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EU fiscal rules must remain flexible until 2022 - Portugal finance minister

Sergio Goncalves and Ingrid Melander
·3-min read

By Sergio Goncalves and Ingrid Melander

LISBON (Reuters) - Flexible EU fiscal rules meant to help member states weather the pandemic and return to growth should stay in place until 2022, Portugal's finance minister said in an interview, adding that a smooth implementation of the EU's recovery fund was essential.

The European Commission, which is in charge of enforcing EU fiscal rules, last year suspended requirements to keep government deficits below 3% of GDP and to cut public debt below 60% of GDP as the coronavirus pandemic hit the economy hard.

"We should not withdraw the exceptional rules ... too early," Joao Leao told Reuters.

The EU should "make sure that for this year and next year we have flexibility to help support economic growth," he said, adding: "We need room to have strong temporary measures to support the economy."

Portugal took over the EU's six-month rotating presidency at the start of January, and Leao said: "The main priority of the Portuguese presidency is to achieve a fast and strong economic recovery, that's absolutely key for Europe."

For that, he said, the 750 billion euro ($925.35 billion) recovery fund agreed last month was essential.

"We need this process to be as smooth and fast as possible … the challenge is for countries to implement this concretely, sometimes it takes time. It is important that EU countries are aware of the need to starting planning right now."

Leao said that, amid the challenges triggered by a fresh wave of COVID-19 infections, it was key that "the ECB provides stability and makes sure that the monetary conditions are spread to all countries, so that all countries could benefit from good monetary conditions that will support growth."

The second priority of Portugal's EU presidency regarding economic matters is moving forward with the banking union and capital markets union, he said.

He said he hoped for some progress in the first half of the year on plans for a European Deposit Insurance Scheme (EDIS) - the missing piece of the European Union's plan for a banking union.

"It is a very challenging project and it is very important," he added.

"SLIGHTLY BETTER THAN EXPECTED"

Leao said Portugal's economy has been doing "slightly better than expected," citing resilient income tax revenues and employment.

Portugal met the target of a budget deficit at no more than 7.3% of GDP in 2020, he said. But he stopped short of saying whether income tax revenue would be strong enough to allow it to beat that target. Lisbon hopes to reduce the deficit to 4.3% in 2021.

The government sees the tourism-dependent economy growing 5.4% this year, above the 3.9% predicted by the central bank, after the 8.5% slump in 2020, the worst recession in a century.

In 2019, the economy grew 2.2%, helping Portugal to reach its first budget surplus in 45 years, of 0.1% of GDP.

Leao said he expected the gradual winding down of a moratorium on capital and interest repayments to be "smooth."

Portugal's banks have suspended capital and interest repayments until September 2021 on at least 46 billion euros corporate and household debt to avoid a jump in bad loans.

The finance minister also said Portugal would comply with all its commitments related to lender Novo Banco after opposition parties blocked an injection of 476 million euros ($567.53 million) into the lender's capital.

"We are going to fulfill these commitments, there is no problem with that... The solution has to be (taken) until May", he said, although the Government is still evaluating how to do it.

($1 = 0.8105 euros)

(Reporting by Ingrid Melander and Sergio Goncalves; Editing by David Gregorio)