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SPEECH/ 09/479

Viviane Reding

Member of the European Commission responsible for Information Society and Media

The Need for a European Social Market Economy and a Re-Launch of the Single Market Project

Figures and graphics available in PDF and WORD PROCESSED

Special Panel “Global Economic Recovery” at the European Ideas Network Summer University

Vienna, 16 October 2009

Chairman, Ladies and Gentlemen,

These days, we in the European Commission are very busy drafting possible strategies and developing policy options for the next five years. More than ever, policy-makers are therefore in listening and reflection mode at the moment. And more than ever today, no-one can afford to develop policies for Europe without being fully aware of the overall economic situation in the aftermath of the global financial crisis.

I therefore found your intense and controversial discussion very informative and helpful. Many of your contributions are indeed important “food for thought” for the next European Commission. In this context, André Sapir and Jakob von Weizsäcker have already been very proactive earlier this autumn. They put their views – many of which were present again in the discussions today – into the useful format of “Memos to the new Commission” on Europe’s economic priorities for 2010-2015. You can be sure that there is no-one in the Commission working on an economic portfolio who has not read your Memos immediately after their publication. We may not agree with every word. However, in terms of timing, format and vision, this is exactly the kind of advice we European Commissioners need at this crucial moment in time.

I take from the debate today the following elements which I believe we in the Commission should concentrate on when developing economic policies for Europe for the next years.

The need for firmly (re-)anchoring policies in economic principles

First of all, there is in my view a great need in Europe and around the world for a clear orientation and firm (re-)anchoring of policies in economic principles . Uncertainty remains high among market players and citizens. We have seen a crisis of unprecedented dimensions, which has forced policy-makers worldwide to take very unorthodox measures of a highly interventionist nature, from stimulus packages via liquidity boosts to nationalisation of certain credit institutions. What to expect next? is therefore a very legitimate question of market participants and citizens.

Policy-makers have in my view the urgent responsibility now to restore confidence in the market economy, while stressing that the mistakes of the past must not be repeated. This is why we need to make very clear what the rules of the game will be for the next decade. One may call this the need for economic principles, or for “Ordnungspolitik”, as my German friends would call it. The European Commission has a key role to play in this, in Europe, but also beyond, via the G-20. This is why I believe that one of the first actions of the new Commission should be to integrate, into the next series of the broad economic policy guidelines, a clear and reaffirmed commitment to the social market economy , based on sound public finances, on price stability, on effective competition, on open borders for trade with our partners, and on competitive social and health systems . A strong policy commitment of the Commission and of all 27 EU Member States to these principles of the social market economy should, in my view, be the headline for all our exit and recovery strategies.

A strong commitment to the social market economy has helped post-War Germany to perform the economic miracle of becoming, after almost total destruction of its economy by war and dictatorship, the economically leading nation of this continent. A strong commitment to the social market economy is also explicitly mentioned as a common objective for Europe in Article 3 of the new Lisbon Treaty. Of course, to develop principles for a social market economy for 27 countries will require, in addition to the legal and political authority of the Commission, vision and leadership. Post-War Germany had Ludwig Erhard, who in many ways incorporated the idea of a social market economy bringing “Wohlstand für alle” (wealth for all) – and this not only because of the popular image of Erhard and the cigar that he was regularly smoking. I certainly do not want to interfere in the difficult decision of who will be the next German member of the European Commission. But Ludwig Erhard used to say that 50 % of economics are psychology. This is why, in my view, a very strong psychological stimulus for Europe’s economic recovery should be that Germany sends us one of its best minds as the next German Commissioner. A new Ludwig Erhard for Europe. But this is of course only a personal wish.

The need for stability

The second action item which I take from our discussion today is the need for stability . The more we now analyse the roots and reasons of the financial crisis, the more the systemic vulnerability of our modern economy becomes visible. Policy-makers need to be reminded of this again and again. Because I fear that the first green shoots of recovery make us forget too soon what has happened. The financial system has collapsed. Financial supervisors have failed dramatically. Incentives were set in a way that encouraged irresponsible behaviour. This must never happen again.

In order t o bring more stability to Europe’s financial system, the Commission adopted, on 23 September, legislative proposals to strengthen Europe’s financial supervision, in particular with the creation of a European Systemic Risk Board to detect and prevent risks to financial stability in the EU; and with the three new supervisory bodies entrusted with the coordination of the supervision of individual credit institutions. I believe we have made a very important step here. It was certainly also useful that the Commission brokered in advance consensus among the 27 Member States to help ensure swift political agreement in these critical times. However, I also see with concern that, in spite of the Commission’s efforts to already take Member States’ views into account at an early stage, efforts continue to water down the Commission proposals. I certainly have high respect for the negotiation skills of the diplomats and the civil service on the other side of the Channel, but the last thing we need now are European regulators without teeth. We had that already at national level. We do not need to repeat this mistake at European level.

