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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Speech - Reforming Europe, beating the crisis
EPC Policy Breakfast/Brussels
11 January 2013
Ladies and Gentlemen,
Good morning and a Better New Year. Let’s make it a less turbulent and a more boring one than 2012!
I am grateful for this opportunity to discuss with you this year's challenges in the European economy and economic policy.
Let us first recall where we stood one year ago.
There was profound uncertainty over Greece. There was serious concern over Italy and Spain. The effects of the ECB's liquidity operations were yet to be fully felt in the real economy. Countless doomsday prophets were predicting the break-up of the eurozone.
Well, 2012 was not the year the eurozone broke up. It was a year in which the eurozone proved its political resilience, a year in which we took the necessary bold decisions to ensure the unity and the sustainability of the euro. Today, those still predicting a break-up of the eurozone are sadly behind the curve.
Even if there is less reason for pessimism at the start of 2013, we cannot afford to lower our guard. Instead, we must now capitalise on the improved sentiment and pursue the rebalancing and reforms of our economies with consistent determination.
This is especially the case as Europe’s economy presents a dualistic picture today.
On the one hand, the coming months will still be difficult because the economy remains weak and our citizens continue to feel the impact of the crisis. Europe is expected to return to growth only gradually in the course of 2013, while the recovery should become more robust as we move into 2014. Moreover, unemployment in the eurozone has reached an unwelcome historic high at 11.8%, but with a large split between the 4.5% in Austria and a wholly unacceptable 26% in Spain.
On the other hand, our latest economic sentiment indicators of this week are showing signs of stabilisation, and confidence in financial markets is considerably growing. This is reflected in the significant fall in borrowing costs for countries such as Ireland, Italy and Spain. Confidence has been boosted by determined policy action at the European level and in our Member States, and also underpinned by the ECB's decision on “outright monetary transactions”.
To illustrate the very real impact of this easing of tensions, just consider that in Italy – where the spread on 10-year debt has halved since the autumn of 2011 – a 100 basis-point drop in yields represents a saving of around €3 billion in the first year alone.
However, the easing of tensions in debt markets has not yet led to a sufficient easing of lending conditions in vulnerable countries, where many small and medium-sized enterprises face major difficulties to obtain financing. Moreover, sentiment can easily turn around.
That's why it is so important that our policy action remains both determined and consistent. We must pursue the rebalancing and reform of our economies, for growth, competitiveness and employment.
And there is no 'single issue movement' alone – be it fiscal discipline alone or be it debt mutualisation alone – that can solve this crisis. There is no silver bullet. We need to continue our comprehensive crisis response, and intensify and fine-tune it, as necessary.
It is all about reforming the European social and economic model. Not nostalgically clinging to the status quo, because that would mean a permanent decline. Not dismantling the European model, because we believe in the combination of entrepreneurial drive and social justice. But indeed reforming and modernising the European model of social market economy.
From this vantage point, let me focus on the five work-streams that together form our comprehensive policy response.
1. We need to maintain the pace of economic reform to support the rebalancing of the eurozone. This rebalancing is underway, as seen most clearly in the turnaround in countries with current account deficits. In Ireland, relative unit labour costs have fallen by almost 20% since the peak of the crisis, exports are growing and companies are creating jobs. In Spain, exports grew by nearly 20% in real terms between 2009 and 2011. And in Greece, the competitiveness losses over the past decade are being recouped.
In these and other deficit countries, the contraction of domestic demand is mainly the result of the unavoidable deleveraging process in the private and public sectors. For a smooth rebalancing of the euro area economy, it will be essential to maintain the tempo of reform with policies to enhance structural and cost-related competitiveness and to remove unnecessary obstacles to growth and employment.
Over time, surplus countries are also expected to contribute to re-balancing. In the case of Germany, we have recommended opening up the services market, increasing the participation of women in the labour force, and encouraging wages to rise in line with productivity. Progress is being made, as domestic demand is strengthening and pay agreements in Germany in 2012 settled on rises of almost 5% on average.
But the European economy cannot be rebalanced in isolation from the world economy. The eurozone is large open economy: because the eurozone trades a lot with the rest of the world, adjustment channels are strongly influenced by economic interdependence. We must be cautious not to lose our international competitiveness, as we are witnessing in countries such as France and Finland, which have been registering worrying losses of their shares in global markets.
It is precisely for these reasons that we proposed, in our Blueprint for a deep and genuine Economic and Monetary Union, the creation of a Convergence and Competitiveness Instrument. Its objective would be to effectively push forward Member States' economic reforms for rebalancing and competitiveness. The CCI would combine a binding commitment by a Member State to a particular reform with European financial support to its implementation.
2. We must ensure that the debate on Europe's future addresses the competitiveness of our industry, and does not focus on institutional issues alone. We need to ask ourselves: what more can we do to boost job creation? What more can we do to improve productivity? What more can we do to safeguard and strengthen our industrial base?
Europe needs more entrepreneurs. Most of Europe's new jobs are created in SMEs. The Commission’s “Entrepreneurship 2020 Action Plan” adopted this week sets out a renewed vision and actions to be taken at both EU and Member States' level to support entrepreneurship.
