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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
From the eye of the storm to new growth and jobs
CEPI – CEOs Forum Meeting/Brussels
14 November 2012
Ladies and Gentlemen,
The world economy, especially Europe, is currently "In the eye of the storm" – as I entitled my recent book just published in Finnish, to defend Europe and counter populism.
We still face the immediate challenge of thinking and deciding how to confront the storm, raging all around us, and which we must go through to be able to get to the safe waters. At the same time, we have to make our ship stronger to sail safely in the future storms. This means that we live in a dual world. On the one hand, we must continue crisis management to overcome the challenges affecting the current economic situation. On the other hand, we must also work for improving the medium to long-term prospects for Europe – especially in terms of economic growth and employment, but also in terms of our economic policy architecture. These two things are closely intertwined.
The latest growth indicators around the world, as well as the high levels of unemployment in the EU, raise concerns about our economic prospects. In the first half of 2012, the overall macroeconomic situation and outlook deteriorated in Europe. After output stagnated in the first quarter, GDP declined by 0.2% in the second quarter. The indicators point to further short-term weakness and consequently, in our autumn forecast, we predicted that GDP would decline again in the fourth quarter.
But at the same time we are cautiously optimistic for 2013 and 2014, even if we had to revise down our forecasts and even if economic growth is projected to remain rather moderate. What is the reason for me being less pessimistic than, say, in the early summer?
The crisis revealed several shortcomings in the initial structure of the euro. At the EU level many decisions have been taken to strengthen the institutional set-up in the EU and in particular in the euro area.
These measures aim at addressing financial market tensions and restoring confidence and reviving growth. Among these measures are the building up of firewalls (e.g. the entry into force of the ESM), the on-going preparations for a Banking Union, as well as non-standard measures by central banks, such as the Outright Monetary Transactions (OMTs) outlined by the ECB.
Concrete steps towards a banking union have been taken after the June European Council. The crisis has shown that coordination between supervisors is not enough. In the context of a single currency there is a need for common decision-making to address threats to financial stability across the Economic and Monetary Union. The Commission on 12 September adopted its proposal for a Single Supervisory Mechanism, which is at the heart of the banking union. The October European Council agreed to finalise the legislative proposals by the end of this year. It will then become operational in the course of 2013. We will also proceed to the harmonisation of national resolution and deposit guarantee frameworks.
Since September, the decisions adopted by the ECB on the introduction of Outright Monetary Transactions have contributed decisively to underpin the integrity and sustainability of the euro area. As a result, borrowing costs have gradually been reduced in vulnerable economies.
In addition to the EU and euro-area level measures, the Member States are working hard. They are undertaking structural reforms aiming at reaching higher growth trajectories and creating more jobs. There is a wave of reforms going on across Europe, e.g. in Italy and Spain. Have these steps already had an impact?
The good news is that our analyses show that adjustment is underway. It has become visible in deficit countries, where the reduction of large current account deficits is progressing. Competitiveness lost during the first decade of EMU is being regained, as unit labour costs clearly show.
The tougher news is that this process has farther to go. But the reform programmes have increased the degree of wage and price flexibility in vulnerable countries. This improves their capacity to reallocate resources to more productive sectors and to contribute to rebalancing in the euro area. This will have a positive impact on growth in the medium term.
In the short term, we need to restore confidence and normal lending conditions across the EU. Financing conditions have become very tight in vulnerable countries. This complicates the on-going deleveraging process, even if we have seen some improvement over the last couple of months. Lack of confidence is currently restraining investment also in surplus countries.
Fiscal consolidation and improved economic integration are necessary conditions for monetary and financial stability, but they are not sufficient for lifting Europe onto a path of growth and jobs.
The Commission has tabled a wide range of growth-enhancing proposals. Some are part of the Compact for Growth and Jobs. It was agreed at the European Council in June and commits all Member States to take immediate action at national level.
The full potential of EU policies must be exploited to this purpose. This includes deepening the Single Market by removing remaining barriers. The Commission has also accelerated its work on the implementation of the Services Directive. We want to eliminate the restrictions on company structures or capital and facilitate access to regulated professions.
However, better functioning markets for services are not enough to foster growth in the absence of a strong industrial base. To this end, the Commission stresses the role of industry in restoring investment and business confidence, and in ensuring that Europe can be at the cutting edge of the ongoing new industrial revolution.
In that regard, I would like to congratulate the European paper industry for its achievements. Despite formidable challenges, the share of the European pulp and paper industry is remarkable in the world markets. The fact that this achievement has been made by companies ranging from small-sized firms to multinationals confirms that there is not only one way towards industrial strength.
This was also noticed in Commission's Industrial Policy initiative adopted last month. It sets up the basis for a new approach to industrial policy in the years to come. The Communication proposes a partnership between the EU, Member States and industry to step up investment into new technologies and innovation. The six priority action lines include: advanced manufacturing technologies, key enabling technologies, bio-based products, sustainable industrial and construction policy, raw materials, clean vehicles and smart grids.
I am well aware that European pulp and paper industry has gone through a difficult adjustment period. This adjustment is still going on. New thinking and new high-end products are needed to ensure the global competitiveness of the industry. One new area of these products will be biofuels.
A few weeks ago, the Commission adopted a proposal to amend the Fuel Quality and Renewable Energy Directives. This proposal addressed the problem of indirect land-use change, caused by the production of food-based raw-materials for bioethanol and biodiesel.
New proposed legislation will put a cap to food-based biofuels to the current 5 % level. The rest of 5 % of the EU-wide 10 % biofuel target in 2020 has to be made from other raw-materials. On top of that, some of the raw-materials will benefit from quadruple counting in reaching this target. The forest residue and residue from the mechanical wood industry is part of the four-time incentive. This should create a strong regulatory demand for wood-based biofuels. I'm confident that you represent the world-class leaders of technology in this field and therefore are able to contribute the EU targets. This could have a very positive impact on the competitiveness of the whole industry.
Ladies and Gentlemen,
Coping with the crisis and improving the prospects of our industrial base to create growth and jobs indeed go hand-in-hand.
All these policies can contribute to economic recovery and have a significant impact on our medium-to-longer-term growth. They will provide the industrial infrastructure needed for what has been identified as a "Third Industrial Revolution". Through the deployment of new technologies, it will allow customised production of a variety of products in much smaller quantities than is currently economically feasible.
Much has already been done, but much still needs to be done. The difficulties currently experienced by many European economies, facing sustainability concerns and social hardship, call for a coordinated effort to systematically remove bottlenecks to growth and jobs. The Commission, through our recommendations under the EU's reinforced economic governance, invites Member States to maintain the current momentum of reforms, in particular those countries that are facing difficult challenges in terms of competitiveness, growth and employment.
I am sure that this effort in modernising our economies will more than pay off. Mile-by-mile, our ship is sailing through the eye of the storm and will soon leave it behind. Yet we must not only get through the present storm, but also rebuild our ship, so that we will in the future be much better prepared for weathering whatever storm we may face.