President Barroso has promised the Parliament that we will conduct , in two and a half years, a mid-term review of whether the new European supervisory architecture will suffice. The answer to this will to a large extent depend on the response Parliament and Council give over the coming weeks to the Commission proposals. Will they strengthen or weaken the proposed new supervisory system? I would like to remind you that we always have an interesting alternative that the Commission has already explored, but did not yet use: the possibility of entrusting prudential supervision in Europe to the European Central Bank, as is possible under Article 105 paragraph 6 of the EC Treaty. This would indeed be a European regulator with teeth. And this option is certainly not off the table for the mid-term review.

The need for new productivity

A final, very important point which I would like to stress after our discussion today is the need for new productivity , globally, but in particular in Europe. We all know that the financial crisis has affected the productive capacities of our economies. It is possible that we are even facing a permanent loss of productivity of the order of 5% of GDP. This is why policies that enhance competition and innovation are urgently needed to speed up the restructuring of our economies, to trigger new investment, to create new business opportunities and to allow new productivity gains .

However, a word of caution is in order here: When participating in debates on productivity-enhancing policies for Europe over the past weeks, I often heard impressive figures and numbers. €3 billion public investment here, an EU-bond of €20 billion there. There seem to be no limits to public spending in the current debates. I find this very theoretical and also deeply worrying. It is true, the crisis has forced policy-makers across the world to breach almost all golden rules of sound public finances. But this should not make these rules disappear. They are there for a reason. We and our children will already pay a high price for the extraordinary measures taken last year and this year to limit the impact of the crisis. We must now make sure that at least our grandchildren will not be also burdened with this. It is therefore vital in my view that governments across Europe put in place concrete structural measures and convincingly communicate that they are really committed to ensuring the sustainability of public finances. I very much agree with Jean-Claude Trichet who recommends that in countries with high deficit and/or debt ratios, the annual structural adjustment should reach at least 1% of GDP. Anything less would not be credible.

This means there is simply no money left for the big new spending programmes dreamt about by some. Perhaps this is not so bad after all. Because this situation will force policy-makers to concentrate on those structural policies which can have a lasting positive effect on productivity: the tax system; the labour market; the health system; the education system; and research policies.

Europe can in my view make its own strong contribution to more productivity. Because Europe already has a first class productivity-enhancing instrument that we can and must use more and better: our single market with its 500 million citizens .

17 years after we wanted to complete the single market, this instrument remains still largely unexploited. I will give you just three examples from the economic sector for which I am responsible in the Commission, the telecoms and media sector:

  • A first example from telecoms : The present regulatory fragmentation, along national borders, of regulation for telecommunications networks and services, costs Europe’s businesses at least €20 billion per year, according to modest estimates. In particular, providers of telecoms services for businesses continue to suffer under inconsistent and ineffective enforcement of network access rules. If these access rules for businesses were harmonised across the EU, GDP could be boosted by 1.6 % to 2 % – just by a clear single market orientation of regulation, and without requiring any subsidies.

  • A second example from the content sector : Innovation and creativity in Europe’s content and media sector are seriously hampered today by the fact that we still afford the luxury of having 27 partly very diverging copyright systems in Europe. This often leads to territorial fragmentation of licensing conditions and hinders consumer access to content from websites outside their own country. Politicians nowadays talk in every Sunday speech about the need to counter the digitisation power of Google – but they still shy away from making Europe a strong player with regard to copyright. The new Lisbon Treaty will give Europe a powerful tool in this respect, as the new Article 118 will allow the creation of a European copyright title. I hope Europe will have the courage to make use of this soon. According to Commission studies, revenues from online content could more than quadruple by 2010, to €8.3bn – if we finally bring about a functioning single market for creative content offers.

  • A third example on online services : In spite of the tremendous advantages the Internet offers for pan-European services, competition and consumer choice, we still lack in the EU a functioning single market for online services provided to the end-consumer. Fragmentation of the rules, and legal uncertainty, has the consequence that only 7% of all transactions made by European consumers over the web are cross-border. An EU-wide test of 11,000 cross-border transactions has just revealed the almost absurd situation that exists at present: 61% of all orders placed by a consumer with an online shop located in another EU country failed, either because the trader refused, for legal reasons, to serve the consumer’s country, or for technical reasons.

Chairman, ladies and gentlemen,

I know very well that Jacques Delors always used to say that nobody would fall in love with a single market. But I have to say that the single market we have today still has far too many flaws for businesses and end-consumers, to be truly lovable .

When looking for the right policy priorities for the next five years, I therefore believe that Europe urgently needs to re-activate and re-invigorate our single market – for the sake of enhanced productivity. And in order to demonstrate credibly to our citizens that the single market is Europe’s strongest asset in our striving for economic recovery and global competitiveness .

It is 17 ye ars ago that a very successful single market project was completed. I believe its now time for a re-launch. Technological evolutions, in particular the Internet and digitisation technologies, allow us to take a substantial new step towards boosting cross-border services via a true Digital Single Market for the online environment. And Europe’s economic and financial situation tells us that we cannot afford to waste this opportunity.

Thanks a lot for the good debate. I hope we will be able to continue our exchanges this afternoon and over the coming weeks.

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