João Paulo Batalha – The “captivating” tightrope walker: what to expect from the new Eurogroup head

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Portuguese Finance minister Mário Centeno, hailed as the man who took on austerity and won, is taking over as Eurogroup head. What difference will he make?

João Paulo Batalha is a social activist and founding member of Transparency International Portugal



Reading the economic press, you might think some sort of quiet revolution – or, at the very least, substantive evolution – is about to take place at the Eurogroup. This is the informal, but increasingly powerful, gathering of euro-zone finance ministers who determine what our pocketbooks, and our lives, will look like in the future. The election last month of Portuguese finance minister Mário Centeno to head the group was seen as the triumph of the European left against the forces of austerity. Writing in Foreign Policy shortly after Centeno’s election about a month ago, the Berlin-based journalist Paul Hockenos argued that the German government’s support for the Portuguese minister may signal a quiet shift in policy by Chancellor Angela Merkel. She and Wolfgang Schäuble – until recently her finance minister – had been champions of EU-wide austerity.

After Centeno’s election, economists and analysts presented the Portuguese minister as something of a wizard, who has been able to reverse some of the most bruising measures taken at the height of austerity while maintaining tight controls on the deficit. Sceptical at first (even outright hostile), none other than Germany’s notorious fiscal hawk, Mr Schäuble, ended up praising Centeno as “the Cristiano Ronaldo of the euro zone” – probably not knowing that the Portuguese football star is dealing with a serious charge of tax evasion in Spain; so, probably not the most apt comparison.

But the devil, as usual, lies in the detail. More than a financial wizard, Mário Centeno has proven to be a talented tightrope walker, cautiously negotiating some relief from austerity policies without affronting the Brussels and Frankfurt orthodoxy of fiscal discipline. More notably, he and his prime minister António Costa have managed to do this while preserving a left-wing coalition with an orthodox communist party (one of the last of its kind in Europe) and the Left Block, an amalgamation of former Marxist and Maoist movements. When they took office in late 2015 nobody bet on this fragile coalition– dubbed by the opposition as “the contraption” – lasting more than six months. Opposition leaders and opinion makers warned that the leftists would force through unreasonable budget policies that would bring the economy to ruin and push the country into another bailout – as bad as or worse than the 78 billion euro bailout negotiated in 2011 and ruthlessly implemented by a right-wing coalition.

Centeno didn’t look like the finance minister to keep the government afloat between pressure from its left-wing partners and the demands of the EU. He is not a career politician. In fact, when he was chosen to lead the finance ministry in 2015 he was an absolute unknown, having been asked by Socialist Party leader and current prime minister Mr Costa to join his team of academics just before the elections to draft the party’s economic platform. With a PhD in economics from Harvard, Centeno became a professor in Lisbon and researcher in the economic studies department of the Portuguese central bank. He was presented to the public as a competent technocrat (not a bad thing to be at a time when career politicians are out of favour). He would find the way out of the crisis by restoring public-sector wages that had been cut or frozen, without angering the dreaded Eurogroup, the European Commission, and the European Central Bank. That he is now to head of one of those feared institutions is a testament to his skill: a combination of sound political management, intelligence, with some luck thrown in.

Luck does matter. By the time Centeno took office in late 2015, the global bubble of the financial sector was starting to reinflate, after years of austerity designed to bail out banks and speculators in country after country. At the same time, political instability in northern Africa diverted more and more tourists to Portugal, which was seen as a safer destination. Tourism boomed, fueling with it a spike in property prices: property has always been a key force in the Portuguese economy.

Expeditious but questionable policies such as the Golden Visa programme, or preferential fiscal arrangements for non-residents, also facilitated the flow of fresh cash into Portugal, as a kind of bargain with the devil. Golden Visa schemes, which have been introduced in different forms around Europe in the last few years, remain fertile ground for money laundering – not that governments really care. In Portugal, the programme is geared to the property sector. The easiest way to get a residency visa is to spend at least 500,000 euros on real estate. That allows a recipient a visa with unrestricted travel rights within the Schengen area. Technically it’s “buy a house, get a visa as a bonus”; in practice it’s “buy a visa, get a nice vacation house as a bonus”, since beneficiaries need to spend only two weeks of the year in Portugal. Effective controls on the origin of the money are practically non-existent – the Portuguese government asks just enough questions to claim it has checked, but not enough to find anything. The preferential fiscal regime for non-residents is a similar thing, with wealthier European retirees in mind. It offers a generous tax exemption to people moving to Portugal, creating such tax inequality that the Portuguese government has had to revise it under pressure from Finland.  Finland publicly shamed the Lisbon government into cancelling the benefits for Finnish nationals.

