Among the four countries jockeying to lead the eurozone bailout fund, Portugal is crafting a unique pitch: It already had a taste of the EU’s fiscal medicine and managed to attain a full and strong recovery.
In 2011, saddled by high debt and rising yields, Portugal turned to the European Stability Mechanism’s predecessor, the European Commission and the International Monetary Fund to ask for a bailout.
Less than a decade later, it hit the sweet spot of economic policy, posting strong GDP growth while reducing debt. By 2019, its debt burden had fallen to 116 percent of GDP, or 14.6 percentage points in five years, while output grew faster than the eurozone average.
That feat coincided with João Leão’s tenure as state secretary for budget. And he’s now the man Lisbon is putting forward to lead the ESM. The mandate of current Managing Director Klaus Regling runs out in October.
“It’s very important to find the right balance to improve public finances through not only careful budgetary policies [but through] good economic growth and employment growth,” Leão told POLITICO. “Portugal achieved this balance.”
Leão — an MIT graduate and economics professor — was named finance minister just after the pandemic hit in 2020, a shock that pushed output into a nose dive while debt skyrocketed to pre-bailout levels. But in 2021, Portugal posted a strong rebound. Debt fell by 7.8 percentage points compared with an average of 1.6 percentage points in the eurozone, which improved Portugal’s credit rating and cemented Leão’s reputation as a steady hand in choppy waters.
Striking the balance
Looking back at Portugal’s rescue package, Leão conceded that “mistakes [were] made.” However, “we learned to avoid some of these mistakes,” he noted. His experience makes him well placed to understand “the difficulties, the complexities,” of those policies, he added.
“You need to … make sure you make the right compromise between economic recovery and sound public finances,” he said, calling this feat “very complex and demanding.”
The ESM is “the rescue fund of Europe,” he said. “Even when it’s not being used, it’s important to provide stability.”
He also addressed the new ESM treaty — not yet ratified by Italy and Germany — as a positive step in empowering the fund to work as a backstop in the event of a banking crisis. Leão also sees the fund’s role as helping countries facing harsh financing conditions.
“If the countries face short-term financial liquidity problems, the ESM is there to help these countries overcome these difficulties,” he said. “And it has to be prepared for that if it’s needed.”
The fund may also have a role in the EU’s economic governance, Leão said. Regarding the Commission’s ongoing review of fiscal rules, he called for “rules that are credible, that people understand, that politicians and the population understand and that markets understand and trust.” The Commission on Monday said it will present proposals on possible changes to those rules after the summer.
To win his bid, Leão needs to beat competitors from Italy, Luxembourg and the Netherlands. The eventual winner needs to secure 80 percent support. Since votes are weighted by how much capital each country committed to the ESM, large countries like France and Germany enjoy veto power over candidates.
Leão could be one of the favorites as finance ministers prepare for the first round of voting on Monday. Antonio Costa’s socialist government is campaigning hard to get him the job, and Portugal’s fiscal redemption story could attract support across the eurozone and the political spectrum.
“I think Portugal has a good chance of being selected,” Leão said.
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