European Commissioner for Economic and Monetary Affairs
The euro is back, but there is no room for complacency
The Economist Conferences Inaugural Eurozone dialogue
Berlin, 23 September 2010
Ladies and Gentlemen,
Glad to be back in Berlin. In my introductory remarks I shall focus on what still needs to be done to overcome the financial crisis in Europe. Both in terms of short term fire fighting of financial and fiscal repair and long term reconstruction of financial and economic architecture.
Let me however begin by questioning the assumption in the headline of this panel given by the organisers of the Economist Conference. I do not think that the euro is in crisis even though we are of course still having concerns about our economy.
I have concrete evidence of the easing of the crisis, which I would call the Roubini index. I refer to "Dr. Doom", Nouriel Roubini, who now gives the euro even five more years of lifetime before its final collapse, while in February he was referring to a time-span of one to two years. I am more than grateful to Dr. Roubini for his strong expression of confidence to the long life and bright future of the euro.
Even more seriously, latest data show that the euro is back where it was before crisis and that Europe's economic recovery has gained momentum and we are exiting from the financial crisis. Apart from solid export performance, domestic demand has contributed to stronger growth. Employment is starting to recover. All in all, we now have more solid ground under our feet.
But there is certainly no room for complacency. The still necessary restoration of confidence in the European economy calls for bold and determined action in all fronts.
In this task, we do not have to start from the scratch. In spring, we took unprecedented measures to safeguard financial stability in the Euro area. The recent second anniversary of the collapse of Lehman in the US serves as a reminder of the kind of catastrophe we were able to avoid in the EU. It may have been a close call, but there has been no Lehman case in Europe, nor will there be.
This was achieved thanks to the coordinated and determined action in May to set up the European Financial Stability Mechanism and Facility, and thanks to the ongoing financial repair that included the bank stress tests and the decisive action by the ECB. Also, the fact that we have seen convincing fiscal consolidation in EU Member States has contributed significantly to the stabilisation.
Nevertheless, we must remain vigilant and continue our efforts to safeguard the financial stability of the euro area. In this sense, I trust that countries such as Ireland or Portugal will continue to tackle with determination their respective financial and fiscal challenges. The Commission and the Council are working in close cooperation with both governments to achieve this.
Ireland, in particular, needs to complete its financial and bank resolution, and substantiate consequently its commitment to bring the public finances on a sustainable path by 2014. I also expect Portugal to tighten its grip on expenditure this year and substantiate concrete measures for next year. As the Commission already noted before the summer, additional measures of fiscal consolidation are necessary for 2011 in order to meet the deficit target of 4.6% of GDP next year. I expect these new measures to be substantiated in the budget for 2011 which will be announced by the Portuguese Government in the coming weeks.
In parallel with the continued surveillance, we must intensify reforming the European economy and its governance. Let me outline the three strands of work that are going on in this regard.
Financial regulatory reform
Under the responsibility of my colleague Michel Barnier, financial regulatory reform is making rapid progress. I only mention last week's regulation of OTC derivatives and the Basel Committee agreement on bank capital standards.
The EU has reached an important consensus on the new supervisory architecture. Besides improving micro-prudential supervision, we will create the European Systemic Risk Board to alert policy makers on risks to macro-financial stability.
Next week, the Commission will table a package of legislative proposals on economic governance.
We propose to reinforce the Pact in two key aspects. First, we will give excessive debt levels more prominence. Second, sanctions must become available at a much earlier stage than today, and gradually build up in severity. Moreover, sanctions would apply as a rule, unless a qualified majority of Member States rejects them.
As to macroeconomic imbalances, we propose a mechanism to identify and tackle imbalances early on. The Commission would operate a scoreboard of economic and financial indicators and carry out in-depth country analysis. Where necessary we will issue country-specific recommendations. This will be complemented by an enforcement mechanism for Euro Area Member States.
Europe's long-term challenges cannot be met without lifting our growth potential. Reducing expenditure and raising some taxes will not suffice, and would definitely cause substantial social costs, if the average growth rate remained under 1½ percent, as projected with the existing economic structures. Commission services have estimated that with ambitious but still realistic reforms the average growth rate could be raised to around 2 %, which would translate to over 10 million additional jobs in a decade's time. That would make a huge difference also in terms of public finances.
The structural reforms have to lift both productivity and employment rates. To be effective, they have to be comprehensive and to start now. That is why we in the Commission have initiated a process of frontloading Europe 2020 reforms. We will launch a number of significant EU level initiatives in the coming weeks and months.
At the same time, we have started a dialogue with the MS about ambitious reforms concerning the pension systems, labour markets, services markets, and of course the completion of financial repair.
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You ask: Is euro area expansion still realistic? The answer is obvious. Estonia is becoming the 17th member of the euro area on January 2011. I have just been to Tallinn and I can tell you that Estonians are confident about the euro.
And I can reassure Estonia and the markets: We are taking the steps necessary for the euro area to remain a safe haven – and to make it more dynamic and capable for sustainable growth and job creation.