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SPEECH/11/347

José Manuel Durão Barroso

President of the European Commission

A European economy fit for the future

Brussels Economic Forum

Brussels, 18 May 2011

Distinguished guests,

Ladies and gentlemen,

Please allow me to thank Commissioner Olli Rehn and his directorate-general for organising this 12th edition of the Brussels Economic Forum.

I am delighted to see so many distinguished and influential economic thinkers and policy makers here today. Let me already justify that unfortunately, because of the Commission meeting today, I will not be able to stay after my statement to listen to my good friend, Angel Gurria's contribution and also to the first Tommaso Padoa-Schioppa lecture by Wolfgang Schäuble, but I am sure I will receive the full report of the conference. This conference is very important for our thinking in the European Commission and I wish you a very successful working day.

Your presence is a clear signal of the continued support for reforming economic policy in Europe. It will only be when all the necessary actors and institutions pull in the same direction that we will build sufficient critical mass to make a real difference both on a European level and in our Member States.

Ladies and gentlemen,

The well-known investor Warren Buffett once remarked that: "It's only when the tide goes out that you learn who's been swimming naked". When times were good and the world economy was carried along by excess liquidity, a multitude of blemishes and deeper flaws were covered up. But when the tide went out and the waves of speculation receded, many swimmers were left exposed.

When the crisis struck in 2008, some Europeans were quick to point a finger at the United States, as if Americans were the only ones swimming naked and Europe was beyond reproach. More recently, the finger pointing has been directed at Europe and at the euro area and certain of its members in particular.

But the truth is that the global financial system as a whole was swimming naked and we all need to continue our efforts to cover up.

The euro has been tested over these turbulent months, but it has never been at risk of collapse. The whole point of sharing a common currency is that it is a political commitment that cannot be undone by the markets. And to look at it historically, creating a multi-national economic space of this scale and sophistication, was without precedent. So are the challenges we are facing today – without precedent – and we have to have the intellectual humility to recognise the dimension of these problems.

It is true that levels of public debt in Europe are too high – and we are taking bold steps to reduce them. But to put things into perspective, European debt and deficit levels still, on the whole, compare favourably to those of the US and other major partners.

Europe has been shaken by this crisis, which has led us to question many aspects of our economic and fiscal policies. But what has emerged is a clear message that changes must be made if we are both to live up to new realities, while also preserving important elements of our social model, what we call our social market economy.

As our recent spring economic forecasts have shown, the European economy is consolidating its recovery. And those European countries that have undertaken the most far-reaching structural economic reforms are now those best placed to take advantage of the growing economic recovery. Other countries can learn from their example.

But Europe is not the only one still figuring out how to dress itself to be less exposed to future tidal changes. This crisis was global - others have been left floundering or shipwrecked too. And a changed world order brings challenges for all players in the game, so let us not forget that global crises demand global responses.

Ladies and gentlemen,

I believe that leadership is not about picking faults and apportioning blame. It is about recognising problems, squaring up to them, and having the courage to take the steps one truly believes will overcome them.

That is why we in Europe are acknowledging our problems and making good on our promises.

And, there was no lack of flaws to be found in the financial sector and its regulators. Banks lent too much, too cheaply to finance bad investments. Markets as a whole systematically underpriced risk and misallocated capital.

Nevertheless, we must be clear that subprime mortgages were not the underlying cause of the crisis, nor were property bubbles. They were merely the trigger, the symptoms of a much wider malaise.

This crisis has also been a failure of government. Governments were guilty of a systematic failure to rigorously supervise the financial sector or effectively regulate property markets. Fiscal policy was often too loose and sometimes reckless. There were too few reforms to get economies ready for the next inevitable phase. There was insufficient policy coordination among national authorities, and for that the European Union must also take some collective responsibility.

All that is changing. Over the last 18 months, we have put into place a system of economic governance in the EU that will safeguard the stability of the euro area, making it a bedrock of future growth.

We have responded decisively to the sovereign debt crisis by setting up the EFSF and EFSM temporary support mechanisms, which will be replaced by the permanent European Stability Mechanism in 2013 - and we have agreed in record time the terms of the revision of the Treaties. These are proving crucial in safeguarding the financial stability of the euro area, by providing assistance to Member States in need, and are conditional on commitments to implement rigorous fiscal consolidation and ambitious growth-enhancing measures towards economic reform. And I think this is indeed a major change. I don't now see anyone in Europe able to oppose the need for economic reform. At different paces yes, with different rhythms, sometimes with different determination, but there is a clear wind in favour of economic reform in Europe. Europe is now well aware of the competitiveness problems we are facing.

At the same time, we are repairing the financial sector to identify and address problems earlier. An effective financial supervision architecture and strict rules on capital requirements for financial services companies are one part of the EU's response. The other part is the creation of strong regulatory authorities to oversee markets, banks and insurers.

The Commission has proposed ambitious new financial regulations, notably to allow banks to fail safely without having to resort to taxpayers to bail them out, and we will continue to develop new proposals in this area. This has to be done at European, not only at national level, because integrated financial markets require common regulations and supervision.

Ladies and gentlemen, reforms that we would have thought impossible two years ago are today a reality. And why? Because the EU and its Member States have understood how interdependent our economies are. We recognise the value of a strong and stable European economy, and we are working together to create it.

However, this is not where the story ends. The Commission is strongly committed both to resolving the current crisis and to preventing future ones.

