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José Manuel Durão Barroso

President of the European Commission

Charting Europe's return to growth

The European Semester Conference

Brussels, 12 January 2011

Thank you dear Marco.

Distinguished guests,

Ladies and gentlemen,

Thank you for your summery of the most important points that we have discussed during the day.

It is a pleasure to be with you. You have all sat through many speeches today and the day is drawing to a close. I hope you will forgive me for one more speech – but it has been quite a day.

The 12th January 2011 has not been a routine day for the Commission. And it will not be remembered as such.

Today will mark the day when European Governance began a new phase.

Olli Rehn has already given a detailed presentation on the proposals we have adopted in the Commission. I do not propose therefore to repeat breakfast with governance by afternoon tea with governance.

I would like to conclude today's conference with a number of key points.

Before the crisis, several Member States – to put it charitably – deviated from basic principles of prudent fiscal policy making. Macroeconomic imbalances continued to build up. When the storm broke, the collapse in revenues suddenly revealed how vulnerable budgetary positions were. The sharp contraction in GDP wiped out on average four years of growth. And by then, it was in many cases too late to find any fiscal space to respond.

What followed has taken a heavy toll on Europe's societies, with a sharp rise in unemployment from 7% in 2007 to almost 10% in 2010. The crisis has had a dramatic impact on public finances, and led to a sharp drop in investment. But the crisis is also having a dramatic impact on many citizens in our societies, especially the most vulnerable citizens of Europe.

This has led to unprecedented action in response. Just to give you one example. Between 2008 and September 2010, more than €4 500 billion of state aid was made available to financial institutions. The Commission took approximately 200 decisions on State aid measures to the financial sector between 1 October 2008 and 1 October 2010.

Much of last year was spent responding to the financing difficulties faced by some Member States, namely in the euro area. And we also put some of the key building blocks of a systemic response to the crisis when we presented our ideas in May and our legislative proposals in September.

It was painful and will continue to be painful for some time. In particular, as regards the so called sovereign debt crisis in the euro area. I do not under-estimate in any way the challenges we still face. But if there is one thing we can take away from last year, it is that every Member State is prepared to stand up and be counted when it comes to defending the stability of the euro area.

As regards the issue of financial stability, namely the EFSF, the Commission states today very clearly in the Annual Growth Survey that its effective financing capacity must be reinforced and the scope of its activities widened. It is perfectly possible to take these decisions no later than at the next European Council in February.

And, while not suggesting that everything is becoming rosy, I do see some positive developments.

The economic recovery has taken hold and is currently progressing in the real economy. This year we should see GDP growth at around 1.5% rising to 2% in 2012.

Europe's manufacturing sector has improved markedly in recent months. We should also see a steady improvement in employment prospects.

And we are starting to see public deficits decline, thanks primarily to the consolidation measures already taken, supported in some cases by a resumption of growth. In the EU, the government deficit is expected to decline from 6.8% this year to 4.2% in 2012 on average.

And with that, we are starting to see a new reality emerging. The politics of economic governance and economic coordination have changed for a lifetime.

It is clear for all to see that the good old days were not quite so good; the old schools of thought need to be re-thought and the politics of "don't look over here" and "I won't look over there" are a thing of the past.

What we are effectively doing is re-writing the rule book.

That means changing attitudes and practices. I would say there were two schools of thought, and both were found wanting. The first was built on the belief that the Stability and Growth Pact was enough to deliver the appropriate fiscal stance. Therefore full respect of the Pact by all Member States was the central issue. This simply didn't happen. Member States did not respect the Pact - even some of its most vocal defenders. There seemed to be a sort of 'gentlemen's agreement' not to criticise each other.

The conclusion we have to draw from this is that a system solely based on rules is not enough: the rules need to be enforced. So, a system of rules, but also a system of enforcement of rules. Enforcement requires an institution to apply these rules, and effective sanctions. And that institution can only be the European Commission, because it is an institution that is independent and can implement these rules. The new proposals on economic governance that we presented in September last year deliver exactly that.

The other school of thought was focused on the eurogroup. Although steps have been taken to give it a more stringent role, for various reasons it has not really worked out that way.

The conclusion to draw is that we must combine both schools of thought. We need both tighter fiscal rules with enhanced economic co-ordination. It is not enough to have one, we need both.

The new European Semester addresses precisely this, combining reinforcement of the Stability and Growth Pact with effective economic co-ordination, in a way that previous attempts have failed to do. It offers effective ex ante co-ordination of fiscal and economic policies in the European Union.

The Annual Growth Survey, launched today, reflects all these considerations and more. But its key messages come through loud and clear: bring back stability, don't wait any longer on structural reforms, and speed up growth enhancing reforms.

First, we need to balance the books. The central focus must be on enhancing macroeconomic stability.

The second key message from the Annual Growth Survey is the need to push forward with structural reforms so we can avoid jobless growth. We need to help people get back to work or find new jobs by making work more attractive, urgently reforming pension systems and making sure that unemployment benefits provide an incentive to work.

