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European Commissioner for Economic and Monetary Policy
No lasting economic recovery without significant reforms in the EU
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Association of German Banks Summer Reception
Brussels, 22 June 2010
Professor Weber, Meine Damen und Herren, Ladies and Gentlemen,
I would like to thank you, Professor Weber, and the Association of German Banks for inviting me here today. I assume the most suitable topic to speak about at this summer reception in these wonderful premises would be the "Sommermärchen" of the World Cup in South Africa. The World Cup has surprised the many doomsayers as a peaceful event with solid if not always brilliant football.
I also wish the German team "ein Sommermärchen" for their decisive match tomorrow. I am sure that they will have worked hard for it and done their homework. "Wir müssen dem Glück auf die Sprünge helfen" – as the German saying goes.
What I will now speak about, carries much of the same theme: We will not be in for a lasting economic recovery if we don't act to help our luck. Without significant reforms, our growth agenda will fail.
Before speaking about the reforms that I have in mind (about economic policy coordination and budgetary surveillance), let me briefly sketch the current economic situation in the EU and what the EU has already done to address the crisis.
Ladies and Gentlemen,
Despite all the recent market turbulence, it is a fact that a gradual economic recovery is underway in the EU. In line with the historical patterns observed following past financial crises, the recovery will be slower than usually after a "normal" recession.
Overall, the EU economy is forecast to grow by some 1% in 2010 and 1¾% in 2011. The path is still likely to be bumpy, with an uneven pace of growth expected across Member States.
Recent news gives an uneven picture. On the one hand, "hard data", such as the robust growth of industrial production, indicate more resilience. On the other hand, recent sentiment indicators have eased somewhat, with a notable drop in consumer confidence.
Despite the rebound in the real economy, uncertainties in the financial markets have persisted. Sovereign bond yields recently reached new heights, and liquidity and valuation in other markets, such as interbank money markets or equity markets, were affected as well.
It is important that the European Council last week agreed to disclose the results of the ongoing bank stress tests in the course of July. This should help in restoring confidence in the European economy.
Prior to that, the EU took coordinated action on rescue measures, in cooperation with the IMF. On 2 May, Euro area Finance Ministers decided on bilateral loans to Greece, pooled by the Commission on their behalf. The first instalment was paid out on 18 May.
On 10 May, the Ecofin Council decided to create the European Financial Stability Mechanism, and a month later (7 June), the euro area Finance Ministers signed the establishment of the European Financial Stability Facility as an intergovernmental mechanism. These provide an EU financial backstop of up to 500 billion euro.
All of this is, of course, coupled with strict conditionality requirement. All these measures should alleviate the concerns of the financial market, and improve investor and consumer confidence.
Nevertheless, financial markets remain worried about sovereign debt in some countries. Indeed, the crisis has taken its toll, and the EU's overall budget deficit has tripled since 2008. For this year, we expect it to be at 7 ¼ % of GDP and still at 6 ½ % for next year.
The EU and the Member States took substantial measures to address the debt and deficit problem – to which I will come in a minute. At the same time, financial markets worry about growth, in particular that fiscal consolidation could have a negative impact on it.
In my view, there is a solution to this apparent paradox. This is the exit strategy the EU defined last year, which is even more valid today.
Consolidation should be pursued in a coordinated and differentiated way. Countries with no or little fiscal space should accelerate fiscal consolidation immediately. Those with better fiscal space should start consolidation from next year onwards. In other words, the overall EU fiscal stance should become restrictive as from 2011, when the economic recovery is expected to have gained a stronger momentum.
And the coordination works. Last week, the Commission assessed fiscal policies of 12 Member States and concluded that the measures they have taken were sufficient to achieve the 2010 targets and, in most cases, invited the member states to specify soon concrete measures to substantiate the targets for the years beyond 2010.
The German government recently substantiated its budgetary strategy with concrete measures for 2011-14. It is in line with the EU's commonly agreed exit strategy: With the deficit increasing from 3.1 % of GDP in 2009 to near 5 % this year, Germany’s fiscal stance is still expansionary in 2010, while consolidation will start next year 2011.
I also welcome that Spain and Portugal have recently strengthened their targets, which are appropriately ambitious and imply substantial fiscal consolidation.
Contrary what some people argue, Europe is not suffocating growth by this strategy of fiscal consolidation. What we are doing is putting our fiscal houses in order in a gradual, differentiated way: faster where the doubts about fiscal sustainability have been biggest, and slower elsewhere. This is essential to reinforce the consumers' and investors' confidence, which is now the critical factor for stronger investment and sounder consumption, and thus for turning the still fragile recovery into a period of sustainable growth and job creation.
Ladies and Gentlemen,
We cannot stop here. Now I come to the part on how we must help our luck for the longer term.
Beyond consolidation, we need to act in two further areas: economic governance and structural reform, especially including reform of the financial system.
On 12 May, the Commission made substantial proposals to improve economic policy coordination in the EU. The fiscal framework of the EU, defined by the Stability and Growth Pact, has sound rules. But we can improve it with three main building blocks for reform:
Firstly, we need to synchronise EU surveillance with the national budgetary processes with a "European Semester". Member States should submit their Stability and Convergence Programmes and National Reform Programmes timely, so that they can benefit from early coordination at European level as they prepare their national budgets. We must also put more force behind the Pact – both when there is an Excessive Deficit but also earlier. The Pact must have sufficient teeth to ensure that all Member States exercise fiscal discipline that is not only good individually for the MS but a necessary condition for a smooth functioning of the common currency area.
Secondly, we must look beyond the budget and address macro-economic imbalances between Member States. Both strong exports, based on competitiveness, and domestic demand are important for our prosperity. Strong divergences between Member States can undermine cohesion, especially within the euro area. This must be tackled before it becomes a costly problem for all.
Thirdly, in the medium-to-long term we need to build a crisis resolution mechanism that is permanent. It is better to be safe than sorry.
Moreover, fiscal consolidation should be embedded in a strategy to lift productivity growth and employment rate. In our rapidly ageing societies, this is only possible through significant structural reforms in all areas of economic activity. Last week, the European Council adopted the "Europe 2020" growth strategy to this end.
Before closing, I'd like to finish with a call to the many bankers here in the audience. The reform of the financial system is one of the main concerns of the G20. My colleague Michel Barnier is putting all his effort behind an ambitious reform agenda – he has my full support.
We need to make progress at the G20: Faced with fiscal consolidation and structural reform, our citizens are right to expect that the financial sector would be part of the programme. My call to the bankers is therefore to work with us to reform the financial sector so that it can support the nascent upswing, as well as the structural reform agenda.
Ladies and Gentlemen,
The EU has again proven that it can respond powerfully to crisis situations. Powerful rescue schemes are up. The agreed consolidation strategy is being pursued.
But we need to tackle the very issues at the origin of the crisis: reinforce economic governance in Europe, and accelerate structural reforms. We must not miss this chance, but act with determination and in unity. Let's work together – and help our luck.