World needs a stronger Euro

Eurogroup President addresses London Business School

Eurogroup President Mario Centeno

Eurogroup President Mario Centeno is confident that the euro is in a strong position to ride out a global downturn. Centeno leads the body representing the 19 finance ministers of the Eurozone.

Speaking to an audience at London Business School (LBS), Centeno provided evidence of the stability that has returned since the economic crisis and the relatively strong economic position the Eurozone is currently enjoying. It has grown for the fifth year in a row and created 10 million new jobs since the financial crisis, with wages also growing across the board. Unemployment continues to fall and consumer confidence remains above the long-term average.

He claimed this stability is the result of sound policies implemented following the crisis - a combination of fiscal belt-tightening and structural reforms.

The recent agreement to strengthen the role of the European Stability Mechanism was the first development he identified. This will now provide a backstop for the Single Resolution Fund - which helps prevent governments from bailing out failing banks – while giving countries with sound fundamentals better access to precautionary credit lines.

Another significant step is the decision to put in place a Euro Area budget to support convergence and competitiveness. Europe’s finance ministers are currently working to define the main features of this budget, which will complement monetary policy.

Centeno conceded that there is still more work to be done. A common European Deposit Insurance Scheme would be a key element in boosting confidence and preventing bank-runs in the Eurozone. It is, however, politically sensitive and will take time to implement. He pointed out that in the US, it took more than 50 years to develop a Deposit Insurance Scheme.

When questioned on whether we could expect to see further developments towards a capital markets union, he was less optimistic. Even though it could lead to billions of euros of savings each year, political sensitivities are too great to expect much progress in the near future.

In spite of the untapped areas of potential for the euro, and its challenges, Centeno believes it should be acting as a global currency alongside the dollar. He questions the “exorbitant privilege” that the US derives from the global dominance of the dollar and believes that it is openly using its currency as a tool to complement economic sanctions. The euro needs to help stabilise the international financial system by increasing its role in international trade.

He said, “We realise there is still quite some work to be done to bring the euro area up to a level of integration compared to say, the dollar. And that is now our agenda.”

As he pointed out, the difference between the EU and each member state taken individually is that together they can make a difference in the world. And he believes that it is the responsibility of the EU to do exactly that.

“In the future, the world is not going to become less interconnected, less digitalised or even less globalised, despite the latest populist and protectionist tendencies,” he said. “Amidst what looks like increasing global political turbulence, we, in the euro area, will continue to keep a cool head and choose the path of solidarity and multilateralism to address current and future challenges. If we want to continue to have a say, shaping the world financial order with our values and with a rules–based system, the euro is our best and only shot.”

This event was supported by the AQR Asset Management Institute and the Wheeler Institute for Business and Development