European Commissioner for Economic and Monetary Affairs
Rethinking Economic Policy in Europe – a new era of EU Economic Governance
Brussels Economic Forum
Brussels, 18 May 2011
Minister, Secretary General, Ladies and Gentlemen,
It is my great pleasure to welcome you to this 12th edition of the Brussels Economic Forum. In these years, the BEF has become a key European platform for debating and shaping policy responses to the present and future challenges of the European and global economy.
I am sure that this year our Forum will once again provide an excellent opportunity to exchange views among people with extensive experience and deep insights into economic analysis and policy making.
The theme of this year’s Forum is timely and highly topical “Rethinking Economic Policy in Europe: a new Era for EU Economic Governance”. To set the scene for our discussion let me give you a snapshot of the European economic outlook. Where do we stand now?
Since last year's Forum, the European economy has continued recovering from its deepest recession since the Second World War.
Our fresh economic forecast for 2011 and 2012, as well as the first quarter national accounts data released last Friday, confirm that the recovery is maintaining its momentum. Moreover its base is broadening from exports to domestic demand implying that growth is becoming more self-sustained. In 2012 we reach the pre-crisis level of production in the EU as a whole.
Furthermore, these improvements are taking place despite uncertainty created by the political events in the Middle East and North Africa and the natural and nuclear catastrophe in Japan, and despite continuing tensions in the sovereign debt markets of certain Member States.
Of course, that is not to say that everything is fine. We are living in a two-speed Europe. While some economies are recovering fast and creating new jobs at a rapid pace, some Member States are still struggling with negative or very low growth and increasing unemployment.
The adjustment process in the worst hit economies is far from over. For the most vulnerable ones the resumption of significant growth is closely interlinked with overcoming the sovereign debt crisis.
Moreover, despite the recovery, unemployment is declining at a painfully slow rate, and the longer-term EU growth prospects are modest, with current policies. Also, even if public deficits are declining, debt ratios continue to increase.
It is thus clear that we still face formidable challenges. But before looking into what still needs to be done, allow me to recap the central elements of our policy response so far.
In the immediate aftermath of the Lehman collapse, the European Union and its Members States took unprecedented action to ensure that the European financial system could continue to function. The European Economic Recovery Programme provided significant fiscal stimulus to complement the rapid easing of monetary policy. Furthermore, we worked hard and successfully with our global partners to avoid protectionist reactions, which so often have accompanied and aggravated severe downturns.
While these policy measures could not prevent a 4 per cent decline in GDP in 2009 and an increase in unemployment of 4.5 million in the EU, they did still succeed in preventing a replay of the Great Depression of the 1930s.
By early 2010, the crisis had evolved from a financial panic (autumn 2008) to a deep recession (2009), and then to a full-blown sovereign debt crisis.
To prevent Greece from defaulting, an ad hoc financial assistance package with strong conditionality was put together in May last year. A week later we created the temporary financial backstops – the EFSM and EFSF - to manage any further potential sovereign financing problems which could threaten financial stability in Europe. Later last year we also decided on the principles of a permanent stability mechanism, which will replace the temporary ones in 2013.
In December of last year, the temporary facilities were brought into action when we needed to grant financial assistance to Ireland. On Monday, a similar decision was made on a programme for Portugal.
There is no doubt that these programmes of financial assistance and fiscal and structural adjustment have been necessary to prevent further seismic shocks to Europe's financial system. These programmes, together with policy action taken in many non-programme countries – particularly on fiscal consolidation – and the very responsible policy approach taken by the ECB, have allowed us to contain the sovereign debt crisis in these three countries.
Of course, setting up those programmes is not enough in itself. They have to be implemented and adjusted where needed. We are just now in the process of reviewing the Greek programme. Our review mission is in Athens.
It is clear that Greece has to seriously reinforce the implementation of the economic reforms and of the privatisation programme before any new steps may be taken. I expect concrete decisions to this effect in the coming days.
But fire fighting – important and unfinished as it remains – is not sufficient in itself. Analysis of the root causes of the financial crisis and the particular vulnerabilities of the European economy has led to important policy conclusions, and to the on-going re-building of our financial and economic architecture.
First, financial institutions and markets must be regulated and supervised much more rigorously than has previously.
Secondly, we need a major overhaul of economic policy coordination in the European Union.
Thirdly, we must urgently address the issue of expanding public debt.
Finally, we must get serious about the structural reforms needed to lift potential growth and job creation.
The shortcomings in our economic policy coordination are evident. We did not pay sufficient attention to the potential of unsustainable debt dynamics. And even when the problems were identified, the Stability and Growth Pact lacked the necessary teeth to effectively restrain imprudent policies in the Member States.
Furthermore, in our economic surveillance, we almost completely ignored broader macroeconomic imbalances such as asset price and (private) credit booms, large current account imbalances and the erosion of competitiveness. And, generally speaking, we have underestimated the importance of spill-over effects within our integrated economic system.
These shortcomings are now being addressed by the legislative package put forward by the Commission last September and broadly endorsed by the task force led by Herman Van Rompuy. The package seeks to strengthen the Stability and Growth Pact, introduce surveillance of macroeconomic imbalances, reinforce policy coordination, and improve enforcement mechanisms.
Ladies and Gentlemen
While we have certain dualism in our economy, we should not loose perspective and forget where we were one year ago, and what we have achieved.
In the last 12 months,
we managed to safeguard financial stability in the euro area and avoid insolvency of three of our Member States;
we prevented a meltdown of our financial system; we created effective stability mechanisms;
all Member States have engaged in fiscal consolidation and most of them have also launched structural reforms to boost growth and jobs; and
we are in June finalising an unprecedented reinforcement of EU economic governance, with a tight set of rules and sanctions.
The quest for stability and reform will still call for very difficult decisions, both at national and European level. I trust we all have the wisdom and the political will to take such decisions.
Success in this endeavour requires both intellectual rigour and political determination. Your contributions to this debate in this Forum will be highly appreciated.
Let me wish you an inspiring and productive Brussels Economic Forum 2011.