Let me be quite clear: this does not mean reducing our level of social protection. But it does mean bringing in those who are currently excluded from the labour market.

The third key message in the Annual Growth Survey is: frontload and accelerate reforms that are growth enhancing.

Frontloading reforms that speed-up growth will also help to accelerate fiscal consolidation and support reforms of the labour market.

That means getting support to businesses, namely SMEs, and investing in the growth industries of the future like green energy, innovative start-ups and advanced manufacturing.

It means tapping the full potential of our Single Market – our biggest of all drivers of growth.

It means increased investment in energy, transport and IT infrastructure, in part through innovative financing including EU project bonds.

It means continuing to press for a conclusion of the Doha Round, while advancing Free Trade Agreements with partners such as India, Canada and Mercosur and stepping up regulatory convergence with major partners.

And all of this needs to find its way into the next financial framework proposal. Europe’s next budget must be a growth enhancing budget.

Ladies and gentlemen,

I see five major differences based on the lessons drawn from the Lisbon Strategy implementation and the economic crisis. And I think some of the points that you have summarized in fact are covered by these differences. Firstly, it is about steering the process before decisions are taken. It makes a difference as you understand for the Commission and for the EU and the Member States as a whole to intervene to correct situations ex post or to prevent a situation ex ante, trying to formulate in a cooperative manner policy responses, even acknowledging the differences in the Member States or afterwards trying to correct some of the results or the malfunctions. It is no longer about commenting on decisions already taken by Member States. It is about providing guidance ex-ante, thus allowing a frank and informed discussion between Member States and EU institutions before Member States take decisions and vote their national budget.

Of course I want to reassure those that are nervous about it. The final decision is taken by the sovereign entities, by the national parliaments. But it's just a matter of common sense that, when we see the level of interdependence in the Euro area, and even in the European Union as a whole, that a country takes a decision without knowing about the decisions that are being prepared by its neighbour.

Because it's sure, and now it's confirmed that bad decisions taken by one country can affect not only the neighbours but the whole Euro area, the whole European Union and even sometimes beyond the European Union.

So this is a matter of solid common sense: to coordinate ex ante economic policies including budgetary policy. And this does not reduce the power of national parliaments. On the contrary, it empowers national parliaments because information is power: you have more power when you know what others are doing so that we can adapt and we can also collectively shape a response that should be as coordinated as possible, while – I repeat – acknowledging the different situations in which member states find themselves.

Secondly, and I want to underline this point, the tone is intentionally different. The Commission is coming with sharper messages. We are making clear choices and setting key priorities to be more efficient. And we are serious about it. I don't know if you already had the opportunity today to read the Annual Growth Strategy. If you have not, please read it. You will find some differences compared to other documents of the Commission. I like all the documents of the Commission but I prefer those that send sharp, clear and unambiguous messages than ones that are, by definition, exercises of internal diplomacy.

And this is something that we have to do, and that we have to encourage people to do. This is the best way we can service Europe: by not hiding behind politically correct messages but by sending the messages that are needed: for fiscal consolidation, for economic reform, for growth in Europe.

Thirdly, we are putting economic policies and the budget choices together. For the first time, commitments taken at European level will be translated into national decisions and budget. We need more consistency in the way we drive our economies out of the crisis. The days of saying "yes" in March and "no" in November – I hope - are over. Now it must only be "yes" if it is possible. And we should avoid contradictions between macro economic decisions and micro economic decisions; or the contradictions that sometimes happen, even inside governments, in terms of policy making.

Fourth, the Commission's recommendations to the Council will be based on a new and stronger legal base, from the Lisbon Treaty, giving much more authority and strength to our messages.

Finally, we have a proper enforcement mechanism. Once our proposals are adopted by Parliament and Council next summer, the European governance system will get teeth with a strong enforcement mechanism. Financial sanctions will be envisaged against Member States deviating from the recommendations and their own commitments.

Let me conclude by bringing us back to what this really means.

You could be forgiven for thinking that this is about Brussels, about systems, about concepts and about processes, but nothing could be further from the truth.

We are living through an economic crisis that is taking a terrible toll on many families and businesses across the European Union. We all have a shared responsibility to provide solutions. 2011 is about making the hard choices that gets our economy moving, gets people back in work and provides a perspective for those in need of our help.

To respond to the question that Marco Buti mentioned before, I don't know sincerely that if taking the right and courageous decisions our governments and the parties of our governments will also win elections. I know – those that will not take the decisions will lose them. And not only will they lose them, but they will lose all credibility and respect.

We are in a real historic moment for Europe. If it is not now - when? If it is not us - who will do it? If it is not now, in face of the biggest crisis we have since the beginning of the European integration, when are Member states ready to take real steps for economic policy that is consistent with the goals they have themselves stated? If it is not us, at European level, that take an encouraged attempt to take those decisions, who will do it? That is why I really believe we have a responsibility towards of course our citizens, but also a responsibility to the history of Europe, and if we want the history of Europe not only to be written in the past, but also in the future, these are the choices we have to make.

Thank you for your attention.

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