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José Manuel Durão Barros
President of the European Commission
State of the World Economy and Finance and its impact on development in 2012
General assembly of the United Nations
New York, 17 May 2012
Mr Secretary General,
Heads of State and Government,
Ladies and Gentlemen,
It is a great pleasure to speak here today in the United Nations, amongst such distinguished speakers and before this audience.
We in the European Union have been keeping a close and frank debate on these issues both internally and with our international partners. Tomorrow, I will be participating in the G8 meeting in Camp David where the state of the economy will be central in our discussions, and next month I will be attending the G20 in Mexico where the economy and the action plan for growth and jobs will feature prominently.
However, no grouping or organisation is so widely representative as the United Nations. And even if the bulk of the United Nations’ work is on matters of peace, human rights and international security, we should not forget that the Chapters IX and X of the Charter concern the international economic and social cooperation. This is precisely why I have gladly accepted the invitation from the United Nations Secretary General and of the President of the General Assembly to address all of you today, and I sincerely congratulate them for this timely initiative.
The economic crisis has a global nature, its impact has been global and the remedies must also have a global dimension.
Since its beginning back in 2008, the financial crisis has both highlighted and deepened weaknesses in national economic systems and also some very important global economic imbalances
In fact, if the irresponsible behaviour of some in the financial sector, coupled by lax regulatory oversight, was the spark that ignited the problem, its massive spread and global scale impact was the result of deep-seated economic imbalances that build up before the crisis started and need to be corrected if we want growth to resume in a more solid and sound basis.
In the years up to 2007, namely in the most developed economies, investors underpriced risk and misallocated capital on a massive scale: treating risky assets as if they were safe and inflating huge housing bubbles financed by reckless lending by both domestic and foreign banks.
And when the bubble burst, a banking crisis ensued, and economies plunged into recession. In both the United States and Europe, the natural counterpart to a collapse in private-sector spending was an increase in public-sector borrowing – and high deficits since then have in turn pushed sovereign debts up dramatically.
But while investors have so far been willing to finance at low rates large deficits in many major economies with high debts, they have taken fright in some cases at the ability of individual countries, for instance individual eurozone governments, to repay their debts and in other cases at their ability to refinance them at reasonable rates.
Suddenly the European Union had to face a financial crisis which spread into an economic crisis and at the same time the EU had to fix its internal economic and financial governance structures, especially in the Euro Area.
Much has been done in these last 2 years to overcome the problems. In Europe, indeed, we are delivering a robust response to the crisis by repairing our banking system; strengthening our economic governance; setting up credible financial firewalls and providing unprecedented solidarity to Member States more exposed to the crisis. And, of course, we are also promoting structural reforms for the medium and longer term, like the reforms for competitiveness, but also addressing the issue of internal imbalances, especially in the eurozone.
Our key concern, as in most parts of the world, is growth; naturally! But the question is where does growth comes from. And, of course, the responses are not the same in different parts of the world. But, at least in Europe, it is quite clear that for growth to come back to important levels and to restore confidence we need fiscal consolidation, structural reforms and targeted investment.
Indeed, at the heart of our response has been a twin track approach of stability and growth. That means restoring sustainability to our public finances – because the crisis has shown that debt fuelled growth is unsustainable. And it means creating also the conditions for growth and jobs, through structural reform and targeted investment.
Firstly, there must be no let-up in our focus on stability. We need to stay the course, without being blind to an evolving economic situation. Fortunately, the European rulebook allows for adaptability while remaining firmly focussed on sustainability and ensuring sound public finances.
Reducing debt and deficits is essential to build confidence and cut borrowing costs. Every Euro spent on interest payments is a Euro less for jobs and investment. In terms of firewalls our permanent defence mechanism – the European Stability Mechanism – has alone, a firepower of 500 bn euros (some 650 billion dollars), based on paid-in capital of 80 bn euros, higher than other international financial institution.
Secondly, to regain competitiveness there must be acceleration in structural reforms. There is work to do at both national and EU level. At the level of the European Union we are working very actively to deepen the Single Market, the largest market in the world by value.
