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SPEECH/05/249












Joaquín Almunia

European Commissioner for Economic and Monetary Affairs




Improving the EU’s growth potential through sound fiscal policies and economic reform























Brussels Economic Forum
Brussels, 21 April 2005

I would like to start by welcoming you all to this year’s Brussels Economic Forum. We are gathered here for the 6th time – with quite a broad range of strongly interrelated, issues to be discussed.

Today, we will concentrate on how to improve EU’s internal growth performance and growth potential. Tomorrow, we will try to put the EU’s performance into a global perspective by asking: Is the EU rising to the challenges of globalisation? – And if yes, are we doing so in a “fair way” by ensuring that the bigger pie is reasonably distributed between us and our neighbours?

***

Allow me to open today’s sessions by providing a background on the key economic policy challenges that the EU currently faces. I will begin by making some comments on the economic situation, before turning to the improved fiscal framework and, finally, the renewed Lisbon strategy.

1. The economic situation

The Commission’s Spring forecasts, which were published earlier this month, predict a return of euro-area GDP growth to potential during the course of this year. While employment growth should accelerate, the expected impact on unemployment is limited and the overall budgetary situation barely changes.

I shall not enter into the details of our recently released spring forecast, which will be covered by Klaus Regling. Instead, I would like to set the scene for today’s discussion on ‘the economic outlook’ by highlighting the following three issues:

Europe’s growth performance has disappointed

Firstly, we have become somewhat more downbeat about the EU growth outlook for 2005 since the autumn forecast. This follows, in part, from the renewed upsurge in oil prices and the strengthening of the euro. Both contributed to the deceleration in economic activity in the second half of 2004. The deterioration in competitiveness in several (euro-area) Member States also played a part in the latter deceleration.

Some parts of the EU are more dynamic

Secondly, I would like to underline that differences in economic performance are sizeable across Member States.

Most of the recently-acceded Member States are growing quite rapidly as might be expected for catching-up economies. On the other hand, some of the euro-area Member States are still struggling to achieve potential growth.

However, the improved competitiveness of Germany and, more recently, the Netherlands holds out hope for a better economic performance in the years to come. Structural reforms together with moderate wage increases, contributed to falling unit labour costs, thereby allowing both countries to regain market shares and improve their export performance. The beneficial impact of implemented structural reforms on the confidence of households and enterprises is expected to provide a welcome boost to domestic demand over the forecast horizon.

A return to potential growth is not enough

Thirdly, although we expect growth in the euro area and the EU to return to potential during the course of this year – this is not, and cannot be, the limit of our ambitions. Potential growth has been on a downward trend in Europe for quite some time. It is estimated at around 2% in the euro area and somewhat higher in the EU. However, this is still markedly lower than the 3% annual growth considered to be a necessary condition to secure the achievement of the Lisbon goals.

To put this into perspective, let me take the example of the Lisbon target for the employment rate. The economic upswing has, so far, had a limited impact on the labour market. This is, to a certain extent, explained by the greater resilience shown in the previous downturn where no jobs were lost in net terms and the rise in unemployment was relatively limited.

Employment growth is now set to accelerate gradually in both the euro area and the EU. Approximately 3 million new jobs are expected to be created in the EU during 2005-2006. This will lead only to a modest decline in unemployment in view of the usual influx of persons actively seeking employment as the labour market situation improves. Accordingly, the employment rate will rise only moderately to 63.7% by 2006, thereby missing the intermediate employment rate target of 67% to be achieved by end 2005. The target of an overall employment rate of 70% by 2010 seems increasingly challenging. A swift implementation of further and comprehensive structural reforms is therefore needed to increase the potential growth rate.

In this respect, the Spring European Council in Brussels last month took important steps to improve economic governance, by strengthening the Stability and Growth Pact, and by injecting new dynamism into the Lisbon Agenda. I would like to draw your attention to some of the key elements in these important agreements.

2. Strengthening the Stability and Growth Pact

During the initial years of EMU, insufficient use was made of favorable economic circumstances to achieve significant budgetary consolidation. The current economic upswing should be used to consolidate public finances and reduce fiscal deficits, which remain too high in a number of Member States. Well-designed budgetary consolidation can exert a positive influence on confidence regarding growth and employment prospects by addressing concerns about fiscal sustainability in the light of ageing populations.

When recently agreeing on amendments to the Stability and Growth Pact, Member States unanimously renewed their commitment to take the necessary budgetary action to achieve sound and stability-oriented budgetary policies. This compromise agreement presents a balanced package and removes the previous uncertainty about the interpretation of the EU rules. The Pact has been confirmed as a strong instrument to foster budgetary discipline and has been given new vigour.

The preventive arm of the Pact has been strengthened by ensuring that due attention is given to the fundamentals of fiscal sustainability when setting medium-term budgetary objectives. The strengthened commitment by Member States to actively consolidate public finances under favorable economic conditions and the possibility for the Commission to act if this is not the case are particularly noteworthy in this respect.

The new agreement also includes incentives for Member States to embark upon structural reforms.

Changes to the corrective arm of the Pact will allow for the application of the rules to better reflect the economic realities in the enlarged EU of 25 Member States. Room for judgment is introduced in the excessive deficit procedure, but the 3 percent and 60 percent reference values for the deficit and the debt ratios remain the anchor of the system. Any excess of the deficit above the reference value that would not be small and temporary will be considered excessive. There will be no simple discounting of certain categories of public expenditure from the deficit calculations. Finally, Member States in excessive deficit situations will be requested to achieve a minimum annual budgetary effort of 0.5% of GDP.

