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José Manuel Durão Barroso
President of the European Commission
Are austerity cutbacks the right solution for Europe’s economic woes?
Friends of Europe Roundtable
Brussels, 12 October 2011
This is now my 7th Friends of Europe annual roundtable, so I think you can consider me a real friend and I really welcome this opportunity to discuss some issues because we are coming together at what I believe is the most critical juncture in our Union's history.
I think in the history of European integration this is the most critical moment in terms of definition – where we are going what is at stake and what we need to do.
And I consider also the next European Council one of the most critical ones. That is why we have to prepare it in the right way.
If we are to achieve a European Renewal, we must be clear about the need for more integration, more discipline and full implementation of what is agreed.
To that end, the Commission yesterday adopted an economic roadmap - which charts Europe's way out of this economic crisis. That roadmap contains the five things the European Council needs to agree on 23 October.
1. Decisive action in Greece – so that all doubt is removed about Greece's membership of the Euro area, and we end the vicious cycle of uncertainty
2. Increasing the firepower of our Euro area intervention mechanisms. That is, increasing the flexibility and maximising or optimising the capacities of the EFSF and also including early introduction of the European Stability Mechanism (ESM), if possible in mid 2012
3. Strengthening the banking system, by recapitalisation if necessary - building on the €4.6 trillion in support that already exists with a coordinated, targeted recapitalisation of banks.
4. Speeding up stability and growth-enhancing policies – including full implementation of single market agenda.
5. Implementing robust and integrated economic governance – starting with full implementation of the "six-pack," the proposals for the stability and growth reinforcement the Commission has put forward, now agreed by the Parliament.
We could discuss the technical details of these complex issues for hours. We could also discuss what Treaty changes may be appropriate in the medium-term.
But the European Council on 23 October is more about political decisions, about the political confidence that it can create. It is about making clear that the political will is there to deliver a decisive and essential compromise and concrete decisions.
The entire world expects us to come to the G20 meeting in Cannes with a credible plan – we cannot fail ourselves, or the world, in this task.
So it is with these urgent matters for the European Council in mind, that I would like to address your topic today: "Are austerity cutbacks the right solution for Europe’s economic woes?"
As you may have guessed, dear friends, the Commission does not believe that cutbacks are the solution to Europe’s challenges. But, yes, sound public finances are an essential part of sustainable growth; they are an essential part of confidence and without confidence there is no growth.
We must understand and address all of the roots of the crisis.
To focus solely on cuts suggests that government over-spending was the only source of the crisis.
In fact, we all know that problems with the behaviour and regulation of the financial sector, and problems of political will, are also factors in this crisis. We also know that the wrong sorts of cuts could simply send Europe into recession.
So fiscal consolidation has to be part of wide-ranging reform to how the European public sector operates. It can work and it is working.
Two examples – yesterday I met the President of Latvia. Just now, before coming here, I met the Prime Minister - the Taoiseach - of Ireland. Look at those two countries: one outside the euro area and the other one in the euro area.
Latvia shows that fiscal reform can have a strong and positive impact on a nation’s overall future. Growth in Latvia is 3.3% in 2011 – 5.6% in the second quarter - after the steepest restrictive measures ever taken in the European Union by one country and it is expected to rise to 4% growth in 2012. Ireland also has taken its responsibility to adjust with the greatest seriousness, and can now see the light at the end of the fiscal tunnel. Ireland is achieving fiscal consolidation alongside growth of around 2.3%. I just congratulated the Taoiseach, the Prime Minister, of Ireland for this.
So the key is not to avoid fiscal reform but to see that those reforms serve a long-term vision of a stable, competitive European economy which delivers sustainable growth. And the key here is confidence. Confidence is possibly the most important capital and this is a capital that is now in short supply when we speak about euro area and the European Union.
One of the difficulties today is getting the private money that does exist to flow again. While at the same time moving to sounder public finances and investing in growth and social cohesion for tomorrow.
As new growth cannot be funded through more and more public debt, we are obliged to be extremely discriminating.
Discriminating in the savings we make, in the investments we make, and in delivering both at the right time.