Thirdly, to accompany stability measures and structural reforms, and since the key is growth, sustainable growth, we need to step up investment. We will move forward with project bonds. These will attract funding of up to €4.6 billion over the next two years for key infrastructure projects in transport, in energy and in the digital area. We have also proposed boosting the paid in capital of the European investment bank by at least €10 billion which would make available much needed funding in support of job creation. This could make possible around €180bn in increased investment, which is equivalent to 1.5% of EU GDP.
And we, in the European Commission, have also proposed an EU budget for the next seven years that shifts the focus of spending to growth enhancing measures, focusing also in increased competitiveness.
Given this list of actions, I believe that, in spite of all the difficulties, and we are not complacent in the analysis of those challenges, we are on the right track.
And I bring you a message of confidence. We are, indeed, doing a root-and-branch reform of our budgetary and economic policies. And, beyond the so-called “sound and fury”, we are making good progress in laying firm foundations for economic recovery and sustainable growth.
Of course, I have to tell you very openly, that the European Commission would have preferred the response to be quicker, and to be sometimes bolder. That is our role as the European Commission, a truly independent supranational body.
But at the same time, and I am sure that you will understand, the European Union is the Union of sovereign Member States – 27 Member States, 17 in the Euro area – so, of course, we have to work on the basis of compromise and, of course, we have to have the support of the 27 democracies in the European Union.
But the important thing to understand in Europe’s response and that sometimes commentators underestimate is that the Euro is much more than a mere monetary construction, it is the product of a project of peace which was at the origins of the European integration. And this political project is what unites us beyond the momentary difficulties. And I want to tell you also, with the same independence that we have from the Member States, that I am fully confident in the commitment of the European Member States, namely in the Euro Area, and also of all the European Institutions, including, naturally, the European Central Bank, to do whatever is necessary to overcome the current challenges.
The lessons of the financial crisis must be absorbed by all of us. Our institutions, our surveillance mechanisms and our defences all need to be strengthened. The European Union is working towards this, at all levels. And it is also important that others address the different challenges that they are facing in other parts of the world.
In the G20 Europe will push for the implementation and enhanced monitoring of the Cannes Action Plan for Growth and Jobs. Tackling global macroeconomic imbalances and promote growth should remain at the core of the G20 agenda. But not growth driven by unsustainable borrowing. Growth must be socially inclusive and environmentally sustainable. We must strive for solidarity not just within but across the generations.
In the context of the G20 we have secured agreement on a substantial increase of the IMF’s resources by over $430 billion, to which the European countries have contributed massively (more than half, indeed $250 bn). This decision was important for all of us, not only in Europe, but all IMF members.
Mr Secretary General,
The work inside the European Union has not distracted us from our broader world vision, or led us to reduce our efforts to promote economic development, addressing, more specifically, the concerns with extreme poverty that still exist in many parts of the world.
Let me give one clear example. Last month in Brussels in the presence of the Secretary General Ban Ki-moon, the European Commission launched its "Energise Development" initiative. Our key objective is to help developing countries in providing access to sustainable energy services to 500 million people by 2030. This and other challenges will be at the core of the Rio+20 Conference and we are actively working towards its success.
To this end we are seeking to mobilise hundreds of millions of Euros in additional funds to reach this ambitious objective. And if we work together, and have the courage to implement change, it can be done.
In fact Europe is facing up both its internal needs and its international obligations. We remain, as European Union and together with our member states, the largest provider of overseas development assistance, with 53 billion Euro per year – more than half of global aid for development. And through our "Everything but arms" policy we have the most open trading regime with the developing world, giving free access to the world's largest single market.
Today, before you, here at the United Nations, I would like to affirm that this global commitment has not and will not be changed.
The striking lesson from this crisis is that we are all interdependent. No country can sustainably prosper on the debris of its partners’ economies. In today’s world, no country is an island. That is why it is crucially important to avoid any form of protectionism as this would be self-defeating, and I hope that all countries in the world respect the commitments taken in this regard.
Indeed in a world which is rapidly evolving, we need even more solidarity at the global level, not just to deal with the current crisis but to ensure that the opportunities offered in this age of globalisation do not just benefit some countries or some sectors but bring benefits to all of us.
This is what we want for Europe, a more sustainable and inclusive economy; and this is also what we believe is important to achieve globally: sustainable and inclusive growth at the service of our citizens.
I thank you for your attention.