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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
A new stability culture in Europe
Europe House Lecture
The Hague, 2 February 2012
Mr [Wouter] Bos, Mr [Adriaan] Schout,
geachte dames en heren, Dear Friends,
It is an honour to speak to such a broad and dynamic audience today, in a country which, since the foundation of the European Community, has been – and still is – a strong advocate of deeper integration and a Community approach to European policies. For such a successful trading nation as The Netherlands, the two overriding projects of economic integration in the EU, the single market and the economic and monetary union, are the lifeblood of stable and sustained economic growth and of solidarity and social inclusion in an ageing society.
I cannot be in Den Haag without paying tribute to the work of one the greatest sons of this city, Professor Jan Tinbergen. 50 years ago, Tinbergen argued that economic policy can only remain decentralised when policy instruments remain separate, without interacting with each other. But, in his view, they should be centralised when instruments influence and interact with one another. The economic and financial crisis is painful evidence that we have neglected such valuable insight.
Yet, the EU treaties say very clearly that EU member states must regard their economic policies as a matter of common concern. We have been, and are still, paying dearly for our negligence in this regard.
Tinbergen also made a conceptual (and value-neutral) distinction between negative integration, by reducing trade barriers, and positive integration, by creating new institutions. Indeed, the first has been our traditional and important approach to the single market, while the second follows from the economic integration that stems from the single market and monetary union.
We have been doing the first, and must continue to do so. But recently we have done substantial work on the second. That's how, with the new EU rules on economic governance, we have added the E to Economic and Monetary Union. This is the subject I would like to focus on today.
The Netherlands has understood the consequences of an ageing society well ahead of other member states. In the last twenty years this country has worked towards sound fiscal policies precisely to avoid future generations from paying the price of an ageing population.
The new rules on economic governance requires a new and deeper approach to economic integration, based on a clear understanding of interdependence and accountability among member states within an economic and monetary union. Last September, the Dutch Government made concrete proposals to reinforce economic governance in Europe. They clearly identified the need to strengthen accountability among member states and helped to accelerate political negotiations on a new fiscal compact, which EU leaders agreed to just three days ago.
This year will be the year when the future governance of the Euro will be determined. And it will be the year when strong monetary union will finally be complemented by an ever closer economic union.
This will happen against the backdrop of a worsening economic outlook. We are going through a mild recession in the EU. And it could turn much nastier if we do not contain the sovereign debt crisis.
In fact, the EU is responding to the sovereign debt crisis with a twin strategy to create lasting financial stability and sustainable economic growth and employment. Without further consolidation, confidence in public finances cannot be restored, nor can sustained growth resume. We cannot backtrack from consistent consolidation, while we must create the right conditions to revive growth.
There is little fiscal space for policies based on traditional fiscal stimulus. Structural reforms are therefore needed to underpin new growth. Reforms must be far-reaching, comprehensive and convincing, ranging from product and labour markets to the public sector.
Our approach to fiscal consolidation goes hand-in-hand with smart and growth-enhancing policies. These are not policies that are diametrically opposed. Instead, they are two sides of the same coin.
The critical question is: What is the main reason for turbulence in the sovereign debt market? Evidently, it is a lack of trust and confidence.
In other words, markets do not seem to trust that some vulnerable member states will be able to carry out the necessary fiscal and structural reforms to pay off their debt. Therefore, these countries have needed to step up their efforts in order to regain market confidence. And they have committed themselves to do exactly that.
Let me take the example of a country making many headlines – Greece. It is clear that Greece has to make decisive progress on reforms. The focus must be on both continuing with fiscal consolidation and on speeding up structural reforms that can boost growth and create jobs.
An agreement on substantial involvement of the private sector to reduce Greek public debt is a key condition for a second EU financial assistance programme for Greece. I expect such an agreement between the Greek Government and its private creditors by the end of this week.
The example of Ireland demonstrates that the approach of conditional financial assistance can and does work. Thanks to determined fiscal consolidation, restructuring of the banking sector and structural reforms, the Irish economy is finally on the path towards recovery, which is also being reflected and rewarded by the markets. Similarly, despite its recently high financing costs, Portugal is making good progress with its programme to enable fiscal sustainability and improved competitiveness.
