Portugal’s economy is recovering because it has ditched austerity, Prime Minister António Costa told Handelsblatt. He said the EU should be given more power to avert further crises.

“Confidence is the key to the economy, and we have given that to the Portuguese,” Prime Minister António Costa told Handelsblatt.

António Costa is a polite man whose face lights up when he smiles. While he was speaking to Handelsblatt last week, camera crews were waiting outside for his address to the nation in which he congratulated his compatriots on having overcome the euro zone's debt crisis. The country reached a turning point this month when the European Commission declared it was no longer in breach of the bloc's deficit rules, six years after it received a €78 billion ($87 billion) bailout in 2011. The Commission said Portugal’s budget deficit fell to 2 percent of GDP in 2016, well below the EU's 3 percent ceiling.

In his interview, he said Portugal was thriving because it had abandoned austerity measures. It was a veiled swipe at the tough conditions Chancellor Angela Merkel imposed in return for EU aid during the crisis. Last year, Germany's hardline Finance Minister Wolfgang Schäuble had warned Portugal that loosening budget restraints could topple the country back into a crisis. He has since reacted with surprise and praise to Portugal's economic success, reportedly calling Portuguese Finance Minister Mário Centeno “the Ronaldo of the Ecofin” group of finance ministers in reference to the Portuguese soccer star.

Handelsblatt: Mr. Costa, last summer the European Union wanted to impose sanctions on Portugal because the country had exceeded the budget deficit limit yet again. Now it has released Portugal from the excessive deficit procedure. Can Europe hope that Portugal isn't a weak link in the euro system?

Mr. Costa: The EU sees Portugal's progress. We are growing again, unemployment is falling and we reduced the budget deficit to 2 percent in 2016. This is clearly below the 3 percent required by the EU and the lowest deficit in the last 42 years for Portugal. We will reduce the deficit even further this year. So the EU's decision is the natural consequence of its deficit rules.

When you took office 18 months ago and allowed a large number of austerity measures to expire, many feared another economic collapse. But you cut spending more than your conservative predecessor. How difficult is it to be a socialist in the European Union today?

When our government took office, it encountered many ideological prejudices in both the media and European institutions. But we demonstrated that we have found a new and better way to stabilize the country.

What did you do that was better?

Ending austerity was critical to strengthening the people's confidence and the economy. Private investment has grown by more than 7 percent in the last year and is growing even faster now. Confidence is the key to the economy, and we have given that to the Portuguese – confidence in their country, their future and our ability to emerge from the crisis.

But you didn’t end austerity. In fact, you cut back even more.

No. We gave income back to families and created conditions to enable companies to invest. This led to stronger economic growth, which in turn leads to a declining deficit. No country can grow if you take money away from families and businesses.

We don’t need a bad bank. The banks now have the necessary equity to calmly tackle the problem of bad loans.

The three largest rating agencies have given Portugal's debt junk status. Their confidence in your country appears to be limited.

I believe that the rating agencies did not expect the European Commission's latest decision. I am confident that they will soon increase their ratings. They are all now realizing that our situation is much better than in 2011, when they issued these ratings. They will have to change their ratings if they want to remain credible.

The banks have mountains of bad loans amounting to 17 percent of their lending. Your government has been developing plans for a bad bank. How far have you got?

We don’t need a bad bank. The banks now have the necessary equity to calmly tackle the problem of bad loans. And now that growth has picked up, more companies are able to repay their loans.

You have no other plans to stabilize the financial sector?

Yes, we do. We are working with the Portuguese central bank on a shared platform for banks to coordinate debt collection. Many companies have loans with multiple banks. If lenders are able to coordinate more effectively with one another, it will be easier to collect outstanding loans. But the situation today is already much better than a year ago. Today it's more of a statistical question than an economic obstacle.

Can you rule out the possibility that the government will have to bail out the banks?

Yes. They are no indications that they need further government assistance.

You don’t have a very positive experience with that. In 2014, the government spent €4 billion ($4.5 billion) to bail out major bank Novo Banco, and now it has sold the bank to Lone Star, a hedge fund, for a symbolic amount. Why?

The notion that the sale would be a simple process and that the bank could be sold for a high price was an illusion of the previous administration, with nothing to justify it.

But the lender is the good part of failed bank Banco Espírito Santo. It ought to be worth a lot.

The conservative government tried to sell Novo Banco, but no one wanted it. We have now accepted the best offer we had. The quality of the offer reflects the quality of the solution that was found, namely to split Espírito Santo into a bad bank and Novo Banco.

The EU gives each country advice on what it should do economically but it lacks the power to enforce these recommendations.

Let's talk about politics. French President Emmanuel Macron is calling for a European finance minister and a parliament for the euro zone. What do think about that?

The proposals are both correct and necessary to complete the European economic and monetary union. We need a shared budget to finance a shared policy. And for a budget you need the right institutions.

Does the EU need a reform?

Yes. We should not succumb to the illusion that all our problems are solved, now that the big government debt crisis is over. Brexit will force us to rethink the European budget. There are asymmetries in the monetary union that we should balance out. Although the EU gives each country advice on what it should do economically, it lacks the power to enforce these recommendations. We need to change that.

What will this economic harmonization look like?

Our experience has shown that we need mechanisms that are activated automatically, in order to cushion the negative impact of crises which affect countries in different ways, but also to avert future crises. I'm thinking, for example, of a European unemployment benefit, of completing the banking union by creating a joint deposit insurance and of a budget capacity that promotes convergence. The euro zone is unstable because of the growing differences between prosperous countries and those with problems.

Europe is having trouble with US President Donald Trump who is involved numerous scandals at home. Does this worry you?

I will not comment on US internal affairs. I think it's clear that I would not have voted for Trump. But we have a good and strong relationship with the United States in the Atlantic alliance. And we will maintain that relationship, regardless of who is in power there.

One issue that isn’t working well in the EU is that of refugees. Portugal, like some other countries, hasn’t accepted as many refugees as agreed yet. Germany is shouldering the burden alone.

Well, that's just the price of success. People want to go to Germany because they believe there are better opportunities there. I visited a refugee camp in Athens, and I invited the people there to come to Portugal. But many told me they wanted to go to Germany because they could find jobs and good pay there. This too shows that we need to harmonize our economies more effectively, or else people will only want to go to the successful countries.

Mr. Costa, thank you for the interview.

The interview was conducted by Handelsblatt's Spain correspondent Sandra Louven. To contact her: [email protected].