Portugal needs to make the most of the good economic times that it is currently enjoying to reduce its weaknesses and prepare for the “inevitable” economic slowdown, the president of the European Stability Mechanism (ESM), Klaus Regling, warned on Monday.

In an address to a conference in Lisbon on The Future of the European Stability Mechanism, organised by Público newspaper, Regling cited Portugal as a “good example” of the strategy followed in the euro area in the wake of the financial crisis.

The president of the ESM – the entity set up during the crisis to guarantee funding for loans granted to countries that agreed economic adjustment programmes with the troika of international institutions overseeing them – noted the positive economic mood in Portugal, where “people are smiling more now than three years ago”.

He highlighted developments such as the fall in unemployment, the fact that exports are now contributing to growth, and the greater resilience of the banking sector. Even so, the ESM president made a point of stating that there are many “challenges ahead”. In particular, he warned that economic growth will slow in the coming years to fall in line with a potential growth rate that is lower than it has been lately. That, he said, is “inevitable”.

According to Regling, this means that “Portugal should use the current benign environment” to address its weaknesses, such as continued high borrowing levels.

“When the cycle turns it will become harder to address all these issues,” he warned.

The European IMF

Having handed out both praise and warnings for Portugal, Regling focused on the role that the ESM could have in the scenario that emerges from the euro area reform process. As the institution's president he noted that it has lent a total of 280 billion euros to countries that undertook adjustment programmes and that, thanks to the long maturities and low interest rates that the ESM has made possible, Portugal has been able to save 1,3 billion euros annually in debt servicing costs (while for Greece the saving is estimated at 10 billion).

For the future, as the International Monetary Fund reduces its involvement in the euro area, Regling expects that future bailouts and adjustment programmes can be overseen by the European Commission and ESM. He stressed, however, that his institution has no desire to encroach on the commission's areas of responsibility – which are clearly defined by EU treaties.

Where the ESM could help, Regling argued, is above all in matters relating to countries debt sustainability and financial stability and to market access, to help stabilise euro area members “before small problems become big ones”. The work of the two institutions can be coordinated in very productive fashion, he assured his listeners, rejecting that idea that problems might arise in dividing up the work between an institution with a more technical vocation (the ESM) and one that is more political (the European Commission).

Este artigo tem uma versão em português

Translation by Douglas Bissell