By Dr. Martha Theodorou
On January 1st, 2023, Croatia adopted the euro as its official currency and became the 20th member of the Euro area. What is your opinion of the economic entry criteria ('convergence criteria'), agreed by the Member States in 1991 as part of the preparations for the introduction of their new common currency?
I think they are an integral part of how we operate. In order to join the euro, there has to be a certain degree of convergence, in terms of price stability, public finances and exchange rates. From my own country’s experience, meeting these criteria is not always easy and this can be challenging. However, the decision to join the euro has been unequivocally positive for Ireland – our economy has never been in a better shape – in large part due to euro membership.
The euro is a proof of what we can achieve when we work together. By sharing a common currency, we inevitably share our goals and align our policies. But the advantages of European integration go beyond economic benefits: our strength lies in our unity of purpose and our commitment to a shared European destiny.
The economic downturn caused by the COVID-19 pandemic has had a major socio-economic impact on EU countries. The Multiannual Financial Framework (MFF), reinforced by Next Generation EU, is the largest stimulus package ever financed in Europe. How is the EU economy at present, after COVID-19?
While we are all conscious of the current sustained period of high inflation and recent financial market turbulence, it is important to not lose sight of how resilient our economies have been. In terms of growth, even with a dreadful war on our borders, our euro area economies grew last year by 3.5%, with growth in Greece reaching an impressive 5.5%. This was on the back of a strong recovery from the Covid-19 pandemic with growth surpassing expectations and outperforming many experts’ opinions.
Unemployment rates are also at record lows across Europe (around 6.6%) with employment at record highs (167 million in the euro area). To sum this up, we have an extra 3.6 million people at work in the Euro Area (4.7 million for the EU) since pre-Covid. These are extraordinary achievements in the face of a terrible war. They show that our policies are working. They show European resilience on a very large scale.
However, we also need to recognise the challenges we face. Financial sector developments over the past few weeks have again highlighted the need for vigilance and for avoiding complacency. In recent months, our economies have slowed and there has been a loss of momentum, partly due to the war but also due to tighter financial conditions. Growth stagnated at the end of 2022, but I expect a gradual recovery in the months ahead with overall growth in the region of 1% for this year for the euro area. Inflation, while it has peaked remains unacceptably high (8.5%) in the euro zone (although Greece is amongst the lowest at 6.5% in February). We have also seen inflationary pressures broadening.
The European Commission has adopted a Communication, specifying orientations for a reformed EU Economic Governance Framework. Taking into consideration the overall architecture of the Economic and Monetary Union (EMU) and the current situation in the European Union, what is your opinion regarding the reformed framework?
The economic governance framework is particularly important for the Economic and Monetary Union. Even more so for the Euro Area, where a rules-based framework supports the stability of our common currency, the euro, and underpins the resilience of the euro area economy. In March EU Finance Ministers agreed Council Conclusions on how they see the orientations of the review to which the Eurogroup contributed with its views on the relevant euro area aspects. EU leaders endorsed these orientations on 23 March 2023. This provides the European Commission with input in view of preparing its legislative proposal.
Swift progress on the review is a priority for enhancing economic policy coordination. We need clarity and certainty on the framework. Credible, realistic, gradual and growth-friendly debt reduction is a key element in this.
In my recent letter to the President of the European Council ahead of the March Euro Summit, I stressed the importance of the EU fiscal framework and the economic governance framework more broadly for ensuring consistent policy implementation in the euro area.
What policies are proposed for the labour market in the Euro area, in view of the current high inflation, the longer-term changes linked to demographics, and the green and digital transitions?
Labour markets in the euro area have shown very strong resilience in recent years despite the many crises that we have experienced. Last year was a very positive year in terms of employment growth. Unemployment reached a record low in November. While this year is likely to be more challenging, we can feel positive about this foundation. The euro area has turned into an employment powerhouse in a few short years.
A particular focus for us has been monitoring trends in nominal wages which, combined with weaker economic growth this year, could potentially undermine some of the good labour market performance. We need a balance between compensating the most vulnerable for the loss of purchasing power and overall wage increases so that inflation growth is not fuelled. This is not entirely in our hands because these processes are obviously led by workers, employers and their representatives. But so far decisions that have been taken have been measured, and this is something that needs to continue.
In the Eurogroup statement on the fiscal policy response to high energy prices you supported particular income measures that are exceptional, temporary and targeted toward the vulnerable. How effective was this approach in alleviating the impact of high energy prices on households and firms?
We will have to see how things develop but I am encouraged from what Member States have done so far. The resilience of the euro area economy in principle also implies that there is less need for fiscal support, which should be good news for national budgets. We now have a relatively short window of opportunity to ensure that energy crisis support measures are phased out or become more targeted and efficient and maintain the right price signal incentives to save energy. This is important for reducing the overall budgetary cost and achieving an appropriate euro area fiscal stance.
Our Eurogroup statement on fiscal guidance from March reaffirmed our common view on the need to for us to protect the most vulnerable households and viable firms, while preserving incentives to limit energy consumption and increasing energy efficiency. At the January Eurogroup meeting, a few Member States made presentations on the steps they are taking along these very lines as they look to scale back and adjust measures. It is about learning from each other and sharing best practice, while recognising the political complexity that these changes imply.