Other vulnerable EU countries are taking bold decisions to bring their fiscal house in order and implement badly needed structural reforms to pave the way for a lasting recovery. Italy's determination is already being acknowledged by the markets, as its yields have lowered recently.
Fiscal consolidation alone is not enough to bring public finances back to safer and sustainable levels. Confidence has to be restored on several fronts. Intensified fiscal consolidation and structural reforms need to be complemented by stronger financial firewalls, to contain market turbulence and speculation that have been contaminating the euro-area.
Ladies and Gentlemen,
Today, we know all too well that the US subprime crisis in 2007/8 could have such a profound impact on the European and Monetary Union because of too little positive integration – as highlighted by Tinbergen. The shockwaves from the failure in only one specific and relatively small segment of the financial market were amplified by our own shortcomings.
In the last decade, our integrated financial market channelled savings from those countries with slow growth in domestic demand to those countries where domestic demand was thriving. This fuelled credit booms and rising wages and prices. We did not have mechanisms in place that could have guarded us against excessive macro-economic imbalances, such as high private indebtedness or a loss in competitiveness. Again, through the financial system, negative repercussions travelled back to the lending countries.
But Europe is learning its lesson. We finally consider our economic policies as a matter of common concern.
First and foremost, we are putting in place a stability culture as the core principle of economic governance in the EU. Economic theory tells us that for sustained economic growth, institutions matter.
"Institutions" in this economic sense is the set of rules and norms that guide our behaviour. We are rebuilding our common European house with set of rules that will prevent and, where necessary, correct any emerging threats to the stability of the monetary union.
And we are developing a culture in which the inhabitants of this European house learn to respect the rules; otherwise they have to accept the consequences – in this case, sanctions.
In December, six pieces of legislation to strengthen the Stability and Growth Pact entered into force, the so-called six-pack. This important new set of rules is now helping us to tackle both fiscal and macro-economic imbalances of Member States much earlier than has previously been the case. The new tools include financial sanctions to be imposed if a euro area Member State does not follow EU recommendations to put its fiscal house in order. We cannot afford to tolerate a breach of jointly-agreed rules by anyone anymore. We have seen, only too well, that this happens at the cost of other Member States.
Just three days ago, leaders of 25 EU member states agreed to enshrine the principles of this new discipline in an international agreement, the new fiscal compact, which parliaments will ratify in the course of this year.
Apart from strengthening the European house, the new economic governance will also include stronger national fiscal institutions. The Netherlands has a very strong tradition here, with the CPB, the Centraal Planbureau, as an independent institution. It produces independent macroeconomic forecasts, estimates for budgetary measures and even analysis of election platforms. Spending frameworks have been pioneered, as has the sustainability analysis of public finances. And it is not only the legal basis of the CPB, but also the wide acceptance of its role in society that is the essence of the "stability culture".
Once more, this owes much to Professor Tinbergen, the CPB's first president. Europe can learn from the Dutch model.
For Europe's economic governance, this year will mark a turning point, because now we need to live up to the rules, and enforce them.
In fact, the reinforced Stability and Growth Pact has proven to work already. Currently we have 23 Member States in violation of the Maastricht criteria, or, in our terminology, in the Excessive Deficit Procedure. With the new rules in force since December, those countries with close or imminent deadlines – last year and this year – have taken additional measures that were needed to avoid sanctions, with one exception, Hungary, regarding which the Commission will take appropriate steps soon. Shortly, we will also present our first report that takes a systematic account of the existing macro-economic imbalances.
Ladies and Gentlemen,
I have stressed that economic and monetary union will be based on better governance and will be more rules-based. This reasoning extends to other economic policy areas in the EU, in particular the single market.
The single market is our main tool to create and to dissipate innovation and dynamism across the EU. This is particularly important for such an open, mid-sized economy as The Netherlands.