Because all of us who have a leadership role, facing this unprecedented set of circumstances, will be judged by history, not just on how we try to anesthetise short term pain, but on whether we take a holistic view of the whole body, and whether we put forward measures to strengthen it in order to prevent injury in the face of future falls or stumbles.

And that is precisely what the Commission's comprehensive package of economic governance measures aims at – tighter surveillance of economic and fiscal policies to enable the European Union to respect the goals we set ourselves.

Last September we put on the table our package of six legislative proposals on improving economic governance based on the consensus reached at the Task Force chaired by the President of the European Council. We believe that these proposals will enhance fiscal discipline and tackle excessive macroeconomic imbalances. Negotiations are ongoing, but I hope to see them approved by the Council and Parliament next month.

Europe has a set of rules in place to guarantee sound public finances - the Stability and Growth Pact. But these rules need to be respected, and so giving real teeth to the Pact is crucial. For, as we have seen, by not being effectively implemented or enforced, the Pact inevitably lost some credibility. Yet, we have now learned the hard way that excessive debt and public deficits in one Member State can damage the wider euro area and the European Union as a whole.

At the same time, the crisis has shown that if we want our common monetary system to be a success, we cannot have a single currency trying to run on its own, without coordinated budgetary and economic policies to support it and provide a healthy backdrop.

From now on, the first six months of each year will see intensive policy coordination between the European Union Institutions and the Member States, to decide which economic policies should be followed to build growth, which structural reforms to prioritise, and how to match this with sound fiscal consolidation. This coordination is what we are calling the European Semester. In this way, Europe will ensure consistency between economic decisions and budgetary constraints while delivering on growth. We kicked off this process this January, when the Commission published its view on the priorities. These were adopted by the European Council in March.

In addition, leaders from 23 European Union countries, the 17 euro area members as well as six non-members have agreed the Euro Plus Pact. This adds additional commitments to the pack, with the objective of improving competitiveness and leading to a higher degree of convergence. I very much hope that the remaining four countries will also decide to join.

The implementation of all commitments, including those made under the Euro Plus Pact, are fully embedded into the economic governance framework, and will be monitored by the Commission, with full respect the integrity of the Single Market.

Ladies and gentlemen, increasing competitiveness to boost jobs and growth is the aim of the game – the ultimate goal.

Isaiah Berlin, the 20th century Latvian philosopher wrote that: "men do not live only by fighting evils; they live by positive goals, individual and collective".

And the goal of the EU and its Member States is not just to fight the crisis, but to achieve smart, sustainable growth, opportunities for young people, and good standards of living for everyone. This is about providing real confidence in our economic system, but also sowing the seeds for sustainable economic growth.

That is what the Europe 2020 strategy - our common economic agenda - is about, what the Single Market is about, and what external trade negotiations are about. It is what European Union investment in R&D, transport and energy, namely renewable, are about, and it is also the Commission's guiding principle in its current assessment of Member States' National Reform Programmes.

Reinvigorating Europe's economy, providing good jobs, and thus securing the social commitments that we hold dear, is the focus of the Commission. Moreover, by speeding up growth, we will also help to accelerate fiscal consolidation and support structural reforms.

In challenging times such as these, when people and governments are making difficult adjustments, it is important to remember that it will only be through closer European integration, bold reforms and increased investment, that we will achieve our goals and raise living standards.

Ladies and gentlemen, before I conclude allow me to make two points specifically on the euro area.

First, on the financial assistance given to the euro area countries in distress. As I have mentioned, assistance is given subject to the implementation of a strict conditionality programme by the Member State concerned. The programmes, and the conditions attached to them are agreed before the assistance is granted. This was the case, for example, with Portugal in the Eurogroup and Ecofin of this week. I would like to emphasise that for the Member State undertaking such a programme, its implementation is necessarily painful. It implies the correction of deep rooted imbalances, in many cases associated with vested interests. But if properly implemented the country will be better off. Results will not be immediately visible but they will be there. We need time, we need to persevere. Consistency is a fundamental principle of any policy, and a fortiori of economic or financial policy.

Moreover, to those who observe the implementation of the existing programmes, it does not help to come every day with new ideas or new conditions. Priority must be given to decisively implement what was agreed. In politics, and in economics, sticking to the course is a virtue and a must, and it is what we must do now. And let me be absolutely clear: debt restructuring could never be an alternative to the admittedly painful adjustments that need to be implemented.

The second point I would like to make refers to growth. Securing sustainable growth in the euro area is a matter of common concern. I have already elaborated on the European Semester. Naturally, the Member States under severe adjustment programmes will grow at a slower rate for a while. But, the more others will grow, the swifter will be their adjustment. The global response of the euro area to the debt crisis must include both adjustment and growth. That is why I note with satisfaction that according to our very recent forecasts, most of the growth in Germany for this year will come from domestic demand. As I said earlier, growth is indeed a priority also for the Commission, and that is why in the preparation of the next Multiannual Financial Framework we take the growth enhancing dimension - the EU 2020 Strategy - particularly seriously.

Ladies and gentlemen,

Let me conclude by stating that thanks to the bold and courageous steps Europe is taking together, we are better equipped to face today our common challenges than we were one year or two years ago.

With your continued input, Europe will be more robust, more resistant to high winds and turbulent tides, and, we hope, will be successful in bringing prosperity to all its citizens.

I thank you for your attention.


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