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European Commission

MEMO

Brussels, 23 April 2013

Austerity and growth debate: What President Barroso actually said at the Brussels Think Tank Dialogue (22 April 2013)

Matina Stevis (moderator): The role of the institutions of the Commission within the context of this crisis can surely not just be to provide intellectual leadership or aspiration. Surely it must be to be relevant to the citizens in Athens and Lisbon or in Nicosia and to be strong. I've heard you and others describe the Commission as the guardian of the Treaty. It means nothing to an Athenian that you are the guardian of the Treaty. The Treaty means nothing. You are to be the guardian of that citizen, of your compatriot in Lisbon. So, it is the moment for the European institutions to decide whether they will be strong and relevant or weak and irrelevant. That is an existential moment for you, Sir, as well as for the Union itself.

José Manuel Barroso: First, I have to react to a statement you have made when you said that the Treaty means nothing (even if you are a moderator, it was not a moderate statement), I say to you, it means a lot, because one of the reasons we have a rise of unemployment in Greece is because the Treaty was not respected by the Greek authorities and by other countries. We have a Stability and Growth Pact, we have rules and those European rules were not respected by the Greek authorities, so these unemployed people in Greece should be told that the authorities of their country did not respect the Treaties that they have signed. Not only that country. So a Treaty means immense for Europe, not all, but the difference between the European order of today and the order of the First and the Second World War is precisely in that now we are a community based on law and common principles. Before we were a Europe based on balance of power, confrontation and even the worst. So to say that the Treaty means nothing, I simply cannot accept it. A community of law is fundamentally different from "l'état de jungle", from arbitrary powers. This is my first point.

Second point, there I share completely your concerns, we have to go beyond the Treaties and I think I understand also because, as you said, coming from Portugal, I am in a very good position to understand it, there is a deep problem now of trust of the normal European citizen towards the European Union. We know that. One of the reasons being of course the consequences of the financial crisis, namely the social situation that is, as I have said it before, and emergency social situation in many of our countries. Now, to put the blame of this on the European Union is not only politically dishonest, but intellectually inadequate. The crisis was created not by the European Union or by the euro as some suggest. The crisis was created by unsustainable public debt and by irresponsible behaviour in the financial markets, not only in Europe, by the way. And we are feeling the consequences of the crisis that was originated either in the financial sector or in the national competences of our Member States, including the supervisory capacity. Now we are trying to have a Single Supervisory mechanism and it's almost done, but let's not forget that everything that happened in the banking sector in Europe so far happened under the authority, or should I say the lack of it, of the national supervisors. This is important to remind, because today people tend to suggest it was the fault of Europe. We are now equipping Europe to those kind of challenges and from that point of view we are making progress.

Now, having said this, I know this will also not respond to the concerns of the unemployed citizen in Greece or Portugal or many other countries we could quote. That is why I also think that we are reaching the limits of the current policies. The current policies are of course appropriate in terms of reducing the biggest challenge that we have today which is the challenge of unsustainable debt, public and private, the need to deleverage, the need to put Europe on a sound footing so that Europe can be more competitive and can have growth again, but growth that is sustainable, because what we have learned, and this is for me the biggest lesson of the crisis, and I think a lesson that we have not yet all completely drawn, is that growth based on debt is not sustainable. Growth based on unsustainable public or private debt is artificial growth and what we need is to have growth that is sustainable, namely based on increased competitiveness in Europe. This is what we need. This is the greatest lesson to draw from the crisis.

So while this policy is fundamentally right, I think it has reached its limits in many aspects, because a policy to be successful not only has to be properly designed. It has to have the minimum of political and social support. I know that there are some technocratic advisors who tell us what is the perfect model to respond to a situation, but when we ask how we implement it, they say that is not my business. This cannot happen at European level. We need to have a policy that is right. At the same time we need to have the ways, the means of its implementation and its acceptance, the acceptability, political and social. This is where I think we have not done everything right, responding directly to your question. We have not been able collectively, the European institutions, the Member States, to explain really what was at stake and to build the necessary support. And then we have this unacceptable prejudice coming on. The idea, in some of our Member States, the states in the periphery (to simplify) that the problems they have, they have not created it, that it was created by someone, probably Berlin or the European institutions, or the IMF. It was not created by the others. But also the other prejudice that exists in some of the, let's say, central countries or more prosperous countries, that there was some kind of inability of the people from the periphery or from the South, that some of these people are by definition lazy or incompetent. And this is a deep problem. It is intolerable, morally unacceptable. Coming myself from one of those countries I can tell you myself that Portuguese people are extremely hardworking people and all kinds of comments, based on national prejudice are simply against the European values. The issue is in fact that there are different levels of productivity and competitiveness in Europe, but not all these problems are because of qualities of the peoples or of the nations. On the contrary, they have very objective reasons and we could go one by one. And we have seen in the history, and we don't have to go back very far in history, that countries change very often in terms of being the successful stories or the bad pupils of the economy. The point is more in terms of management, technology, policy, wrong or good decisions, policy and politics matter. And this is the important point and I want to make that point very strongly that as President of the Commission (what you have said and I take your challenge) I have a duty and I want to say that it is unacceptable the kind of national prejudices that I see so often in the political debate today and that we have, those who believe in Europe, we have to fight against this populistic, nationalistic tendency.

