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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Overcoming the crisis in Europe and Italy
Parliamentary Hearing with European and Budget Commitees of the Chamber of Deputies and of the Italian Senate
Rome, 25 November 2011
Honourable Presidents of the Commissions and Members of Parliament,
I am very glad to be back in Rome and in this Parliament. I recall many constructive and productive discussions with you in past years.
I have always been a big admirer and a keen student of Italy and of the Italian culture in the broader sense of the word. I remember reading, as a kid, the great books of Giovanni Guareschi, which have been immensely popular in the country I know best – a proof that there is a European cultural connection between the South and the North. I take a positive note of the fact that both Don Camillo and Peppone could be supportive of the new government of Prime Minister Monti.
Today, I will focus my intervention on the Commission's vision and strategy to emerge from the financial, economic and, increasingly, social crisis, which is ravaging Europe.
The steady, although modest, economic recovery experienced since mid-2009 has now stalled. The proximate causes are the turbulence in the euro area sovereign debt market and a global slowdown of activity. As a result, we expect output in the euro area to grow by only 0.5% next year, and no improvement is projected in labour markets. The economic standstill is also bound to complicate the improvement of public finances.
Unfortunately, risks to this scenario are on the downside. The recent developments in euro-area sovereign bond markets suggest that contagion is spreading from peripheral countries to the so-called core countries; export markets could also turn out weaker than expected.
The further deterioration in investor sentiment can be attributed to an accumulation of factors. There are obvious concerns about the prospects for public-debt sustainability in the vulnerable Member States. There might also have been unrealistic expectations about the time needed to implement the decisions taken by euro area leaders at the end of October.
These concerns are factually exaggerated. Nevertheless, they have taken root in financial markets and are increasing government funding costs to painful levels in several euro area countries. There are also implications for the EU banking sector, which has significant sovereign exposures and is now facing funding constraints in several countries.
It is essential to convince investors that we are taking the necessary steps to address the crisis. The five-point comprehensive strategy outlined by the Commission in mid October and then agreed by euro area leaders on 26 October remains valid. What is needed is urgent progress in delivering the various elements. These key work streams are:
In Greece, the new government and the main political parties have now expressed their commitment to the current adjustment programme and to the agreement of 26 October. Greece faces huge challenges, which can be overcome only with strong determination and a broad based political and societal support in the country.
Work on strengthening the financial firewalls has moved on. The technical and legal work to leverage the EFSF is underway, and I expect the Eurogroup to take decisions soon. I have advocated that the entry into force of the permanent European Stability Mechanism should be advanced. The ESM is based on paid-in and callable capital, which makes it a financial institution, more sturdy and flexible than the EFSF. Starting the ESM next year, rather than in mid 2013 as planned, would give us a stronger firewall and certainly be positive.
We must press ahead with the reinforcement of the banking system. We are currently finalising the key elements of the recapitalisation package. Work on term funding guarantees is also advancing. On this, a more coordinated approach at EU level than in 2008 is warranted, as nowadays the guarantees of several Member States could be of limited help to their banks.
The so called vulnerable countries in terms of market pressures, including yours, are strengthening their policies. The fundamental reason for the turbulence in the sovereign debt market is that there is not trust in the market that some highly indebted member states can service their debt. In this situation, there is no real alternative to reducing the debt to GDP ratio.
Let me emphasise that this requires not only fiscal consolidation, to reduce the numerator, but also structural reforms to boost growth, or the denominator. This is the case also for Italy. I will come back to Italy in a moment.
Finally, one clear lesson from the crisis is that the euro area needs more effective and stronger economic governance.
On Wednesday, the Commission adopted its Growth and Governance package. On governance, the package continues our efforts to bring a new stability culture to fiscal and economic policies. New legislation to strengthen the Stability and Growth Pact proposed a year ago will enter into force shortly. It will allow us to tackle both fiscal and macro-economic imbalances of a Member State much earlier than has been the case under the current rules. A euro area Member State that does not follow the EU recommendations will face financial sanctions.
It is my duty to make full use of all these new instruments from Day One of their entry into force, on 13 December. We cannot afford anymore to tolerate a breach of jointly agreed rules. We have seen, only too concretely, that it happens at the cost of other Member States.
The proposals presented by the Commission on Wednesday reinforce these new tools for euro area countries, based on article 136 of the Treaty.
