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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
The recovery of the European economy
European Parliament, Brussels
4 December, 2013
Honourable Members of Parliament, Ladies and Gentlemen,
Thank you very much for the invitation to discuss with you Europe's path to recovery and the two independent Annual Growth Surveys, namely the one just outlined and the one presented by the Commission on 13 November.
Since the summer, we have been seeing an economic turnaround in Europe, albeit a tentative one at this stage. In Europe overall, growth turned positive in the second quarter of this year and this was confirmed for the third quarter, including for example in Spain and Portugal. We expect the recovery to gather strength next year and further in 2015. Grosso modo, both reports forecast a similar economic scenario of a gradual recovery, which should provide for common ground on policies.
It is true that Europe has faced tough times in recent years and unemployment is still at unbearably high levels, although the latest figures on unemployment suggest that the negative trend is turning. In October, eurozone unemployment fell for the first time since spring 2011.
The recovery is still fragile. However, 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.
In fact, from next month, the euro area will no longer have the same composition. We won't be 17 anymore, but 18. One month from now, Latvia will become the 18th member of the euro area. Latvia went through a macroeconomic adjustment programme until 2012. It is currently the fastest growing economy in the European Union and its unemployment is now falling rapidly, from 14% to 11.9% in one year.
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 show results.
We all know that this has been no ordinary cyclical downturn. Its origins lay in the large and unsustainable macroeconomic imbalances that accumulated over too many years. It is no 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 addressing the debt overhang must go hand-in-hand with addressing the structural challenges in Europe.
Those imbalances are being corrected, but we should certainly not claim victory yet, especially in light of the still high unemployment. Instead, we should take the signs of economic improvements as an encouragement to continue with reform efforts in a determined manner.
The Commission’s Annual Growth Survey builds on a balanced strategy for growth and jobs, while at the same time adapting the priorities to the economic and social situation we face in the recovery phase. To improve the situation of young people in the labour market, Member States should make all necessary efforts to get the Youth Guarantee fully operational by 2014. As you know, the social dimension of the Economic and Monetary Union is now addressed in our economic policy-coordination along the lines of the communication presented by my colleague Laszlo Andor ahead of our autumn package.
Ladies and gentlemen, a word on fiscal policy. The Commission has not advocated a one-size-fits-all policy but a strategy of differentiated fiscal consolidation according to fiscal space, together with economic reforms that support the economic turnaround.
Debt will stabilise in the euro area next year before beginning a gradual decline.
Overall the pace of fiscal consolidation in the euro area as a whole is set to slow down substantially in 2014, which is consistent with the nascent recovery. This slowing down has been made possible by three factors.
1. by the increased credibility of fiscal policy, which the euro area Member States have achieved since 2011.
2. by the decisive action the ECB has taken to stabilise the markets.
3. by the reform of EU economic governance, which now provides an effective framework for a consistent consolidation of public finances over the medium term and the advancement of structural reforms.
Social fairness is not in contradiction with sound public finances. And while sometimes requiring difficult decisions for particular groups, structural reforms help to spread the benefits from growth across society. Some examples:
Better performing social protection is essential to support social change and reduce inequalities and poverty over time. A more efficient tax system, for example with fewer exemptions or loopholes to prevent tax avoidance, and a well-organised administration contribute to both efficiency and social fairness. Expenditure reviews, which some Member States are now undertaking, can remove administrative overlaps and red tape, and still provide better services.
In the health care sector, reforms can lead to savings and better outcomes for patients. Much has been achieved in this sense in Greece, for example by streamlining the social security funds, introducing e-prescriptions, pushing generic medicinal products, and the reorganisation of hospital capacity. Measures to control over-prescriptions and fraud mean that public expenditure fell by €1 billion (or around 25%) in 2012, and should fall by around €800 million more over this year and next.
Research, innovation and skills are the foundation of sustained growth, but public resources are best used if the money is spent as efficiently as possible, for example, by allocating funding on a competitive basis.
Also the cost-benefit calculation of public and private investments improves with better planning procedures and coordination. The energy sector is one pertinent example, because I fully agree with the authors of the report on the importance of moving to a low carbon economy.
It is clear that the 2030 climate framework and reaching the targets need to be devised in the most cost-efficient way possible to protect the competitiveness of the European economy. The growing cost of support for renewables has become a concern in many countries. There is also clear evidence that over-subsidised deployment of renewable energy has partly contributed to lowering the price in emission trading schemes.
Investment to modernise the electrical grids is important to enable the Internal Energy Market to function properly.
I naturally see a role for public investment here. But I also think we must use ways to better mobilise private capital with some form of risk-sharing with the public sector. The project bond initiative is one example, and with the new MFF from January on, the Union budget will make more use of risk-sharing schemes in general.
The Commission is looking into further alternative funding sources to businesses. We plan a follow-up to the Green Paper on Long-Term Investment for early next year. The SME Initiative, which President Barroso presented to the European Council in June, points in the same direction, and the October Council called for the greatest possible participation by Member States. We now expect Member States to inform us about their contributions by the end of the year, so that the new instruments can begin operating in January 2014.
The European Investment Bank is our key partner here, and President Hoyer has outlined the overall priorities and benefits of the 10 billion euro capital increase on other occasions.
Of course the private banking sector will remain the dominant source of financial intermediation in Europe, and this is why the upcoming stress tests are so important to complete the repair. This is also essential for a sound start into the Banking Union, which should build confidence and reduce financial fragmentation. This is not about bailing out bankers, it is about strengthened responsibility and financial stability, so that banks can go about their core business of lending to the real economy, and get credit flowing so that companies can invest and create jobs.
Ladies and Gentlemen,
The Banking Union is one key pillar for a deeper and genuine Economic and Monetary Union.
As regards economic and fiscal policy, with our autumn package, including the assessments of euro area draft budgetary plans, Europe has taken a major leap forward in economic policy coordination. In the context of the macroeconomic imbalances procedure, you have noted that in-depth reviews will be conducted for several countries with current account surpluses. These are not exercises in central planning but in-depth analyses of developments and economic structures that could act as impediments to growth and job creation.
In my view, the way for further fiscal integration to emerge is through a profoundly democratic process, both at national and at European level. This is necessary in order to achieve the required legitimacy when dealing with the twin issues of solidarity and sovereignty. Realistically, a deep fiscal union will not be created overnight.
Ladies and Gentlemen,
There is no silver bullet for growth and prosperity in Europe. Trust me, otherwise we would have fired it. The road to recovery will continue to require difficult choices and determination.
The latest economic indicators confirm that our economic strategy is paving the way for a sustained recovery. As I said, they should be seen as an encouragement to stay the course of economic reform. If we fail to do so, we risk preserving those structures were proven unsustainable by the crisis. Then indeed, we would risk becoming – I quote your report – the "United States of Stagnation".
Dear Progressive Friends,
I believe in evolution instead of revolution. I believe Progressives are indeed needed to modernise Europe's economic and social model.
Not nostalgically clinging to the status quo, since that would only lead to a permanent economic decline of Europe.
Not dismantling the European model, because we believe in the combination of entrepreneurial drive, stability culture and social justice.
But instead, genuinely reforming and modernising Europe's economies and societies for the sake of sustainable growth and job creation, and for the sake of future generations.
Thank you very much for your attention.