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Europe urged to seize Macron moment (interview with Pier Carlo Padoan)

Financial Times - Tue May 23 13:10:00 CEST 2017

Italian finance minister sees French president's victory as chance to reform bloc

Pier Carlo Padoan, Italy’s finance minister, has warned eurozone leaders not to squander the chance to reform the single currency created by Emmanuel Macron’s French election win and said the pro-EU president’s victory was a political “watershed” for the continent.

“Europe has the opportunity not only to get rid of the populist threat from a political and electoral point of view but to establish a new social pact with European citizens, which has to do with welfare, jobs and security,” Mr Padoan said in an interview with the Financial Times. “Macron tilts the balance in the right direction and I hope we don’t waste it.”

Italy’s finance minister also laid down the gauntlet to his own country’s politicians and voters, saying Italy had to “decide if it will be an obstacle or an agent of progress in the eurozone”.

Following Mr Macron’s election win Italy remains a focus of political risk for the eurozone, with general elections due next year when anti-establishment Eurosceptics, led by the Five Star Movement, will challenge the ruling centre-left Democratic party.

“Italian policymakers should say: ‘We can win the elections on a pro-European and pro-growth agenda.’ If we think that we can beat populism by running after populist themes, then we are dead,” Mr Padoan, 67, said.

Italy’s economy is in its third full year of a sluggish economic recovery. The European Commission forecast for this year is for a 0.9 per cent rise in gross domestic product compared with the eurozone average of 1.7 per cent.

“Let’s hope we can read the situation carefully. One of the moods you hear in Europe is OK, the economy is strong, the worst is over, so we have more space for fiscal tightening and the rest will come,” Mr Padoan said, in an implicit warning to deficit hawks in the currency bloc. “If we limit ourselves to fiscal discipline, then we run the same risk as 2010 and 2011 [the worst years of the eurozone crisis].”

The future of the eurozone was discussed by Mr Macron and Paolo Gentiloni, Italy’s prime minister, in Paris on Sunday. In a statement Mr Macron called for a “common budget capacity” and a “real eurozone of investments” that could help “reduce the divergence among our economies”.

“This divergence created the financial tensions that Italy suffered in recent years,” the French president added, flanked by Mr Gentiloni.

Rome supports some of Mr Macron’s plans for the eurozone such as the creation of a finance minister and budget. Mr Padoan said he expected Germany to welcome Mr Macron’s plans for structural economic reforms, making it easier for a convergence of views on the eurozone’s future. But he suggested Germany would have to be more welcoming of fiscal transfers — such as a common unemployment insurance scheme — to make the currency bloc work better.

“The nightmare of the average German voter is that they will lose their money to the terrible southerners. Let’s be serious about this: in history we know monetary integration requires some form of redistribution,” he said. “Otherwise the adjustment that will come sooner or later will be much more damaging — to all countries.”

Italy has insisted that any transfers should not be seen as “permanent” but “reversible” depending on economic conditions.

Mr Padoan defended Rome’s policy of following a narrow path of gradual deficit reduction while maintaining modest growth, rather than more aggressive pursuit of the country’s heavy debt load. He also insisted Italy was pressing on with economic reforms in the labour market, bureaucracy and justice system.

One of the factors holding back Italy’s economy — and making it a weak link in the eurozone’s financial system — is the quantity of non-performing loans in the banking sector. In December, Rome set aside €20bn to help ailing banks, chiefly Monte dei Paschi di Siena.

Negotiations with the EU and ECB over the terms of the MPS bailout have been dragging on for months, amid discussion on how to interpret EU rules on bank rescues. Italian officials now expect an agreement by next month on MPS, with others to follow.

Mr Padoan insisted the process was on schedule. “We are doing things by the rules, and the fact that we are taking time is also related to the fact that we are in a learning process — not just the banks but also the Italian and European authorities. We are setting a precedent, a benchmark,” he said.

“We are not losing time, we are working 24 hours a day to deal with the issue and we are confident that we will successfully conclude the talks.”

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