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European Commissioner for Economic and Monetary Policy
Reinforcing economic governance in Europe
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European Policy Centre
Brussels, 15 April 2010
Ladies and Gentlemen, Dear Colleagues and Friends
Let me begin by thanking the European Policy Centre for organising this timely and important debate on reinforcing economic governance in Europe. I will outline some of our ideas how we can reinforce economic policy coordination and budgetary surveillance, especially in the euro area. As I announced in my parliamentary hearing in the European Parliament as a Commissioner-designate, this is one of my top priorities, if not the top priority.
First I will take a step back to look some of the facts why we need to take action and why we need to do it now.
The economic and financial crisis has harshly demonstrated that continuous economic growth of past decades cannot be taken for granted. True, today the worst seems to be over. Economic development is taking slow steps towards recovery and should be returning to a sustainable growth path. However, there is a fear that we will experience a too slow and even jobless growth. We need to counter this trend and focus on sustainable growth that creates jobs and wealth.
This means that we cannot go back to the business as usual. We need to change our game and strategy to promote growth and jobs. The implementation of the Europe 2020 strategy is ever more important in this regard.
In a nutshell, Europe 2020 is about getting out of the crisis mode and building foundations for sustainable growth and jobs. Its underlying principle is to mobilise growth drivers in order to modernise our social market economies. It calls for improving the productivity by investing in education, innovation and research, and by addressing structural weaknesses of our economies.
Europe 2020 is built on two strong pillars. Europe's economic success needs both the mobilisation of growth and job drivers and the consolidation of the public finances. For the strategy to be realistic and to have a real impact the growth drivers have to be mobilised while respecting the need to consolidate public finances.
In other words, we must restore macroeconomic and fiscal stability, but that alone will not suffice. Equally important, we need investments and structural reforms to bolster growth and job creation.
Ladies and Gentlemen,
The euro area has passed the critical test of the worst economic crisis of the last 30 years. This has revealed the extent of the interdependence of the euro area economies.
In that context, we must keep the broad picture in mind: the euro has been a success story of the past ten years. The euro has brought the benefits of macroeconomic stability, low inflation and deeper economic and market integration. In the current crisis the euro has acted as a protective shield from the worst exchange rate turbulences and interest rate turmoils.
However, the crisis has also amplified some of its challenges. Peer pressure has lacked teeth to ensure timely and effective action. Member states did not use the good times to reduce the public debt. Macroeconomic imbalances were neglected.
The backlash of these shortcomings has been all the more severe: twenty years of fiscal consolidation have been wiped out in two years.
The latest developments in European economy, not least in and around Greece, have shown that there is a pressing and urgent need to strengthen economic policy coordination.
In fact, the roots of enhanced economic policy coordination go way back to the history of the Stability and Growth Pact. Already the Delors Committee of 1989 called for better coordination of national economic policies. The original idea of the founding fathers was to develop from the beginning both economic and monetary pillars of the Economic and Monetary Union. However, there has been no political appetite for action, until today.
Therefore, M is much stronger that E in the EMU. It is high time to fill the E with life, as well.
Now we also have a fresh commitment from the European Council to tackle the issue. The European Council decided to set up a new task force and requested the Commission to make proposals to enhance policy coordination and to implement the new Article 136. Yesterday, we discussed in the Commission on how to develop our ideas further.
My colleagues and I feel a strong sense of urgency in this regard. We need to solve today's problems and we need to do it quickly. We do not have the luxury of time. Luckily, we do not need to reinvent the wheel. We know what needs to be done and we have the means to do it.
The current Treaty provides plenty of room for progress through better and full use of the existing economic policy instruments, and through revised and new secondary legislation, where needed. The new Article 136 on economic policy coordination enables us to explore new grounds for the euro area.
In enhancing economic policy coordination, we have discussed three main building blocks: reinforcing the Stability and Growth Pact, deepening and broadening economic surveillance and setting up a permanent crisis resolution mechanism.
The Stability and Growth Pact is a solid set of rules. The main problem is compliance. To strengthen compliance we need to reinforce the preventive and the corrective arms of the Pact.
That means coordination of fiscal policy should be conducted ex ante, i.e., in advance and in time to ensure the euro area -wide consistency and to be able to better guide national budgetary policies. We could create a "European economic semester" and integrate a European dimension into national budgetary processes. With the spill-over effects in the euro area economies, national is today a rather relative term.
We also need to give new focus on debt dynamics and the sustainability and quality of public finances, including national fiscal rules.
It is clear that, the Excessive Deficit Procedure will remain at the core of the implementation of the Pact. But we need to sharpen our teeth. We need to think ways of addressing cases of recidivists, who continuously break the rules. Penalties are possible even within the current Treaty but not always effectively used.
Secondly, in addition to reinforcing the Pact, there is a clear need to go beyond sheer budgetary surveillance. We need to broaden and deepen surveillance to address macroeconomic imbalances and competitiveness divergences. Other macroeconomic imbalances can also have serious consequences, not least for sustainable economic growth in the euro area. The gap between the surplus and deficit countries of the euro area has widened in the past ten years. Tackling these imbalances is thus the second building block of the package.
It is self-evident that this cannot mean weakening the export performance of any surplus country. Instead, we should improve both export competitiveness where needed and the preconditions for stronger domestic demand where needed and possible. Putting growth back on these two legs will allow Europe to grow stronger and in a more sustainable way.
Let me illustrate this. I am not suggesting that Bayern München should play below its standard against Olympique Lyonnais, just to ensure an equal game. Rather, both Bayern München and Olympique Lyonnais should play better and improve their standard by making both offence and defence stronger, and ideally play as a European team, competitive at world level and strong domestically. This way we can grow stronger together as Europe.
The third main element will be crisis resolution. The ad-hoc mechanism for possible financial assistance for Greece serves the immediate need. However, it is necessary to set up a permanent crisis resolution mechanism with strong built-in disincentives for activation by making it so unattractive that no country would voluntarily use it.
This would only be an instrument of last resort, since the two primary building blocks of reinforcing the Pact and broadening surveillance should limit possible cases never getting this far.
But as we have learnt recently, even the worst developments can happen, so "better safe than sorry".
Ladies and Gentlemen,
These three building blocks of enhanced economic policy coordination form a strong and solid foundation for implementing sustainable economic and fiscal policies. There are elements which would be applied only in the euro area, but could be extended for the benefit of the EU-27, even if more stringent conditions should apply to the euro area member states. The proposal for a European economic semester could be an effective way of coordinating economic policies also within the EU-27.
To conclude, let me invite you as key participants of the European policy debate to contribute to the reflection on reinforced economic governance. I look forward to listening to your views on this subject of paramount importance. Thank you.