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Jeroen Dijsselbloem, the head of the eurozone’s finance ministers, is facing calls to resign after refusing to apologise for saying crisis-hit European countries had wasted their money on “drinks and women”.

The Dutch policy chief – whose Labour party suffered a punishing defeat in national elections last week – was dubbed “insulting” and “vulgar” by MEPs for remarks made in an interview with German newspaper Frankfurter Allgemeine Zeitung.

At a European parliamentary hearing in Brussels on Tuesday, Mr Dijsselbloem said he would “not apologise” after coming under pressure to distance himself from remarks perceived as an attack on the bloc’s southern countries such as Spain, Portugal, Italy and Greece.

In comments reported by the Spanish press, Mr Dijsselbloem told FAZ:

During the crisis of the euro, the countries of the North have shown solidarity with the countries affected by the crisis.

As a Social Democrat, I attribute exceptional importance to solidarity. [But] you also have obligations. You can not spend all the money on drinks and women and then ask for help.

Despite being given repeated opportunities to apologise, Mr Dijsselbloem stood firm, insisting that “solidarity” in the eurozone meant all governments should stick by promises to adhere to the EU’s budgetary rules on debt and deficit limits.

“The concept that when I am being stern on the rules and regulations… and taking them seriously, that this is an attack, is a huge mistake” he told MEPs.

Greece, Ireland and Portugal were bailed out by the EU and International Monetary Fund in 2010, while Spain’s banking system was rescued with creditor funds in 2012.

Spanish MEP Gabriel Mato said the comments were “absolutely unacceptable” and an “insult” to member states, claiming Mr Dijsselbloem had lost his “neutrality” as Eurogroup chief.

The criticism is likely to heap pressure on Mr Dijsselbloem’s position as chair of 19-member Eurogroup. He is currently the Netherlands interim finance minister after his centre-left party suffered a collapse in support in national elections last week.

Mr Dijsselbloem’s mandate as president ends in January 2018. Before today he hinted at staying on in the position until a formal coalition is appointed in the Netherlands.

Responding to MEPs criticism, Mr Dijsselbloem said: “Don’t be offended, it is not about one country but about all our countries. The Netherlands also failed a number of years ago to comply with what was agreed [on financial rules]. I don’t see a [conflict between] regions of the eurogroup”.

“If you want to maintain public and political support throughout the EU for solidarity you must always also talk about what commitments and what efforts must be made by everyone to maintain that solidarity.”

Portugal’s minister for foreign affairs, Santos Silva, called on Mr Dijsselbloem to resign.

“It seems that the president of the Eurogroup has spent all these years without understanding what really happened to countries like Portugal, Spain or Ireland”, he said.

Gianni Pitella, head of the Socialist grouping in the European parliament, questioned whether Mr Dijsselbloem was “fit” to hold the Eurogroup chair:

Dijsselbloem went far beyond by using discriminatory arguments against the countries of southern Europe. There is no excuse or reason for using such language, especially from someone who is supposed to be a progressive.

In the parliament, Spanish MEP Ernest Urtasun‏ told the Dutch minister: “Maybe it is funny for you, but I don’t think it is. I would like to know if this is your first statement as a candidate to renew your post as president of the Eurogroup.”

The Fed is on a clearly flagged path to reduce stimulus, with at least two more rate rises to go this year. But if normalisation was difficult to start for Janet Yellen, Mario Draghi faces three policy dilemmas that make a tightrope walk look easy.

The eurozone has consistently beaten growth expectations over the past quarters. Yet under the hood there is a two-speed recovery in growth and inflation among its members. Core countries are leading together with Ireland and Spain, who have been early on reforms — while France, Italy and Portugal remain behind. Armed with mostly one-size-fits-all tools, the ECB will need extra skill to withdraw stimulus and keep the eurozone together.

The first dilemma is about timing. Normalising policy early can curb inflation where it is already rising, like in Germany or the Netherlands, but could also choke any recovery elsewhere.

The second dilemma is the trade-off between higher long-term yields versus keeping government borrowing costs in check. Current 10-year core yields, below 1 per cent, do not compensate for inflation, expected to be around 1.5 per cent over the same horizon. Tapering bond purchases further can help savers to meet their pension goals and revive banks’ profitability, but it can also make it more expensive for governments to borrow, penalising public spending and investment.

The third dilemma is about short-term rates, currently still negative at -0.4 per cent. While negative rates have kept the euro low and helped to boost exports, they also hinder bank profitability and lending activity even more than low long-term yields. The ECB has been trying to compensate for this collateral damage by paying banks to borrow under its TLTRO loans — the last of which was issued in March — but with scarce results.

Today, the consensus is for the ECB to follow the same normalisation path as the Fed: tapering bond purchases later this year or next and bringing interest rates back to zero only after that. This sequence worked well in the US. We believe Europe needs a different course: bringing rates back to zero before the end of tapering.

The ECB weighs its bond purchases following the share of capital contributions of its eurozone members, the so-called capital key. This means it buys more bonds from larger economies such as Germany and France, not the ones with the most debt outstanding. The result is that core debt has become so scarce that investors are hoarding it, pushing its yields even lower than the central bank’s overnight deposit rate. Investors pay -0.75 per cent to lock cash in German two-year notes.

As for short-term rates, the longer the ECB leaves them in negative territory, the more it depresses bank lending. Bank loans account for nearly 90 per cent of corporate funding in Europe and small businesses, which generate 80 per cent of jobs, rely mostly on banks. This means the central bank should look at credit, not monetary aggregates to judge a successful transmission of its stimulus. Corporate loans have stabilised, but they aren’t growing.

For these reasons, we think the ECB should normalise interest rates before ending bond purchases. This is the best policy option for financial stability. It is also the most challenging. To do it, the central bank would have to justify a delay or an adjustment in tapering, acknowledging that some countries need more support than others. This may sound unpopular in Germany, where elections are approaching, but it is the right long-term decision.

In his latest press conference, Mr Draghi repeated the standard statement saying that policy rates are likely to remain low beyond the end of QE. But some in the ECB governing council are pointing in a different direction: Ewald Nowotny recently said the central bank doesn’t have to follow the same normalisation sequence as the Fed, while Ignazio Visco said the time between the end of QE and rate hikes can be shortened.

To hang together, eurozone leaders need to make a number of difficult decisions. These include giving leeway to Greece over its debt, establishing a common budget for infrastructure and defence, and recognising that monetary policy needs to adapt to the different rates of growth of its members. Like in the past, the ECB will need to lead the way.

Alberto Gallo is partner at Algebris Investments and manager of the Algebris Macro Credit fund

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