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European Commissioner for Economic and Monetary Policy
Reinforcing economic confidence in Europe
ECON Committee – European Parliament
Strasbourg, 5 July 2010
Chairperson, Honourable Members,
It is my pleasure to be with you this evening to discuss the state of the European economy, and to present our initiatives to advance consolidation and growth and to reinforce economic governance.
Before presenting the Commission's Communication on tools for enhanced EU economic governance, adopted last Wednesday, and the related report of Diogo Feio, I would briefly like to focus on what is necessary for Europe to regain our economic confidence and growth.
The key word is confidence. In order to strengthen the economic recovery and pave the way for sustainable growth, we need to restore and reinforce confidence into the European economy by delivering on all fronts: safeguard financial stability in Europe, pursue growth-friendly fiscal consolidation, conclude financial repair and reform, advance structural reforms, and reinforce economic governance.
This means addressing both short-term and long-term challenges at the same time. Many of you may have noticed the recent interview by Jacques Delors in which he said that the fire-fighters have done their job, now we are waiting for the architects. I do agree with Delors – but only in half! In other words: yes, we need architects to reform the EU's economic governance – but we also need to maintain vigilance in fire-fighting, since we are certainly not out of the woods yet.
Let me start from across the Atlantic, where the G20 leaders met in Toronto two weeks ago. Confidence and growth were the key words also at the G20 Summit. G20 demonstrated a common resolve to create strong, sustainable and balanced global growth.
The EU had a comprehensive policy agenda for Toronto, and the Summit's outcome reflects our priorities. We agreed in G20 on the paramount importance of global coordination in order to safeguard and support the ongoing recovery of the world economy by combining an orderly completion of fiscal stimulus this year and subsequent growth-friendly fiscal consolidation, tailored to national circumstances.
The need for a steady course in macroeconomic policy is underlined by the conflicting news about growth outlook around the world. In the spring, most of the new hard data suggested that a strong recovery was underway, while financial market turbulence pointed to substantial risks. More recently some real economy indicators have also softened, particularly in the US, raising fears about a double dip.
In my view these fears are exaggerated. The underlying basic trend in the real economy is clearly upwards. European export industries have capitalised on the robust rebound in world trade. The level of unemployment is stabilizing in the EU as a whole, and in some member states we can already see improvement in employment. Recent data on industrial production from some hard-hit countries, like Ireland and Spain, have also been encouraging.
But we need to remain vigilant, in particular with regard to the financial markets. The doubts about the health of the European banks need to be dispelled, which is why the stress tests are so important.
The Commission is in favour of full transparency and advocated the extension of bank stress tests and the publication of the results by the end of July. This will help reduce uncertainty and restore confidence. In parallel, both national and EU financial backstops – the European Financial Stability Mechanism and Facility – have been put in place.
Furthermore, the EU's fiscal policies need to be geared towards containing any uncontrolled increase in public debt. Our fiscal policy approach is addressing this need in a carefully calibrated, gradual and differentiated way. We must continue on this steady path, without jumping at every piece on news or commentary.
The steady fiscal course is essential to reinforce consumers’ and investors’ confidence, and thus to turn the emerging but still gradual recovery into a period of sustainable growth and job creation.
The completion of our financial regulatory reform is another necessary condition for sustainable growth. The European Council on 17 June agreed that member states should introduce a system of levies and taxes on financial institutions as part of a crisis resolution framework. In Toronto it was agreed that there has to be a real step forward on financial regulation, to be completed in the Soul Summit in November.
The G20 left to each member the decision to apply a levy or not. This obviously fell short of our objectives. However, the G20 could at least agree on a common set of principles on a levy on financial institutions.
In the EU, we need to complete our own reform of the financial supervisory architecture as soon as possible. I know that your committee shares this goal, and with a constructive approach by everyone, I am confident that it can enter into force by the beginning of next year, as planned. On behalf of the Commission, my colleague Michel Barnier and I are ready to do what we can to help reaching it.
Let me now move to another key element of restoring confidence – economic governance. The crisis has revealed major systemic weaknesses in the current Economic and Monetary Union.