This policy of arms wide open – and eyes wide shut – contributed to the rise in property prices, putting some energy back into the Portuguese economy. The rosier economic outlook gave Mr Centeno a little more latitude – aided by a prime minister who is a master at negotiating wiggle room, both internally with his left-wing coalition partners and externally with his counterparts in Brussels or Berlin. Mr Centeno reversed none of the huge tax hikes imposed at the height of the bailout; he was just able to return some income to some segments of the electorate, enough to brighten the mood and encourage people to spend a little more and save a little less.

Then there is the budget trickery of the infamous “cativações” (captivations), arbitrary freezes on budgeted expenditure. This mechanism has been around for a while. Initially, these “captivations” were a safety valve, a monitoring tool to ensure that public bodies were not hitting their budgeted expenditure without ensuring that their budgeted income projections were being met as well. Lately, though, the captivations became a serious brake on public spending. After the current left-wing government took office, captivations soared – from 1.2 billion euros in 2015 to close to 1.9 billion in 2017. The estimate for 2018 is little better: 1.8 billion. The money’s there; you can see it in the budget; you just can’t spend it. While the government appears to be investing heavily in the economy and its people, it is only doing so on paper.

And while the left-wing coalition partners profess their hatred for Mr Centeno’s sleight of hand, they seem to have swallowed a good dose of reality and are moderating their demands – even in the face of the same types of public service cuts that brought them onto the streets in the past, when the right-wing coalition was in power. In some parts of the country, public schools are turning off their central heating to cope with the captivations. In public hospitals, hit hard this year by a nasty strain of the common flu, patients are kept lying on trollies in corridors for days because there are no beds available. Nurses are reporting that some patients are hidden out of sight whenever a public official comes to visit. Who said this was the end of austerity? Meanwhile, the powerful interest groups who annually take their slice of the public budget – through shady public contracting, multi-billion euro concessions, or public-private partnerships and the like – remain as untouched as they were under the neo-liberal regime of the previous executive.

A good example of the taming of the left came in the negotiations for the 2018 budget – at around the same time the Portuguese government was manoeuvering to get Mr Centeno elected to the Eurogroup post. The Left Block proposed a special tax on renewable energy companies, to offset the huge subsidies they get from the state. The ruling Socialist Party agreed to the new tax on a Friday, than changed its mind after pressure from the huge energy lobby, called a new vote the next Monday and then struck the tax from the budget. The Left Block’s coalition partners were furious, accusing the government of kowtowing to powerful corporations in a country that has some of the highest electricity bills in Europe, and where people find it difficult to heat their homes in winter. There followed an unprecedented, scathing indictment of the ruling party by one of its coalition partners – which then proceeded to vote for the budget and continue its support of the government as if nothing had happened.

There is some political calculation here. The Left Block, which enthusiastically supported the confrontation policies of the first Syriza government in Greece against the Eurogroup hard liners, realized from the Greek experience that taking Brussels head on was not going to be a pleasant – or ultimately successful – experience. And while they continue to advocate a revolution in European political thinking, they are content for the moment to have Mr Centeno negotiate some breathing space for a softer evolution of policies. Stuck between the “austeritors” of the euro zone and the radicals at home, Mr Costa and Mr Centeno succeeded in appeasing both. The finance minister managed to walk his tight rope all the way to the Eurogroup chairmanship.

To be fair, things in Portugal are better than they were two years ago, economically as well as in terms of the budget deficit. But whether Mr Centeno’s tightrope act is a sustainable, winning strategy remains to be seen. And whether it will buy him any credit as he sits at the head of the table at Eurogroup meetings is a bigger unknown. After his election the minister made it clear his role will to be to seek consensus among his colleagues – which inevitably means a lowest common denominator approach: he will be a chairman, not a CEO. The Eurogroup has some huge governance and transparency challenges, insisting on presenting itself as an informal, and therefore unaccountable, gathering of politicians and technocrats. So far, Mr Centeno has not uttered a word about his views (if he has any) on necessary reforms. A good test of his determination will be how he steers the negotiations to end Greece’s third bailout. And judgment should be reserved until the new Eurogroup chairman, who is just now taking over, has had a chance to make his mark. Will Mr Schäuble’s “Cristiano Ronaldo” turn out to be a game changer after all?




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