have an autonomous voice in negotiating with our allies,” the economist said. Costa pointed out that “for this to materialize, the EU needs to develop an industrial complex that can guarantee its defense, which implies going over national interests to build a European defense industry. But it is also necessary to create a political thought that reconciles the whole with each of the parts. It is necessary to create confidence that the whole works and that it is advantageous for each of the parts.”

The former governor of the Bank of Portugal also defends the Capital Markets Union, because Europe “is an exporter of capital, but is not able to take advantage of its financing capacity to promote economic development comparable to that of the US, especially in industries that are on the technological frontier.”

“Europe also needs to develop an equation, which is to know if it is increasing per capita income and productivity of a population that is declining and thus finance its social model, or if it will simply extend the current productive model incorporating more workers, who will naturally have to be immigrants, but without increasing productivity. If it does not increase productivity, it is losing international competitiveness,” Costa said.

For the economist, the EU needs to gain competitiveness without abandoning principles of Competition, Sustainability (energy and environment), and the principle of multilateralism. “That is, it cannot adopt a mercantilist policy contrary to the founding principles of the EU,” he says, adding that this “equation goes against the winds blowing at the moment in the international scene, which is based on unfair competitive practices, in the win-lose dichotomy and not win-win.”

Carlos Costa believes that the fragility of globalization stems from the fact that “political agents are more focused on the gains of some agents than on the generic gain. Now, in Europe it is not possible to leave losers behind. That is, the EU must open space for its trading partners and simultaneously compensate those who will be called to make an adjustment, namely in the Common Agricultural Policy. The EU will have to be in solidarity with European farmers who will be harmed by imports from South America.”

“In the European Union there cannot be losers, because if there are losers there is no cohesion,” Costa emphasized. The logic of the EU is “there is room for everyone, but some will have to adjust and find a new specialization or a new market niche,” the economist said. Costa, a defender of economic multilateralism, believes that competition with China is biased because Chinese production rules, in his opinion, “are doped,” referring to state aid, anti-competitive practices, or even dumping practices.

“We need to defend a multipolar world in economic terms,” he said. Costa believes that the EU will transform into a multilateral trade platform linked to large alternative economic spaces. “We are building a web of multilateral relations with some limits,” he said, recalling that Europe is more rigorous than most non-European countries in environmental matters. Europe penalizes producers with the carbon tax, which does not happen, for example, with India, which raises questions of competition in the import of Indian products. Also, labor rules are stricter in the EU than in India, which leads to criticism from European producers.

Europe faces this dilemma: whether to lower the standards of requirements or seek to bring its trading partners closer to its rules? Regarding the mutualization of debt in the EU, the former Governor of the BdP recalls the principle that “there is no bailout of the whole for each of the parts, in the bail-out, that is, there is no obligation to be in solidarity in the rescue of one of the member states if by chance its debt has difficulties in being placed on the markets.”

Costa recalls that when the 3% deficit and 60% of debt to GDP limits were established in the European Commission, there was a rationale behind it. “These values were stipulated based on the calculation that if a country has a debt that is 60% of its GDP, in a normal situation, it can have a deficit of 3% without that bringing an increase in debt. This assumed that the inflation rate was 2% and that the trend growth would be 3%, which would lead to a stabilization of the debt with a 3% deficit. Yet, these theoretical assumptions did not materialize,” he explained. As they were not imperative objectives, in 2010 and 2011, the sovereign debt crisis occurred. The European Commission provides conditional support, as happened with the troika.

There is a tension between the budgetary policy of the Member States and the monetary policy aimed at price stability, he explains. How is it resolved? “There is guidance accompanied by conditional support,” he says. Regarding France and Germany, which are now facing public finance problems, Costa points out that the difference is that “in the large ones, the moment of truth, this band of market discipline, tends to reveal itself much later than in small countries, because they benefit from a presumption of solvency and because they are countries with the means to mobilize resources and investors.”

“However, the issues will arise and sooner or later France will have to make its program to adjust public finances, as will others, and the importance of these adjustment programs is that they are vital to ensure confidence between Member States and the stability of the currency.” The ECB has a single mandate, which is price stability, which implies an inflation rate of 2%.