To put it simply: we need stronger and better EU economic policy coordination. We also need a more rigorous implementation of the rules of the EMU. Rules don't matter if they are not followed.
The Commission adopted last Wednesday a concrete toolbox to reinforce economic governance by substantiating our earlier initiatives and by setting out a roadmap for their implementation.
First of all, we want to safeguard macroeconomic stability and to prevent harmful macroeconomic imbalances in the EU. We propose to reinforce the surveillance and correction of macroeconomic imbalances, with an alert mechanism and a corrective arm.
Divergences in competitiveness and emerging macroeconomic imbalances will be reflected in a scoreboard, with alert threshold that would trigger in-depth analysis and action when flashing.
In most serious and confirmed cases, the Commission would make country-specific recommendations and could also propose placing a Member State in an “excessive imbalances position”. For euro-area countries, an enforcement mechanism in the case of serious and repetitive breach of recommendation could be envisaged.
We also proposed an effective coordination and surveillance of structural reforms. This is important to identify bottlenecks of growth and to attain the Europe 2020 objectives and the five headline targets (employment, social inclusion, research and innovation, education, energy and climate change). In case of insufficient progress, country-specific recommendations could be made.
To integrate all these strands of surveillance, the key tool is the European economic semester. It would allow for prior coordination of economic policies before final decisions on the budget for the following year are taken by member states. Let me stress that this is not any interference in member states’ sovereignty; it is about making sure that national budgets are consistent with EU commitments and will not put at risk financial stability in Europe.
All member states would submit their Stability and Convergence Programs and their National Reform Programs at the same time in April to allow the Council to have meaningful ex-ante discussions and issue country-specific policy guidance in July, based on the Commission recommendations. Then, in the second part of the year, member states would finalize their budgets. Commission proposes to launch this European semester as of January 2011.
In order to strengthen the Stability and Growth Pact, excessive debt needs to be addressed more seriously than in the past. We propose to set a clear benchmark for defining a satisfactory pace of debt reduction. Member states with debt ratios in excess of 60% of GDP could become subject to the Excessive Deficit Procedure, if the decline of debt falls short of this benchmark.
Moreover, national fiscal frameworks should better reflect the SGP objectives. National fiscal rules should also warrant the respect of the Treaty reference values on deficit and debt. Multi-annual budgetary planning and expenditure ceilings should be included too.
Before concluding, a few words on incentives and sanctions. There is clearly a need to strengthen the credibility of EU’s fiscal framework through a better enforced and more rules-based Stability and Growth Pact. That means having a wider range of incentives and sanctions, which are used preventively and invoked at an earlier stage.
Concretely, for the euro area member states, the incentive would consist of an interest-bearing deposit temporarily imposed to countries in persistent violation of budgetary rules, until this is corrected.
As regards the corrective arm, we propose for all member states to use the EU budget as additional leverage to ensure respect of the Stability and Growth Pact. This means, for instance, expenditures under structural funds, agriculture spending and the fisheries fund.
In case of non-compliance with the rules, we foresee two early steps. First, suspension of commitments: this doesn’t affect immediately on payments, and allows time for correction. Second, if there is non-compliance with the recommendations, this would imply the cancellation of suspended commitments, and a loss of payments.
On the follow-up of this Communication: we expect the Ecofin Council to confirm 13 July the launch of the European semester in 2011. We shall make legislative proposals on all these issues in early autumn. The Commission also continues its substantial contribution to the work of the Task Force chaired by President Van Rompuy.
I welcome the swift reaction of the Parliament to the ongoing debate on economic governance. Looking at the Draft Report of Mr. Diogo Feio, I see that we are, by and large, on the same line.
In my view, our immediate priority should be to make the newly established and temporary European Financial Stability Facility operational. Based on this experience and following an impact assessment, the Commission intends in the medium-to-long term to make a proposal for a permanent crisis resolution mechanism.
I look forward to continue constructive and productive cooperation with the European Parliament and your committee, as you will play a key role in making the legislation a reality. I count on your support.
To sum up, our proposals reinforce the Community method, which is the key that makes the EU work and deliver. We must now indeed deliver at all fronts to reinforce confidence in our economy.