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Olli Rehn

European Commissioner for Economic and Monetary Affairs

Europe's Economic Future: Growth, Innovation and Governance

Conference on the Common Strategic Framework for EU Research and Innovation

Brussels, 10 June 2011

Ladies and Gentlemen,

Let me too wish you welcome to today's important conference on the funding strategies for EU research and innovation.

In my contribution to today's discussion, I would like to share an overview of where we stand in our efforts to ensure the preconditions for a healthy economic recovery in Europe, and how I see the role of innovation policies in those efforts.

I can begin with a positive note: the economic recovery in Europe is maintaining its momentum and becoming increasingly self-sustaining, despite the financial turmoil and external turbulence. However, developments remain uneven and tensions in the sovereign debt market continue.

It has been clear for a long time that the current stage of the crisis is a severely intertwined combination of a sovereign debt crisis and banking sector fragilities. It is equally clear that we cannot solve one without solving the other. We need to resolve both, in parallel.

Where do we stand now? Before turning to these challenges, let me make a brief balance sheet of our deeds and achievements.

First, even if our financial system has been damaged, we have prevented a financial meltdown. This was a pre-condition for halting the free fall of economic activity and subsequently for the start of the recovery. Extraordinary decisions have been required for this, including the creation of new institutions, such as the European Financial Stability Facility.

Second, we have managed to turn the deep slump into a steady, even if moderate and uneven recovery. According to Commission's Spring Forecast, growth in the EU will be close to 2 % this year and the next, and unemployment has started to decline.

Third, we have started to seriously address the problem of high public debt. Public deficits declined slightly last year, and will do much more so this year. Moreover, many EU Member States are now pursuing structural reforms to enhance competitiveness and long-run prospects of growth and job creation.

But that's not enough, of course.

Ladies and Gentlemen,

The main lesson we have learned from the crisis is simple but fundamental: prevention is always better than correction – not to speak of being forced to crisis management.

The financial crisis revealed certain systemic weaknesses in the EU's economic and monetary union. Many countries in the euro area did not use the opportunity of good times in the first decade of the euro to put their fiscal houses in order. When the crisis hit, it exposed those countries where imbalances were large and/or public finances were in a bad shape.

In response, we are undertaking a fundamental reform of EU economic governance. The legislative package proposed by the Commission last fall should be adopted by the Council and the European Parliament in June. It consists of three building blocks:

1. strengthening the Stability and Growth Pact to prevent unsustainable fiscal positions, and correcting such positions promptly, if they nevertheless emerge;

2. introducing a broadened surveillance of macroeconomic imbalances and divergences in competitiveness, with corrective actions recommended if excessive imbalances are identified; and

3. creating a more effective enforcement mechanism, with earlier and more automatic sanctions in the case of violation of the rules.

In addition to these very necessary instruments for economic governance, we have also introduced a new annual policy cycle for more effective and timely coordination: the European Semester.

The European Semester integrates the EU surveillance of both fiscal and structural policies in advance of national decisions.

The objective of the Semester is to facilitate that the national economies of Europe will work together for common goals and deliver the smart, sustainable and inclusive growth as foreseen in the Europe 2020 strategy, based on sustainable public finances.

At the heart of this endeavour is Europe's competitiveness, our capacity to foster employment and growth. This depends to a very large extent on our ability to drive innovation. We need high-value, innovative and research-based industries developing ever better products, services, business processes and social models. In a world of decreasing resources, innovation is our best guarantee for Europe's future standard of living.

To put things in the perspective, let's look at where Europe stands in the global context:

  • R&D intensity stands at roughly 2% in the EU27, considerably lower than R&D intensity levels in the US (2.77%) and Japan (3.44%).

  • A strong catching-up process occurs in China where the volume of R&D investment more than doubled in the last 5 years (although overall R&D intensity is still lower at 1.44%).

  • If China will keep up the same speed over the next few years, it will overtake the EU in total volume of R&D spending by 2014.

Consequently, supporting knowledge and innovation in Europe must be a key priority in the policy agenda.

Although we are confronted by fiscal constraints, the EU and Member States need to continue to step up efforts in R&D, education and innovation. This is why we have recommended to the member states this week that fiscal consolidation must not happen at the cost of growth-enhancing expenditure.

But measures on the expenditure side alone are not enough. The current budgetary situation does not allow significant increases in public R&D spending in the short term. It is, therefore, of utmost importance to ensure that public funds are used in the most efficient way. Likewise, we need to find ways and means for attracting more private investment in R&D. Furthermore, the fragmentation and costly duplication of national research & innovation systems in the EU needs to be tackled.

Our guiding principle should be to achieve world-class quality and excellence of our research and education systems. It is fundamental to increase the efficiency and the quality of education and research investments.

A key step in this direction is to bring together the three main existing funding sources – the Framework Programme (FP), the Competitiveness and Innovation Framework Programme (CIP) and the European Institute for Innovation and Technology (EIT) – into a single Common Strategic Framework for Research and Innovation (CSF).

This single framework will set out the strategic objectives for all EU research and innovation funding actions. It will provide the context for simplification and streamlining the set of funding schemes through standardised rules and procedures. By coupling together research and innovation activities the impact and added-value of EU funding will be increased.

The Commission has launched several initiatives to introduce reforms aimed at cutting the red tape, supporting small businesses and boosting an entrepreneurial society – a society that encourages citizens to develop their own innovative capabilities and use opportunities provided by a dynamic market economy. A greater effort in support of knowledge creation, productive innovation and technological diffusion will make Europe a more attractive place for working, investing and living.

Ladies and Gentlemen,

By way of conclusion, let me return back to the beginning, or to the overall perspectives of the European economy.

It has been said recently by several commentators that the eurozone has only two options: either it will move towards a full political federation and transfer union, or it will be gradually dismembered, even completely broken up.

In my view, this kind of simplistic dichotomy stems from a bipolar worldview that is excessively rigid and black-and-white. Instead, the economic and political reality in today's Europe is much more multidimensional and made of a variety of colours.

I see European integration as an evolutionary enterprise, which moves forward sometimes in steps – sometimes larger, smaller. That's why I see the future evolution of the EMU in two timescales.

In the near future, indeed in the coming weeks, the European policy-makers have to take difficult decisions on the reinforcement of EU economic governance, on the finalisation of the permanent European Stability Mechanism and on the continuation of the Greek programme of economic reform and adjustment.

But we also need to think about the day after tomorrow. Jean-Claude Trichet, the President of the ECB, outlined some very important thoughts in this respect in his speech upon receiving the Karlspreis 2011 last week in Aachen, calling for a substantial deepening of integration and institutions of the eurozone.

Once we have finished fire-fighting and completed the legislative package, I believe we need to look into a further strengthening of the euro-area institutions, its external representation and other aspects to improve the functioning of the eurozone.

The European Parliament has already foreseen this need in its proposals in the context of the legislative package on economic governance. It suggests a review clause, obliging us to have a critical look in three years at the changes we are introducing now.

Once the current reforms have been implemented, in the medium long term or in the next couple of years, it makes sense to analyse the functioning and the outcome of the reform – hence, the Commission's support for the review clause in the package.

Ladies and Gentlemen,

These are crucial reflections for our common future, for the day after tomorrow. But first we must overcome, with strong vigilance, the very pressing challenges of today.

Europe, again, has a choice to make.

Either we can give in to the populist sirens and to the reform fatigue, and risk losing all we have achieved in fighting the crisis, and a lot of the achievements of European integration.

Or we can choose to work together and take responsible decisions to put down the financial turmoil, reinforce our economic governance, and turn the recovery into a lasting revival.

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