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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Reform and recovery of the European and global economy
Wirtschaftsrat Europe Symposium, Brussels
3 December, 2013
Ladies and Gentlemen, meine sehr geehrten Damen und Herren,
I am honoured to speak to such distinguished guests today and to introduce the symposium on "Europe's role in the global economic order" on the occasion of the 50th anniversary of the Wirtschaftsrat.
Since its foundation, the Wirtschaftsrat has reminded us that deeper European integration is necessary for growth, stability and prosperity in Europe. It has also reminded us of the virtues of economic openness in and for the social market economy.
I would like to recall the "Leitsätze zur Europapolitik", presented in in January 1968 by the first chairman of the Wirtschaftsrat, Dr. Klaus Scheufelen. Those guiding principles of 1968 included the creation of an economic and monetary union, with a "European currency bank" and the coordination of economic and fiscal policy, based on a permanent council of finance ministers, the central bank and the Commission. Moreover, the Wirtschaftsrat called for a single market and the harmonisation of banking regulation. Today we call this construct "economic governance" and "banking union" – both now in the making.
Ladies and Gentlemen,
Many of the policy goals of the Wirtschaftsrat have become a reality over time, not least thanks to the contributions of its members.
However, Europe has faced tough times in recent years. So before coming to the global, external aspects, let us focus on the internal ones.
Not long ago, many perceived the break-up of the euro as a real threat. Thanks to decisive policy action, at the national level and at the EU-level, including by the European Central Bank, this existential threat to the euro is over.
One month from now, Latvia will become the 18th member of the euro area. Latvia was under a macroeconomic adjustment programme until 2012. It is currently the fastest growing economy in the European Union.
Ireland regained the trust of financial markets and will exit from its macroeconomic adjustment programme by the end of the year as planned. Also, Spain has successfully implemented the necessary measures, so that its financial assistance programme, which was confined to the banking sector, can end in January as planned.
This provides clear evidence that strong ownership and genuine commitment to reforms shows results.
More broadly, since the summer, we have been seeing an economic turnaround in Europe. We expect the recovery to gather speed next year. The latest figures on unemployment tell that the negative trend is turning.
The Cassandras have thus been proven wrong. But we can certainly not claim victory yet. The recovery is still fragile. In much of Europe, unemployment remains unacceptably high.
We all know that this has not been an ordinary cyclical downturn. Its origins lie in the large and unsustainable macroeconomic imbalances that were allowed to accumulate over too many years. It is not an ordinary cyclical upswing and return to growth, either.
The macroeconomic imbalances became cemented in economic structures. The credit boom brought a massive misallocation of resources in the previous decade. This is why we face profound structural challenges in Europe, which are now gradually being corrected.
To restore the foundations for sustainable growth and job creation, economic reforms must therefore continue. At the same time, the EMU is being rebuilt.
Two weeks ago, we presented a package that marked the culmination of many weeks of intense work at the European Commission. This package analyses the conditions for sustainable growth and job creation in the three important and interlinked areas of fiscal consolidation, macroeconomic imbalances and structural reforms.
For the first time, the Commission assessed the draft budgetary plans of the eurozone Member States for 2014 before they are adopted by national parliaments. This is a major leap forward in economic policy coordination. And with this package, we are likely to have brought fiscal policy coordination to the upper limits permitted by the current Treaty.
Overall, Member States are committed to sound public finances and to safeguard the achievements made over the last few years. However, in a number of cases we clearly identified scope for significant improvement.
Sound public finances must go hand in hand with further structural reforms in order to turn around the macroeconomic imbalances accumulated over the past decade.
There can be no doubt that some countries had to adjust their current account deficits in order to reduce their external debt. These countries need to continue working to regain competitiveness and create the basis for sustained growth.
Ahead of our autumn package, we witnessed a heated debate on current account surpluses, in particular that of Germany.
On the one side, there are regular calls for the country to reduce its surplus through fiscal stimulus, to lift southern Europe from its doldrums. On the other side, in Germany these calls are often regarded as jealous attacks against the country's extraordinary economic performance.
After some initial overheating, the debate has become more rational. The Commission does not criticise success in global markets. To the contrary, seeking out opportunities from global competition is essential for the European economy to return to solid growth.
The eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world. Germany is specialised in products that are in demand in the rest of the world and is highly competitive on both quality and price.
However, a trade surplus essentially means that the revenues from the success in the export sector are invested abroad. And a high surplus – it now amounts to 7% of GDP – implies that Germany saves much more than it invests domestically. In fact, investment in Germany has fallen from 21.5% of GDP in 2000 to 17.6%, a significantly lower proportion than in other eurozone countries. I am keen to hear whether you would consider this optimal with regard to Germany's future growth potential.
The Commission will analyse the economic facts in the context of the macroeconomic imbalances procedure, which is part of the reinforced economic governance agreed by all Member States.
Let me be clear: this is not an exercise in central planning. In fact we are looking at the structural features of the German economy that might act as a bottleneck to investment and domestic demand. My services are now conducting the analysis which should be ready next spring.
More demand in Germany can also spill over to the vulnerable countries, but the precondition for this is that their products and services have to be competitive and that they work further on their economic reform agenda. Otherwise more demand in Germany would simply go to the neighbouring countries, to China and to other emerging economies. This is therefore a further reason to stay the reform course in Europe.
At the same time, the persistent financial fragmentation in Europe implies that it remains difficult to finance the necessary structural change in some countries.
Further restructuring in the banking sector – and in the corporate sector – remains important, and the bank stress tests and asset quality reviews next year are crucial in this regard.
This is essential for a sound start into a fully-fledged Banking Union.
The European Single Supervisory Mechanism for banks will become operational in less than a year.
It should be complemented by a Single Resolution Mechanism, in order to restructure non-viable banks, while protecting the system. This is not about using public money to “bail out bankers”. The proposed resolution fund will build up with contributions from the financial sector itself.
Ladies and Gentlemen,
Strengthening our growth potential through continued structural reform is also important since external challenges to growth have increased.
The first decade of EMU coincided with the integration of the emerging economies into the European economy, notably from eastern Europe. It was also boosted by the accession of China to the WTO in 2001. Not all countries in the EU have been using these opportunities to the same extent. However, success on global markets has now become essential for those countries that ran large current account deficits.
Unfortunately, the outlook for global GDP growth and world trade appears now weaker than we had expected a few months ago. Growth has lost momentum in China. Brazil and Russia have performed poorly.
More broadly, the lack of will or ability to deliver reforms that are necessary to strengthen economic fundamentals is a major risk in some emerging market economies. Renewed volatility of capital flows could aggravate uncertainty and weigh on growth in the world economy and thus also on Europe.
In addition, in the US, the next fiscal cliff in 2014 will require very decisive action by policymakers. Moreover, the eventual phasing-out of monetary stimulus does call for careful calibration and communication to avoid ramifications to growth.
In this regard, the Transatlantic Trade and Investment Partnership between the US and the EU is of enormous importance. An ambitious and comprehensive agreement could bring significant economic gains as a whole for the EU (€119 billion a year) and the US once the agreement is fully implemented.
In Europe, we have tended to regard reinforced economic policy coordination as an internal affair. But the crisis has clearly demonstrated that international fora are very valuable. This has been obvious for financial regulation in global markets. And the recent capital market volatility indicates that it might also be useful in other areas.
However, this will not and cannot replace our own efforts to provide businesses with the environment they need to succeed in global competition. Competitiveness is fundamentally based on the real factors of production and productivity, especially on our innovative capacity and well-trained labour force.
There is further potential to simplify the business environment, reduce red tape and improve the quality of legislation. And yes, also at EU level, where the simplification and streamlining of EU legislation is promoted through the on-going regulatory fitness and performance programme (REFIT).
Ladies and Gentlemen,
The latest economic indicators confirm that our economic strategy is producing a sustained recovery.
We must strengthen it and proceed on our way to reform the European economic and social model. Europe should not resist global economic forces: it should seek new opportunities from them. Otherwise we run the risk that Europe becomes an open air museum of industrial monuments.
But Europe’s road to recovery will continue to require difficult choices and persistence. It is now essential to stay the course of economic reform.
The courage and foresight that helped Ludwig Erhard to produce the German economic miracle based on the free market continues to be needed in today's Europe. I trust the Wirtschaftsrat will keep on making the case for this goal.