Overall, there is renewed consensus on a revised set of rules with greater economic rationale, allowing for a better ownership by Member States. The Commission will ensure a forceful implementation of the agreement and the impartial and equal application of the rules to all Member States.

3. The Lisbon Strategy and the BEPGs

Putting in place a better framework for sound budgetary policies is a necessary, but not sufficient, requirement for achieving higher growth in Europe.

Five years after the European Council at Lisbon adopted an ambitious economic reform agenda, the achievements have lagged far behind expectations. The recent Spring European Council recognised the urgency of taking action to strengthen Europe’s competitiveness and boost its growth potential. Accordingly, the European Council decided to give a fresh impetus to reform efforts and to relaunch the Lisbon Strategy. I hope that the changes made to the strategy will effectively address its main weaknesses – the slow implementation of reforms in Member States and a gradual loss of political focus.

To strengthen its focus, the Lisbon Reform agenda will concentrate on making Europe a more attractive place to work, investing in knowledge and innovation for economic growth and creating more and better jobs. The implementation of a limited number of well-specified measures under these priorities would contribute not only to generating higher growth potential and creating more jobs, but also to reaching the broad objectives of the Lisbon Strategy.

To improve the governance of the Lisbon Agenda, we have put forward a new delivery mechanism to better involve Member States in the process of economic reform. A major novelty has been that each member of the EU-25 has been invited to submit by the autumn of this year National Reform Programmes, which will identify the key obstacles to growth and employment in their respective countries and will involve a commitment to reform measures over the next three years. I hope that these single national reform programs will ensure a more coherent national policy strategy and promote a deeper debate in the Member States by involving national parliaments and other stakeholders. I am looking forward to an interesting and perhaps controversial debate on this issue.

* * *

As a first step in the renewed Lisbon Strategy, the Commission recently adopted Integrated Guidelines, which bring together for the first time in a single, simplified document, the Commission’s recommendations on the Broad Economic Policy Guidelines and its proposal on the Employment Guidelines. The result is a three-year blueprint of macroeconomic, microeconomic and employment policies for growth and jobs in Europe.

The first part of the BEPGs sets out a wide-ranging programme of macroeconomic policies for growth and jobs. The central message here is that macroeconomic stability is crucially important for ensuring a well-balanced economic expansion and the full realisation of current growth potential. Furthermore, it is stressed that Europe cannot hope to embark on a successful programme of microeconomic reforms without at the same time ensuring that policies to promote macroeconomic stability are in place.

The main issues can be summarised as follows:

  • The BEPGs call on Member States to avoid pro-cyclical budgetary policies so as to preserve economic stability over the cycle.
  • They also call for debt reduction, healthcare and pension reforms and measures to boost employment rates and the labour supply to ensure economic sustainability in the face of ageing populations.
  • To promote an efficient allocation of resources, the BEPGs recommend a redirection of government expenditure towards growth enhancing categories like R&D, education and physical infrastructure, and a gearing of tax systems towards raising growth potential.
  • The BEPGs call for greater coherence between macroeconomic policies and structural reforms by taking measures to increase flexibility, mobility and adjustment capacity in response to globalisation, technological advances and cyclical changes.
  • Wages cannot be left out of the equation. The BEPGs call on Member States to promote nominal wage increases and labour costs consistent with price stability and the trend in productivity over the medium term.

The second part of the BEPGs sets out a comprehensive and coordinated set of microeconomic reform measures, which will increase the efficiency and adaptability of the European economy and thereby raise its growth potential. These policies are organised around two pillars of the Lisbon Action Programme that was agreed by the Spring European Council last month: (i) making Europe a more attractive place to invest and work; and (ii) spurring knowledge and innovation for growth.

Amongst the specific reforms recommended here are measures to:

  • speed up the transposition of Internal Market directives,
  • accelerate financial market integration,
  • improve national and Community regulations and cut red-tape, and
  • increase and improve the effectiveness of public expenditure on R&D and promote business R&D.

As I have said, the BEPGs are for the first time integrated with the Employment Guidelines. The Employment Guidelines, which are pivotal for the Lisbon reform agenda, aim at getting more people into employment; increasing investment in education and skills; raising the adaptability of workers and enterprises; and modernising social protection systems.

In summary, the Integrated Guidelines for the period 2005-2008 represent an important first step in the renewed Lisbon Strategy. With it, the Commission has fulfilled its commitment to come forward with a streamlined and focused roadmap of macroeconomic, microeconomic and employment policies for growth and jobs in Europe. The responsibility now falls to the Member States to translate these guidelines into credible and concrete National Reform Programmes. The Commission will actively support Member States in the preparation of these programmes and undertake a thorough assessment of their content in time for next year’s Spring European Council.

***

Summing up, today’s discussion will focus on how to improve the EU’s growth performance and, in particular, growth potential. We have recently taken steps to strengthen the economic policy coordination framework. The reform of the Stability and Growth Pact will help to get the macro-economic policy mix right. The renewed Lisbon Strategy brings greater focus to the structural reform agenda and the need to improve the delivery mechanisms.

Tomorrow, we will look beyond the EU borders by considering migration, offshoring and the economics of neighbourhood policy. By offering “a stake” in our Internal Market, on top of enhanced trade liberalisation and financial assistance, as well as improved energy and transport interconnections, we aim to strengthen both growth and stability in the region we share. This will depend on the degree of progress made in aligning national regulations and practices with EUs. Many of the lessons learnt during enlargement are relevant also for effective wider cooperation. By supporting constructive reforms, including legal and institutional changes, growth performance and potential can be improved.

I look forward to hearing your opinions on all of these topics.


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