European Commissioner for Economic and Monetary Affairs
Economic outlook and governance in the euro area
Extraordinary ECON Meeting – European Parliament
Brussels, 29 August 2011
Mme Chair, Honourable Members,
I would like to thank you for your invitation to this meeting to discuss recent developments in the European economy.
Let me first assess the current economic and financial market situation before focusing on some specific points of legislative or institutional nature related to the debt crisis.
The current economic and financial market situation
In the first half of 2011, the EU economy continued its gradual recovery, although recently with a slower pace. After the strong GDP growth in the first quarter (0.8% quarter-on-quarter), the second quarter recorded slower growth (to 0.2% q-o-q). Short-term indicators for the euro area point to a further moderation of growth.
However, one has to take into account that temporary slowdowns (or "soft patches") are not unusual in multi-year-long recoveries. In particular, this subdued recovery is not surprising in the aftermath of a financial crisis, given the continuing need for financial deleveraging in the private and public sector.
Stress in financial markets increased over the summer, leading to substantial volatility and occasional turbulence. This was mainly due to the US political discord on its debt ceiling and the EU sovereign debt problems, as well as more general concerns about an economic slowdown. At the same time, funding pressures in the EU banking sector have risen.
Indeed, what we seem to be currently going through is a more parallel performance of financial markets and the real economy. My reading of the evolution in this regard is that the financial markets and the real economy move now more in synchrony, which makes me seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy. This underlines the importance of containing the market turbulence to secure the economic recovery.
The deterioration of the growth outlook is a consequence of a combination of various factors, such as higher oil prices in the first half of the year, and more recently, a less supportive external environment and – yes – the impact of the financial market turmoil.
All in all, the short-term growth prospects have somewhat worsened compared to our spring forecast. We are now working on our interim forecast and will release it on 15 September.
Structural reforms to enhance growth
Given the economic and fiscal situation and the need to boost growth and jobs, what are the EU's policy options for enhancing these goals? As the scope for macroeconomic stimulus is very limited – nonexistent in many MS – growth-enhancing structural reforms have become even more central in the current context.
The key elements of structural reform have been identified in the Annual Growth Survey and the country-specific recommendations of the European Semester. We must make the most out of the single market, especially in services, energy and intellectual property; make the tax and benefit systems more conducive for employment growth; reform the labour markets and pension systems; invest in knowledge and innovation; and simplify the regulatory environment for enterprises to encourage them to grow.
Structural reforms must be an integral part of our comprehensive crisis response. Several member states have taken significant decisions, especially as to fiscal reforms, but more effective structural measures with substantial impact on enhancing sustainable growth are urgently needed. Given the need to continue fiscal consolidation, reforms with no or little negative implications for the budget should be prioritised.
Completing the financial repair
To safeguard the conditions of sustained recovery, it is essential to complete the ongoing financial repair. EU banks are significantly better capitalised now than they were one year ago. This has been confirmed by the stress tests in July. In the run-up of the tests, European banks increased their capital by some € 50 billion.
Those banks whose capital positions were found to be too weak by the stress tests were required to take appropriate action within 6 to 9 months. Private sector solutions – rights issues, sale of assets, mergers etc. – are preferred. However, public-sector intervention is required, if such private sector solutions were unavailable. This process is now moving forward.
Despite these measures to reinforce capital, EU banks have experienced difficulties in their access to funding in recent weeks. As the necessary recapitalisation of EU banks proceeds, we expect their funding conditions to improve. And of course, the banks have access to the provision of liquidity by the central banks, as noted over the weekend.
The implementation of 21/7 decisions
On July 21st the Heads of State or Government of the euro area took a number of important decisions that will help safeguard financial stability and resolve the debt crisis.
They agreed on a new EU/IMF programme for Greece, which ensures the financing of the Greek state in the medium-to-long-term. Unlike earlier, private sector creditors contribute to the solution through voluntary debt roll-overs and buy-backs.
The euro-area leaders also agreed on a set of new stabilisation tools by increasing the flexibility and effectiveness of the EFSF and of the ESM. These enhancements to the EFSF and ESM constitute a clear change of approach and will allow acting earlier and more efficiently to ensure financial stability. We have called on the euro-area member states to accelerate the approval procedures for the implementation of these decisions, so as to make the EFSF enhancements operational very soon.
Economic governance of the EU and the euro area
In the continuing search for new ideas on economic governance, we should not forget what we have already achieved, notably the European Semester and the Euro Plus Pact, the reforms of financial regulation and new architecture of financial supervision, as well as the new financial backstops (EFSM, EFSF, ESM).
But most importantly, the adoption of the legislative package on EU governance will be a crucial step forward in strengthening fiscal surveillance and formalising the surveillance of macro-economic imbalances. An urgent approval of the package is key in allowing us to make significant progress in economic governance.
However, there is no reason for complacency, as recent market developments have demonstrated. The July summit invited the President of the European Council, in close consultation with the Presidents of the Commission and of the Eurogroup, to make concrete proposals by October on how to improve working methods and enhance crisis management in the euro area.
We should, in particular, find ways to provide more institutional clarity in the euro-area. Especially, we need to reflect on how to improve the division of labour and respective responsibilities of the euro-area meetings in the composition of Heads of State or Government and of Finance Ministers, and how to improve the working methods of the Eurogroup, including also its support structures and communication practices.
Moreover, there are currently rather high expectations on how eurobonds could help solve the debt crisis by pooling the debt issuance of euro-area member states. However, it is clear that eurobonds, in whatever form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination as an essential counterpart, so as to avoid moral hazard and ensure sustainable public finances. This would have unavoidable implications for fiscal sovereignty, which calls for a substantive debate in euro area member states to see if they would be ready to accept it.
As I said before the summer in this House in the context of the "six-pack" on governance, the Commission is committed to present in the near future a report on the alternatives and technical issues for the design of Eurobonds. On this basis, before we take any further steps, broad consultation will be required to identify possible common ground and a sensible way forward.
In his forthcoming State-of-the-Union speech, President Barroso will outline the Commission's proposals on how economic governance of the euro area can be further developed.
To sum up, we need to continue to monitor the current economic and financial market situation, in order to constantly assess the adequacy of the policy stance in the EU and the euro area.
The best way to foster growth at the current juncture is to vigorously implement structural reforms, including the Single Market, which will enhance the medium to long-run growth potential, but will also have positive short-run confidence effects.
And to address remaining risks to financial stability, it will be essential to swiftly implement the 21 July euro area summit decisions and adopt the pending governance package. The "six-pack" is not only important in its own right, but it is a necessary foundation for any more ambitious pooling of fiscal sovereignty.