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Viviane Reding

Vice-President of the European Commission

The end of Europe? No, the beginning of a stronger, more united Europe

Economic Policy Seminar

Helsinki, 8 September 2011

Ladies and Gentlemen,

It's a pleasure to be here today and to speak to so many distinguished guests.

We meet here at a crucial time for the euro area and for the European Union as a whole. We are currently at a crossroads. The decisions of the coming weeks will shape the destiny of generations. On the one hand there is the economic situation, the ongoing sovereign debt crisis: On the other hand there is the situation in North Africa and the Middle East stemming from the "Arab Spring". These two developments can be seen as an opportunity for Europe. This is therefore a time for opportunity, unity and responsibility. In short, this is a time for a deeper Europe. This is also a time for effective delivery of action.

Over the month of August some, mainly English-speaking press and commentators, bet on the end of Europe. They seem to have a short memory. Let me briefly remind you that the whole problem started with the financial and economic crisis in the United States in mid-2007: It took most economists and financiers by surprise. The belief in the efficiency of financial markets blunted their vigilance. We were taken off guard at that moment in time by the speed and strengths of spill-overs across continents also in the European Union, where the common currency implies a high level of economic integration. In short, the crisis has made us aware that we are all in the same boat – we either sail together or sink together. Policy makers worldwide united very quickly. The G20 summit of 2008 and the process ongoing since then has been a sign of an unprecedented global economic cooperation.

When economic integration progresses, interdependence among countries becomes stronger which in turn implies more potential for spill-overs. This has been known to European policy makers for a long time and that is why the Treaty contains many relevant provisions to deal with it. For instance, the Member States are required to closely coordinate their economic policies. This economic cooperation and coordination since the creation of the European Union has led to a high level of living standards, solid social security models and an unprecedented period of peace and prosperity in Europe's history.

The creation of the euro added to this – during the last 10 years – an unprecedented period of benefits. The establishment of the European Monetary Union constituted a major change in macroeconomic conditions, especially for those Member States previously experiencing high or volatile rates of inflation. Disruptive nominal exchange rate fluctuations between European Monetary Union members disappeared, thereby facilitating trade and investment. The removal of exchange-rate risk and transaction costs further fostered financial and product market integration, while greater price transparency helped consumers and businesses to make better-informed economic decisions and take fuller advantage of the internal market. Unfortunately, in some Member States the new stable low interest rate environment was not used to improve public finances and productivity but rather resulted in unsustainable public and private spending.

The euro (which started with 11 Member States and is now the currency of 17 Member States) has grown into an important international player, be it as currency for international trade, as reference for exchange rate pegs or as foreign reserve currency.

The crisis has, however, shown that the system of coordination and surveillance of economic policies we have set up in the EU has not been without weaknesses. Let me mention some of them:

  • Financial supervision was too narrowly concentrated on domestic developments, which was incompatible with the international nature of the operations of large financial institutions.

  • Economic surveillance was too narrowly concentrated on fiscal developments, leaving non-fiscal economic imbalances outside the scope of surveillance.

  • Fiscal surveillance suffered from some weaknesses in design, but especially from insufficiently rigorous implementation.

  • The surveillance process was backward-looking; its outcomes were ex-post feedback rather than ex-ante guidance.

On top of that, some Member States did not play by the rules they had set up for themselves. Others were not willing to discipline the potential suspects. By saying this I do not want to play the blame game, but to learn the lesson and introduce reforms to unite and to consolidate the European project.

The number and the scope of reforms that the EU has agreed on since the beginning of the crisis are truly impressive:

  • Following the turbulence in the sovereign debt markets in spring last year, the EU quickly created financial backstops for countries under market pressure: the European Financial Stability Mechanism (EFSM) as well as the European Financial Stability Facility (EFSF) as temporary mechanisms for rapid response and the European Stability Mechanism (ESM) as a permanent mechanism for the future.

  • We have put in place a new architecture for European financial supervision. On 1 January this year, four new institutions started their operation:

  • the three European Supervisory Authorities, overseeing the supervision of banks, insurers and securities, will help overcome segmentation and inconsistencies between national supervisors and enhance the overall quality of supervision. The European Banking Authority and the European Insurance and Occupational Pensions Authority have successfully coordinated pan-EU stress tests in the banking and insurance sectors – a mammoth task for small and newly established institutions.