With public budgets still deep in the red, we need to work even harder for smart, green growth. Many policies on growth are principally a national responsibility, but the European Union has an important part to play.
Let me give you a case in point: Taxation could be shifted away from labour towards a more growth-enhancing composition, e.g. shifting towards consumption, property and pollution, and, in return, lower other taxes that help making work more attractive. Also, deductions and exemptions from the standard tax base often create economic distortions – even though incentives for research and development can be useful for the society and the economy.
In fact, R&D is key for growth. My colleague, Vice-President Neelie Kroes, is absolutely right in driving the single market into the digital era. We must reduce the barriers so that bits and bytes can flow. It takes about 6 months to get to market for a high-tech startup. This is too hard in today's Europe. Digital innovators face the complexity of 27 different legal systems, 27 different tax systems, 27 different licensing rules. In other words, a separate set of rules in every member state they want to operate in!
And on top of all that they face a skills shortage: e.g. for engineers, programmers and scientists. But we also have positive benchmarks. You know the Erasmus programme. 25 years ago, it started off with 3000 students. Today it reaches more than 200.000 students per year. We must build on this, and next, Erasmus will go global. We have also proposed a new guarantee facility for loans to students who want to take a full Masters degree in another EU country.
Moreover, a digital, resource-efficient and sustainable economy, producing green growth, cannot emerge without substantial investment in innovation, infrastructure and new production capacity. The current rates of productive investment in Europe are much too low.
At the same time, there is plenty of idle financial capital around. Even companies and households with strong balance sheets shy away from making long-term commitments. A key issue is the lack of confidence in public finances, in the banking system, in the economy in general. Enterprises seem to prefer the most secure, liquid assets.
We have to find more effective ways of incentivising the private sector to invest. At the European level, we are developing new ways to better use resources from the EU budget to mobilize private capital by public co-financing.
Ladies and Gentlemen,
Bringing down debt – deleveraging – takes time. Similarly, structural reforms take long, often several years, to bear fruit. And even the best education today will only become productive tomorrow.
Markets, however, do not wait until tomorrow. They tend to be impatient. This impatience can push solvent sovereigns or banking institutions into a liquidity crisis that could eventually endanger financial stability in the euro area and the union as a whole.
This is why sufficient mechanisms to ensure the liquidity of Member States and key financial institutions are necessary. Building such firewalls and doing so without creating detrimental incentives, or moral hazard, has been a key challenge of our crisis management.
We have taken some difficult but necessary decisions on this recently. Struggling economies may be granted conditional financial assistance from the permanent EU rescue fund, the European Stability Mechanism (or ESM), which will be operational from July this year, which is one year earlier than planned. On Monday, European leaders made sure that requests for financial assistance will be strictly conditional to the ratification and implementation of the fiscal compact. Next month, eurozone countries will look into whether or not the combined financing capacity of the permanent ESM and the temporary European Financial Stability Facility (or EFSF) is sufficient. By spring, the IMF should also have boosted resources thanks to the contribution of financially strong global partners.
For its part, the European Central Bank has taken major steps to ensure the liquidity of the banking sector. Together with the recapitalisation measures overseen by the European Banking Authority, the actions of the ECB have greatly contributed to stabilising the banking system which, in turn, has helped to avoid any credit crunch that could have derailed the recovery of the real economy in Europe.
Ladies and Gentlemen,
Let me conclude.
The euro is here to stay and will, through the reform of economic governance, emerge stronger from the current crisis. We have laid the foundations of an ever closer economic union, to complement the already strong monetary union. We must now implement it rigorously.
We have thus learned the lessons of the past. At the same time, structural reforms and investment in innovation and infrastructure will pave the way for recovery and bring us back to the path of sustained and green growth. Here, the talent of the young is our greatest asset. We clearly need to make a greater effort here, both at EU and national level.
Finally, while the stability culture is being anchored and structural reforms are taking their time to pay off, the reinforced financial firewalls will boost badly needed confidence.
These are the fundamental changes on the road to deeper economic and fiscal integration. I am inclined to say that we are undertaking nothing less than an economic reformation of Europe.