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European Commissioner for Economic and Monetary Affairs
What is needed from European Policy Makers Now?
Building Europe's Economic Future – EEGM Policy Dialogue
Brussels, 1 December 2010
Ladies and Gentlemen,
It is a great pleasure to be here today and to take part in your Policy Dialogue. Unfortunately, I cannot comment on what has been said here before, having been tied up with some urgent business in the "factory". Let me nevertheless reflect on how I see the key challenges the European policy-makers face today.
The past two years have been hard going for economic policy making, both globally and in Europe. When the global financial crisis really hit after the collapse of the Lehman Brothers, there was a significant probability of a second Great Depression. That was avoided. But a Great Recession was not.
Preventing a replay of the 1930s required extraordinary measures: an unprecedented expansion of liquidity provision by the central banks, extensive capital support to financial institutions, and widely applied Keynesian fiscal stimulus.
While many of these actions had to be improvised, at the key moments in the autumn of 2008 the policy-makers in Europe and the US and beyond succeeded in coordinating their efforts and put together robust responses to stabilise the situation and pave way for a gradual normalisation and recovery.
Crisis forced the necessary coordination. As a side product, it has made G20 – established a decade earlier – a central forum of global policy coordination, or governance.
Europe faced a similar moment of truth last spring.
The consequences of the Great Recession to public finances brought the issue of sovereign default onto the European policy scene. The most imminent threat was the insolvency of Greece. After some hesitation the European Union and its Member States could agree on providing, together with the IMF, financial assistance to Greece, conditional on a strict fiscal and structural adjustment programme.
When the turmoil in the European financial markets continued, a financial backstop was created, partly based on a community instrument (EFSM), partly on an intergovernmental instrument (EFSF) and partly on the commitment of the IMF. This resolve to do what it takes to safeguard financial stability, and in particular backing up the words by financing commitments up to 750 billion euro stopped the slide into a financial abyss. Again, the crisis was the midwife of effective coordinated action, and resulted in new institutional arrangements.
The recent re-emergence of tensions in the sovereign debt market has put the financial backstops to a test. The turmoil has centred on Ireland, where the extraordinary banking problems have created a huge burden on the public finances, which were already suffering from a major downturn.
A week ago Ireland requested financial assistance from the EU. The Ecofin Council concurred with the Commission and the ECB that providing assistance to Ireland is warranted to safeguard financial stability in the EU and in the euro area.
On Sunday, decisions were taken on a comprehensive EU-IMF package of financial assistance to Ireland and on the key principles of the future European Stabilisation Mechanism, ESM. I'll come back these decisions soon.
As a whole, the decisions on Sunday constitute a resolute response to the market turbulence. There should thus be no doubt that when really pressed by acute needs, Europe can act decisively and effectively.
Ladies and Gentlemen,
In our recent economic outlook for Europe published on Monday it is striking that there is an evident dualism, even contradiction, between the developments in the real economy, on the one hand, and in the financial markets, on the other hand. This fresh forecast shows that the economic recovery has taken hold and is currently progressing in the real economy, while the financial markets, especially sovereign debt markets, continue to show a significant nervousness.
The key message of our forecast is that the economic recovery has started in Europe this year. GDP growth this year is forecast to be one and three quarters of percent, slightly slowing down next year, and then rebounding to two percent in 2012. This upward revision is thanks to both better export performance and the rebalancing towards domestic demand.
I am particularly encouraged by the prospect that employment is finally set to improve next year in Europe. Another important figure in the economic outlook is that public deficits are beginning to decline, thanks to the consolidation measures taken and thanks to the resumption of growth.
This undoubtedly good news is contrasted by the continuing nervousness in the financial markets. While the EU's determined policy respond to the financial turbulence last May led to an easing of tensions, the stress has reappeared lately and the sovereign bond yields have reached the new highs in several euro area member states.
The Irish situation is now being addressed by a comprehensive economic programme and with the tools provided by the financial stabilisation mechanisms that we set up in the spring.
Simultaneously the principles for a permanent European stability mechanism have been agreed on to be applied after mid-2013. The essence of last Sunday's decision concerning private sector involvement is that the future ESM will be based on case by case principle, with no automatism, fully in line with the international standards, especially the IMF rules.
The ESM will complement the new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
These decisions show that we shall do what it takes to safeguard financial stability in Europe. As always and especially after a deep financial crisis restoring confidence takes time and we need consistent and determined action on all fronts to this effect. We know that and we shall do that.
While the recent decisions prove the resolve of the EU, we are fully aware that this is not yet enough to restore confidence. We need to work in all policy areas and with ever stronger sense of urgency and determination. The challenges to financial stability of the euro area have certain systemic features, which requires a systemic response.
Where do we stand in this regard? What will be the agenda of coordinated actions for next Monday's and Tuesday's meeting of the Eurogroup and the EU finance ministers?
First, we have concluded the conditional financial programme for Ireland which will be formally adopted on Monday-Tuesday.
Second, we have agreed unequivocally on the principles of private sector involvement in the future European Stabilisation Mechanism in line with international standards and IMF rules.
Third, we are working closely together with countries that are have been in the markets' spotlight recently. Portugal and Spain have taken the right decisions for bold fiscal consolidation, and their budgetary strategies are on track. Furthermore, they have announced and are going to announce important decisions, on structural reforms that will lift economic growth and help create jobs. Spain just announced further measures today.
Fourth, we are preparing a new round of bank stress tests, which will be conducted by the European Banking Authority in close cooperation with national authorities, based on the new financial architecture which will enter into force next January.
Altogether, these measures could provide a sound basis for the continuation of actions of stabilisation by the ECB, which has played a key role in ensuring financial stability in the euro area, for instance last May.
Ladies and gentlemen,
Let me conclude.
By working on policies on all fronts in a coordinated way we can continue to stabilise the situation and ensure the foundations for sustainable growth and job creation in Europe.
This is a time of determined decisions and actions both in the member states and at the European level.