Ian Traynor (The Guardian): If I understand you correctly you are saying that basically the austerity policies that have been the principle response to the crisis have run against the limits and cannot really be implemented without the necessary levels of political and social approval and support. This has been the principle response through the past three years and it is time to admit that these policies are not working. Can you comment on that and what are you suggesting?

José Manuel Barroso: The Commission has never and will never propose a policy that is only based on the correction of the deficits. This is certainly a difficult policy to implement, because we believe that without correcting the imbalances in public finances, we will not have confidence and without confidence, we have no investment. And without investment there is no growth. But our response to the crisis, our policy proposals, has always been a comprehensive response. It is the structural reforms for competitiveness, it goes from the points that are in the so-called Europe 2020 agenda to very important policy recommendations that we have been making in the Country-specific recommendations that are sometimes very difficult to accept at national level, because they introduce more flexibility in our markets, but also it is about trade. Trade is a very important driver for growth and we believe it has a great value for Europe today to promote this kind of trade opportunities (not only for Europe, but certainly for Europe as well) and it goes also for investment. As you know the European Commission has presented what we consider as ambitious Multiannual Financial Framework for European investment. It was reduced in ambition in the consensus reached, because unanimity was required by the Member States, but we are putting forward an agenda for investment; it was the Commission who first proposed for instance the project bonds that are now starting to be implemented; the increase in the lending capacity of the European Investment Bank. So, we have a policy for growth.

Politically and socially, one policy that is only seen as austerity, is of course not sustainable. That is why we need to combine the indispensable, I underline indispensable, correction of the disequilibria in public finances, namely huge deficits, huge public debt, fiscal rigour, this is indispensable, we need to complement this with proper measures for growth, including short term measures for growth, because we know that some of those reforms take time to produce effect. What is going on in Greece, in Portugal, in Spain is amazing in terms of correction of the external imbalances. It is amazing what some of these countries have been doing, for instance Portugal and Ireland, Ireland even more, in terms of recovering the confidence of markets and the investors. Let's not forget that the programmes that were designed were basically for this purpose, because those countries could not by themselves find the necessary funding for the functioning of the state. That is why they have asked for the Euro area's support.

Now, this is indispensable, but it has to be complemented by a stronger emphasis on growth and growth measures in the shorter term. We have been saying this, but we should say it louder and clearer. If not, even if the policy of correction of the deficit is basically correct, we can always discuss the fine-tuning, the rhythm or the pace, but that will not be sustainable politically and socially.

In terms of the fine-tuning, let me tell you, probably you have not taken sufficiently notice of it, the European Commission has been proposing, because the final decision is taken by the Eurogroup and by the ECOFIN (politically by the Euro area and the Eurogroup, but formally by the ECOFIN) the extension of the timelines for the correction of the deficits. We have done it for several countries, we will probably do it for others in the next evaluation. We are now making that review in dialogue also with the Member States. This has not been sufficiently acknowledged. We have put the emphasis, and it is clear also in the communication of Vice President Rehn, on the structural deficit rather on the nominal deficit. This is an important point. I am saying that because some people suggested the Stability and Growth Pact is blind and this is simply not true. There is inherent flexibility in the Stability and Growth Pact to implement this policy. So, I think I was clear and I should not be misunderstood. While the correction of the excessive deficit is indispensable to recover confidence (If not what happens is that markets and investors will once again put a very big risk on those countries and so they run the risk of losing what they are getting in terms of renewed credibility), it has to be complemented by stronger measures and also political agreement for growth including short term growth measures. This is the policy that is right to do.

You said this policy is not producing results. I am sorry, we have to see that case by case. Ireland is going back to growth, it has positive growth. It is one of the very few countries that has positive growth today in Europe and they have been implementing one of the toughest programmes of adjustment and they are also already now in positive territory in terms of employment. So, can you say that the programme is not working? It is a painful programme certainly, but you cannot say it is not working.

The short term objective of the programme for Portugal was the country to go back to the markets and in terms of reduction of the spread of the country's debt it is amazing the progress that was achieved, at a very difficult cost in the short term for our citizens, that is certainly true, but creating conditions for longer term sustainable growth, including by the way with the extremely good results in terms of correction of external imbalances and this also applies to Greece and to other countries. A country that people don't speak about probably because it is smaller, Latvia, a country that is not in the Euro area, but in fact it is as if it was, because there was no competitive devaluation. They went from very negative figures in terms of growth to positive - one of the most impressive growth figures in Europe today.

So to say that generally the programmes don't work or the programmes work, is a simplistic vision. We have to have tailor made solutions for different countries, fine-tune the policy responses. They are very complex policy mixes. We cannot apply a one-size-fits-all approach to the European countries and in this Commission this is the vision we are going to defend with our Member States, keeping in mind that the solutions in the end are taken by the Member States. I want to underline this as well, because sometimes people say it is the Commission, it is the Troika. The Commission and the Troika propose. At the end the decisions are taken by the Member States where by the way we have from all political and ideological colours. I think it would be important, while of course giving different contributions to this debate, to avoid simplistic ideological polarisation of this debate. After all the Eurogroup is now presided by distinguished Member of the socialist family. Nobody is going to say that the Eurogroup is a socialist body or that the Commission is EPP body or that the European Council is I don't know what. No. What we need is a real consensus among the most important political forces and optimally the most important social partners on our way forward. And this is very challenging, but I believe those who want to over simplify the situation putting it as a kind of an option between austerity and growth are completely wrong. We need sound fiscal policy. We need deeper reform for competitiveness and we need investment, namely with a social dimension.


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