One of the Eurogroup's priority policy areas for the first half of 2023 is the euro as a digital and international reserve currency. How will the Euro area address potential risks to the financial stability during a pan-European reach of the digital euro?
The Eurogroup has been actively engaged in political discussions on the possible issuance of a digital euro to inform the technical work being undertaken by the European institutions. In January we adopted a statement which takes stock of these discussions. The digital euro is a high priority project for our monetary union for a number of reasons. These range from responding to evolving consumer preferences, providing a public good in the form of a pan-European payment solution, fostering a competitive payments market and preserving European monetary and economic autonomy. A digital euro would, for the first time, provide a digital means of payment that is readily available to every euro area citizen, and universally accepted everywhere in the euro area and possibly beyond.
There is a consensus among Eurogroup ministers that a digital euro should aim to safeguard the financial stability of the euro area. There are concrete ways in which potential risks to financial stability could and should be limited, for example by imposing holding limits and constraints in the design of the digital euro, while maintaining its attractiveness as a means of payment. The exact parameters of such features need to be further analysed and discussed based on a thorough quantitative analysis and their implementation would need to take into account the prevailing economic and financial environment. In addition, the design and introduction of a digital euro should not impair the ability and the independence of the European System of Central Banks in ensuring monetary transmission in order to fulfil its price stability mandate.
Ultimately, to succeed, the digital euro will need to ensure and maintain users’ trust — and for this, privacy is both a key dimension and a fundamental right. The digital euro should be safe and resilient, it should be easy and convenient to use, and it should be widely accessible to the public.
The enhanced surveillance of Greece ended on 20 August 2022. In the context of the post-programme surveillance (PPS) and the European Semester, what do you expect concerning the economic, fiscal, and financial situation in Greece?
The exit of Greece from enhanced surveillance last year was a remarkable achievement and an important milestone not just for Greece, but also for the whole of Eurogroup.
It highlighted the very real progress that Greece has made over the last number of years with your government delivering successful reform implementation despite the challenges from both a pandemic and a war in Europe. The resilience of the Greek people must be once again commended.
Speaking from one former Programme country to another, I recognise the scale of this achievement and want to take this opportunity to congratulate your government on navigating Greece through this difficult period.
Prospects for the Greek economy remain positive. I think we were all impressed by the performance of Greece in 2022, with real GDP growth of 5.5%, well above the euro area average. While growth will be a good degree weaker across the euro area this year, I still expect that Greece will outperform its peers. On the inflation front, like all euro area countries, current price pressures remain unacceptably high. We have seen a peak in inflation and a further moderation is anticipated. We saw in February, that Greece had one of the lowest inflation rates in the EA (6.5% - 2pp below the EA number of 8.5%)
The Recovery and Resilience Facility has provided notable support to the Greek economy and government measures successfully cushioned the impact of energy prices on businesses’ input costs and households’ real disposable incomes. Timely and effective implementation remains key in order to ensure the continuous important impulse for the economy.
But as for all of us, the uncertain geopolitical environment presents potential downside risks, notably for Greece’s tourism sector.
In order to provide better information of its activities to the citizens and the national parliaments in the EU Member states the Eurogroup has agreed, in September 2019, to a list of concrete actions. As of today, would it be possible to further improve the transparency of the Eurogroup and in which ways?
We are always looking into ways to improve how we go about our work. I know there was an impression (around the time of the euro area sovereign debt crisis) that the Eurogroup was opaque. However, this is no longer the case and we have taken concrete actions to improve transparency. To list just a few:
➢ Publishing ‘summing up letters’ by the President of the Eurogroup detailing the issues discussed by the Eurogroup at each of its meetings;
➢ Eurogroup statements and statements by the Eurogroup President that are regularly published;
➢ Working methods and a bi-annual work programme being publicly available;
➢ An online register of all publicly available Eurogroup documents.
At the end of each Eurogroup meeting, we hold a press conference where I give an overview of the main discussions and take questions from journalists. Just the other week I attended the Euro Summit. As part of this, we published my letter to the President of the European Council, which updated on the work of the Eurogroup and our key policy priorities. I also regularly engage with media and the European Parliament on the work of the Eurogroup, in the interest of operating with a high level of transparency.
The Eurogroup's main task is to coordinate the economic policies of the Euro area Member states, and to aim for a stronger economic growth. How important might be the role of the Social Dialogue and the organized Civil Society for the National Plans that enhance sustainable growth, anchored in a common EU framework?
As Eurogroup President, I participate in a regular biannual macroeconomic dialogue at political level with representatives of social partners at EU level. This allows me to discuss our work and priorities but also to hear from social partners on what are their concerns and analysis. In turn, this feeds into my work and the Eurogroup’s work. This open channel of communication is essential for having a good overview of all views and a good understanding of the implications of policy decisions and discussions. This is how Europe works and why the euro area has been such a success. Communication and coordination are integral to what we do and social dialogue is very much part of our work.