If I may summarise, the Commission stands for three things in this debate:
1) For growth and solidarity – what we usually call the European social market.
2) For stability
3) And for Europe living within its means.
What is the role for the European Union?
As you will see from a close reading of our proposed Economic Roadmap, we need more than stability to achieve long-term growth. And it is clear that there is more room for structural reform than for fiscal stimulus. Some countries have room for fiscal stimulus and they should use it, but most of our Member States don't have much room for that.
So from that we can see that there will be no substantial growth without structural reform.
This is the key to protecting the prosperity and the social model we have built.
In that transformation there is a clear role of the European institutions in getting money flowing again, and in providing the foundations for future growth. Let me elaborate briefly using three examples.
The Single Market’s existence has allowed for more than 3 million additional jobs over 20 years. Its level playing field is the definition of fair opportunity; its scale is the definition of competitive advantage.
This is the goldmine Europe cannot turn its back to.
We cannot delay in implementing Directives and recent Commission proposals for deepening the single market. How can we say we have a true single market if key sectors are not included? We cannot.
Instead we must act on the knowledge that a fully functional single market is the best economic asset the European Union can offer to its people.
It would enable businesses to grow, it would enable productivity and purchasing power to rise; it would help us all to face globalisation without fear. That is the case for implementing in full the Single Market Act the Commission has proposed.
The next building block for productivity growth, for jobs and growth generally, is increasing long-term investments. A strong economy needs modern, interconnected infrastructure.
We need to be fully connected in the sectors that will best enable widespread future growth: energy, transport, and digital.
This is the thinking behind our 50 billion Euro Connecting Europe facility – the proposal we have made for infrastructure in the next Multi-Annual Financial Framework. This is indeed also the motivation behind project bonds that we will soon propose for a fast-track pilot phase, something on which we have been working with the EIB.
By sharing the risk of these long-term investments, will help make daily life easier for families and businesses, while helping private sector money to flow again in sectors that help the real economy.
We believe this effort should be part of a huge pan-European investment programme, which includes an increase in the capital of the AAA-rated European Investment Bank.
While we address the big picture challenges, we must also keep sight of the increasing numbers of Europeans struggling in day-to-day life. This is what I meant when I spoke of a Union of "Growth and Solidarity" in the State of the Union address at the Parliament some days ago.
Europe is not a place where only the fittest and the luckiest survive. We must manage the distributional impact of any fiscal consolidation we undertake.
And we must continue to actively invest in the people of Europe – because it is morally right, because it is the best long-term economic bet we can make, and because the people of Europe will only support the coming sacrifices if they know our safety net remains in place and they see some equity in the distribution of sacrifices.
The ultimate goal is to base long-term sustainable growth on quality employment.
That is why we established the Europe 2020 goal of rate of 75% labour market participation.
The 1 in 5 young people who cannot find work now is emblematic of our challenge. Our social model depends on this generation being financially able to support the aging population.
But without strong action now at both national and European level – for example the 'Young Opportunities Initiative' I have called for - the crisis will scar those young people, and the whole European economy, for a generation or more.
I think it is our duty to stop this from happening.
I would like to call on you for an active and concrete contribution to this initiative – especially through better internships and apprenticeships. We will also encourage mobility of young people by putting into place a "First job opportunity" tool to help young people to find jobs across borders. But we need businesses, social partners and national authorities to create the opportunities. We have some elements, we can help with the European Social Fund, but we need for this a stronger partnership of the business community and also the trade unions can help in that direction.
The next steps are clear. We must implement all the elements of the Commission's roadmap.
We have nearly all of what we need in terms of proposals and instruments – we need now to gather the political will and to focus on implementation.
Edmund Burke said that society is a contract between those who are living, those who are dead, and those who are to be born. Our job in the coming days and weeks is to act so that we may fulfil and pass on this contract.
I believe we will do it. I believe there is now a greater awareness among Member States of the need to act European. We need that condition to deliver on our commitments.
We have now presented our Roadmap now we all need to make the journey together.
I believe we are going to succeed. I thank you for your attention.