The first proposal foresees a common budget timetable and the possibility for the Commission to issue an opinion on national budgets if the draft budgets are not in line with the obligations under the Stability and Growth Pact. Moreover, we propose independent fiscal councils at national level and independent forecast to underpin robust budgetary planning and fiscal rules in national law.
Let me stress that while these provisions reinforce further ex-ante coordination and thus the prevention of inappropriate fiscal policies, the responsibility for the budget remains with national authorities and national parliaments. At the same time, it is crucial that the national parliaments internalise in their decisions the common rules and the EU and euro area dimensions. We look forward to more intense dialogue and partnership with national parliaments.
Our second proposal is reserved for euro-area countries that receive financial assistance or facing a threat to their financial stability. It foresees a graduated intensification of surveillance and of monitoring of programme conditionality.
These proposals can be implemented within the current EU Treaties. But strengthening the Economic and Monetary Union further would require changes to the Treaty. The President of the European Council, together with the Presidents of the Commission and the Eurogroup, are now identifying what kind of changes the deepening of political and economic integration within the euro area may require in the long term. This is the right order: form follows function.
In the broader discussion on economic governance, I believe that the Commission has a particular vocation: the vocation of protecting the interests of all Member States; of preserving the acquis, in particular the Single Market; and of making sure that changes in economic governance always respect the Community method.
President, honourable members,
In addition to ensuring stability, we need to work to enhance growth prospects via structural reforms. Among the reforms that matter most are those that can raise productivity and adjustment capacity. This is well stressed in the Annual Growth Survey adopted by the Commission as part of the Growth and Governance package. Over the longer term, productivity will depend on a well-educated labour force and the capacity to innovate.
The social impact of the crisis is already far-reaching and measurable in rising unemployment. I am particularly concerned of high youth unemployment, which is a tremendous waste of talent that Europe simply cannot afford. If I were a Spanish or Italian young man or a woman I would ask "Why is youth unemployment in my country so much higher than in Austria or in the Netherlands?".
This is why we encourage the Member States to give priority to concrete actions that target in particular young people who are not in employment, education or training.
On Wednesday the Commission presented also a consultative document – a Green Paper in our jargon – on Eurobonds, or Stability Bonds. While the prospect of introducing stability bonds could help alleviate the sovereign debt crisis, stability bonds alone will not solve the crisis. We need to work on all relevant fronts.
For me, it is clear that any type of common bond issuance, which implies a further sharing of risk, would have to go hand in hand with a substantially reinforced fiscal surveillance and policy coordination. This would have implications for fiscal sovereignty, which calls for a substantive debate in Member States.
Let me now turn to Italy.
Italy is faced with formidable challenges, largely resulting from well-known and long-standing structural weaknesses. With your support, the new government needs to deliver on fiscal consolidation and adopt bold measures to re-launch growth, while ensuring social fairness.
There has been progress over the last few months. The letter of intent of 26 October sent by the Italian government to the euro area summit covers all main policy dimensions and contains welcome commitments, specifically in areas such as the labour market, the public administration, asset sales, liberalization, etc. The measures adopted on 12 November represent a further advance, in particular those for the liberalisation of professional services, to speed up the working of civil justice and promote mobility of public employees.
Full and effective implementation will be key. Moreover, there is scope to specify further the reform agenda. To help reverse market mood and focus expectations on key deliverables, it would be essential to give strong signals to citizens and markets with a clear and ambitious roadmap for reform and an ambitious timeline.
The euro area Heads of State and Government have mandated the Commission to monitor the implementation of the letter of intent. We have already started this process in earnest, in a spirit of partnership and cooperation with the Italian authorities. This is why I am in Rome today. We are going to present a first report to the Eurogroup next Tuesday.
Clearly, the success of the new government in restoring confidence of financial markets and move ahead with the needed reforms will depend on the degree of political and social consensus. I consider the very broad support for the government in your parliament as a proof of the awareness of the need for a change of gear in policies.
President, honourable Members,
Let me conclude. The crisis is putting the European Union through a difficult test. Great efforts to overcome the current difficulties are underway, both at the European level and in individual Member States.
We all need to work together in partnership and take responsible decisions in order to counter the financial turmoil and make sure that the euro area comes out of the crisis stronger than before.
In that spirit, I am very much looking forward to working with you.
Thank you for your attention.