  • the European Systemic Risk Board (ESRB) widens our scope of oversight to the nexus of macroeconomic and financial market developments at large thus helping us to spot and deter the build up of excessive risks to macro-financial stability at an early stage.

  • In order to correct the loopholes in the framework of economic surveillance, the Commission presented a package of six legislative proposals to this effect in September last year (also known as the "six-pack"). The package aims to strengthen fiscal surveillance and budget rules, and set up more effective enforcement mechanisms. Agreement on the legislation is a priority and expected to be reached by the Parliament and the Council soon.

  • One very important, though less visible change in the conduct of economic surveillance has already been implemented. For the first time this year the "European Semester" was introduced to prevent imbalances in national budgets and stimulate structural reforms. It provided Member States with a set of coherent recommendations covering all areas of economic policy. Surveillance has also received a new impetus with the Euro Plus Pact, agreed by most Member States, in which Member States commit to a number of specific reforms.

The Commission has played a central role in all these reform efforts, with my colleague Commissioner Olli Rehn – a true European – personally responsible for most of the initiatives I have listed. We have taken our responsibility and used the instruments at our disposal to the full extent. The success of the reforms depends crucially on their implementation by the Member States. We count on governments to faithfully put in practice the policy recommendations they themselves have endorsed in the European Council this past June. We also call for the quick approval by the European Parliament and Council of the "six-pack" initiatives in the coming weeks.

But reforms have to continue and will continue.

We should, in particular, find ways to improve the division of labour and respective responsibilities of the euro-area meetings, improve the working methods of the Eurogroup, and strengthen the democratic supervision by the European Parliament.

In line with the decisions of the euro-area summit, further ideas will be developed in the next weeks. It is important to note that the treaties offer a very broad range of options for a deeper and more efficient economic coordination and integration.

A word on the Eurobonds: there are currently high expectations on how Eurobonds could help solve the debt crisis by pooling the debt issuance of euro-area Member States. However, it has to be clear that Eurobonds, in whatever shape or form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination. This is an essential counterpart, so as to avoid irresponsible behaviour and ensure sustainable public finances. Olli Rehn is working very seriously on this and he will present in the near future a report on the possibilities, 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 the short term, the adoption of the legislative package on European Union governance will be a crucial step forward, strengthening fiscal surveillance and formalising the surveillance of macro-economic imbalances. 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. He will add to this all the measures we take to boost growth, to consolidate the internal market and seizing the opportunities for social, economic and industrial reform.

Ladies and Gentlemen,

We are still in the midst of a severe crisis, but I am confident we can overcome it if we act responsibly and united. Many commentators claim we are not doing enough in the European Union. I do not agree. Too often we look at the events through the veil of irrational market behaviour – this is what catches most media attention. I am confident, however, that when markets calm down and the dust settles we will start to see the positive effects of the reforms we are implementing now and which will pave the way for financial and macroeconomic stability and long term sustainable economic growth for the next decades and beyond.

The simple truth is that for all of us Europeans a closer and integrated Europe is the only chance to be a player in a globalised world. I am an optimist by nature and a European by conviction. I love the Europeans and our European continent. This love is based on facts. Over the past 10 years the euro won on the dollar in external value 37%. This is a clear sign that the European economy is strong and stable (at least if compared to the US). In the 'Special Drawing Rights' of the IMF (a kind of virtual global based currency comprising dollar, euro, yen and pound), the weight of the euro was at 31% in 2001, while the US Dollar was at 44%, the Yen 14%. Today, this has changed to 37.4% euro, 41.9% Dollar and Yen 9.4%. Earlier this week the Swiss authorities decided to peg the Swiss Franc to the euro. All this shows one thing: the euro is a global currency. Some do not like this fact. They are the same who wanted the euro dead before it was born. They are the same who try to destabilise the markets in Europe in order to divert the attention away from deep budgetary and monetary problems in other continents. We should not fall into this trap because the euro is our currency and it is a strong currency. And we will pool all our forces and determination to ensure that it continues to grow for the benefit of all Europeans.

Thank you for your attention.

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