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Speech by Romano Prodi

President of the European Commission

"A new economic policy for a new European economy"

Brussels Economic Forum

Brussels, 2 May 2001

Ladies and gentlemen,

This is an auspicious date for our gathering.

Three years ago today, as Prime Minister of Italy, I met here in Brussels with fourteen other heads of State and government and the President of the Commission to take a historic decision.

We agreed that eleven of the EU's Member States met the necessary conditions for adopting the single currency and would therefore take part in the third stage of Economic and Monetary Union. We also appointed the President and members of the Executive Board of the European Central Bank.

With this decision, we made EMU a reality, and we did it keeping to the timetable laid down in the Treaty.

A year earlier, no-one would have expected so many countries to be ready on time. But we did it. I am proud of what we achieved, and our efforts were clearly worth while.

EMU and the euro have already had a major impact on Europe's economy.

  • The euro is already a reality in the bond markets and in the strategic decisions taken by European firms.

  • The Maastricht criteria of budgetary consolidation and monetary discipline have given us macroeconomic stability.

  • In parallel, businesses have developed and reorganised; mergers and acquisitions, together with the single market, have brought greater competitiveness.

  • Thanks to these changes we now have a stable macroeconomic framework and a strong economy with

  • low inflation,

  • low interest rates,

  • low public-sector deficits

  • and growth rates that have reached 3% in the last two years.

Even with the current slowdown in the US, the present economic outlook is good thanks to our sound and relatively self-contained economy.

Last week, the Commission issued its new economic forecast. We expect real growth to be 2.8% in 2001 only slightly lower than our previous estimate.

These are important achievements. But I am convinced we can do and must do better.

As I look to the future, to 2008 the year when we will celebrate the 50th anniversary of the Community I see goals which are not just desirable, but also feasible

  • increasing potential growth from 2.5% to 3.5% in the current members,

  • and achieving growth rates of 5-7% in the candidate countries,

  • thus obtaining a growth rate of around 4% in our enlarged Union.

What this requires, obviously, is raising productivity rates throughout Europe.

My strong feeling is that the current climate is favourable to an increase in productivity rates.

The present conditions are similar to those of the 1960s, the first decade of European integration, when GDP growth inside the Community averaged nearly 5% annually.

Four main factors contribute to this favourable prospect.

  • First, the euro. As I mentioned before, the euro has already created a stable macro-economic environment and acted as a catalyst for structural change.

From 1st January next year, euro coins and banknotes will be in circulation a tangible daily reminder of the reality of European integration. This, I am sure, will have a great impact on consumers and on markets.

  • Second, the enlarged Single Market. Enlargement will bring to the European economy approximately 120 million more consumers and producers, greatly increased resources and diversity.

But it will also bring to the Union twelve countries that have, in just a few years, undergone an enormous transformation.

    The energy and determination they have already shown will not suddenly vanish when they arrive. On the contrary: they will hit the ground running and go on running, bringing wave after wave of fresh dynamism to the Union as a whole.

    We haven't sufficiently studied the economic consequences of enlargement, partly because our experience in this field is too limited.

    We must therefore make a quantitative and qualitative analysis of how to develop a highly integrated market with 500 million people and a single currency.

    A market which sees:

    • both economies with a high level of productivity and high labour costs

    • and economies with low productivity and low labour costs.

    In this new scenario, we must ask ourselves:

    • how new investments will be allocated

    • what the new trends in decentralisation of production and business specialisation will be

    • what the trends in costs and exchange rates will be

    • which countries will take the lead, and what policies will encourage this phenomenon to spread

    • how this will affect the weakest regions in the current Member States

    This is in order to allow the Community institutions, the individual States and the regions develop the policies best suited to promoting development and cohesion in an enlarged Europe.

    On these issues, I look forward to thorough discussion, giving us the intellectual means to accomplish an effort unprecedented in the political and economic history of Europe.

    • A third important factor in the current favourable environment is our determination to exploit the full potential of the new information and communication technologies (ICT).

    These technologies:

    • have a pervasive influence, as important as the Industrial Revolution;

    • they increase productivity

    • and they create global markets.

    ICT also has a far-reaching effect on the way people work:

    • It injects flexibility into the system,

    • and it benefits from that flexibility.

    Where rigidity is a problem, ICT can be the catalyst for a virtuous cycle.

    We know ICT is not a miracle cure for all ills. Euphoric faith in the New Economy can be dangerous as recent events in the financial markets have also shown only too clearly.

    In the prospect of enlargement, we need to extend our reflection beyond ICT.

    We also have to think about the costs and benefits of an acceleration of traditional investment, especially in the field of transport.

    Despite the spread of new technologies, we should not forget

    • the infrastructure deficit which hampers the development of the new Member States;

    • and the need to physically link the new Members to the current 15 States of the Union.

    For the sake of robust development, we need to reduce the infrastructure differences between countries.

    • The fourth major factor is the process of social and economic reform now under way in Europe. It is the combination of:

      • labour market reforms,

      • greater investment in education and training

      • and action to modernise our social protection systems.

      Economic and social reform is, in the end, about changing people's daily lives. Changing the way people work. Giving people new skills so they can handle the new jobs made available by research and technological development.

    We must intensify our efforts and our investments, co-ordinating our actions.

    Of course, changes always carry a risk that things can go wrong: but here in Europe we have an excellent social safety net to protect workers from that kind of risk. And we are reforming that social protection system to make it more "incentive-compatible".

    But there is a problem which might in the long run affect the strength of the European economy, and it is the increase of the income gap between citizens.

    This is undeniably happening in the US as well, but it is also true that in this respect ethical issues aside European society has been, and still is, much more demanding than its American counterpart.

    These disparities do not seem to pose any problem at the moment, as if they could go on increasing forever without negative effects.

    But I believe that this trend cannot go on forever and that, once again, we must face up to the need for change now or risk having to face up to irreparable divisions in our society later.

    The warnings coming from the Commission departments in charge of social policy should be carefully pondered and translated into action. I look forward to your comments and suggestions on these issues.

Ladies and gentlemen,

The changes I have been describing are, I believe, creating a New European Economy, a fully integrated pan-European market producing a new era of European wealth for all its citizens.

But I want our discussion to go beyond economic policy within Europe.

The New European Economy gives us the opportunity to develop a new economic strategy in the world.

Our partners in the developed world are already aware of the Union as a force to be reckoned with.

  • We already speak and act as a single, powerful trading bloc.

  • Our economic and political "clout" is being enhanced as the euro becomes an internationally important currency.

  • And as the Union enlarges over the next few years it will gain even greater strength.

To the rest of the world,

  • The EU is already the leading donor of aid.

  • The European Investment Bank is playing an increasingly important role in international development.

  • Nor must we forget the importance of trade access for these countries.

But all these separate economic actions still do not constitute an organic economic policy. The EU must therefore combine all these instruments in a single, coherent economic strategy.

A strategy that entails making an important choice:

  • whether we should seek to project our influence into all corners of the globe,

  • or whether we should focus our efforts on specific regions.

A balance must clearly be struck between emphasis on our regional policy and the need for action on global development.

Ladies and gentlemen,

In a year from now, when we meet again in this same room, Europe will certainly have moved on from where we are today.

We will, I believe, have come through the current turbulent economic period.

We will have made progress with the social and economic reforms we agreed at Lisbon.

We will be close to concluding accession negotiations with a number of well-prepared candidate countries.

And the euro will be hard cash in people's pockets!

This last fact alone is tangible evidence of how far we have come in just a few years.

Thank you.

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