A flourishing, entrepreneur-friendly business environment requires better access to finance; support for entrepreneurs in the crucial phases of the business life-cycle and their growth; seizing the business opportunities of the digital age; fairer bankruptcy procedures; a lighter regulatory burden.
Europe also needs to look beyond its borders for growth. We need to embrace a forward-looking and proactive trade policy to open up new markets for European products and services, and refuse to be drawn into the dead-end of protectionism. To revitalise our industrial base, we need fair competition in the internal market and open markets in the world economy.
About 30 million jobs in the EU, or more than 10% of the total workforce, depend on sales to the rest of the world. No less than 90% of global economic growth by 2015 is expected to be generated outside Europe, a third in China alone.
If we were to complete all on-going or upcoming bilateral trade negotiations, including with the US and Japan, we would be adding 2.2% or 275 billion euro to the EU economy. This is equivalent to adding a country as big as Austria or Denmark to the EU economy.
The recent free trade agreement with South Korea is an encouraging example: due to the removal of tariffs, 600 million euro of duties have been saved by our exporters. Exports of chemicals, machinery and textiles are all up by around 25% and of animal products up by 84%.
One of the most crucial developments, from an economic point of view but also from a political and strategic angle, would definitely be a deep free trade agreement with the United States. We have a common interest to boost our ties, based on shared principles and values.
Such a deep FTA would have to include the protection of intellectual property and an effective mutual recognition arrangement. It would have huge potential to boost growth on both sides of the Atlantic. The EU-US trade relationship is already the biggest in the world, with more than 1.8 billion euro of goods and services traded every day between us. An FTA would also help to revitalise our transatlantic partnership at a time when we both face strong headwinds.
I look forward to working closely with the new US Administration in promoting our joint global agenda, in particular, in the G7, G8 and G20.
3. We need to set the wheels of the European economy in motion again, by boosting productive investment, both public and private. Improved access to finance for our companies is essential to strengthen the foundations for innovation, industrial production and exports.
With the financial sector still not functioning as it should, public banks can play an especially important role here. The EU Member States have now approved to increase the paid-in capital of the European Investment Bank by 10 billion euro, at the initiative of the Commission.
This is already reflected in the EIB's 2013 lending programme. The Bank has been ramping up its project pipeline over the past few months, so that the fresh capital can now be deployed. With the usual co-financing rates, this should catalyse investments in the range of 180 billion euro over three years to support innovation and skills, SMEs' access to finance, resource efficiency and strategic infrastructure.
In the coming months, we will also see the first pilot projects financed via project bonds. Project bonds are a smart way of attracting finance from sources other than banks, such as insurance companies and pension funds, to invest in key European infrastructure.
These initiatives are supported by both the EIB and the EU budget, which will be used to mobilise private funding for EU policy goals, maximising its impact as an engine for growth.
While enhancing public investment, we must not forget that it is private investment that, nevertheless, is the prime driver of growth and jobs. To unblock private investment, we must complete the repair of the financial sector to restore the flow of credit to households and businesses. It is not about "bailing out bankers", it is about growth and jobs.
4. We must continue pursuing growth-friendly fiscal consolidation. Public finances in the EU are gradually improving, and so is markets’ confidence in governments’ action in this area. In 2009 and 2010, fiscal deficits in the euro area were above 6% of GDP. For 2012 they are expected to be somewhat above 3% of GDP, which is a welcome improvement. We expect a further decline this year.
Here again the situation across countries varies considerably. This is why the Commission applies a differentiated approach to consolidation, taking into account the respective challenges of each and every Member State when determining the required fiscal adjustment effort.
Each country’s consolidation effort is specified in so-called "structural terms", which means removing the effects of the business cycle and one-off measures on the budget. If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed fiscal effort. Such decisions were taken last year for Spain, Portugal and Greece.
Yet, we have to recall that public debt in the EU has risen from around 60% of GDP before the crisis to around 90% of GDP. And it is widely acknowledged, based on serious academic research, that when public debt levels rise above 90% they tend to have a negative impact on economic dynamism, which translates into low growth for many years. That's why consistent consolidation remains necessary.
5. We must build a deep and genuine EMU. The Commission’s “Blueprint towards a deeper and genuine Economic and Monetary Union” provides a sequenced plan for completing the construction.
For the short term (6 to 18 months), we foresee several concrete proposals within the current Treaties, starting with the banking union. The agreement on the Single Supervisory Mechanism reached in December was an important step. But we must limit taxpayers' exposure to the banking system. Thus developing a European Resolution Mechanism is a key priority for this year. A resolution fund should build on contributions from the sector.
In the medium-term (18 months to 5 years), we could envisage further integration involving Treaty changes. Any steps towards more solidarity and mutualisation of risk would have to be combined with increased responsibility and further sharing of budgetary sovereignty. That implies deeper integration of decision-making, as well as commensurate steps towards a political union and increased democratic accountability.
But a deal on the so-called “Two-Pack” remains a necessary condition for any real progress. This is a test of Europe's credibility on our road towards a stability union of both responsibility and solidarity.
Ladies and Gentlemen,
2012 was a year of crisis, but it was also a year of progress. In 2013, we need to beat the crisis and take that progress to a new level. That means seeing through the rebalancing and reforms of the eurozone.
It means focusing on the competitiveness of our economy, an open economy of entrepreneurs and better-trained employees and workers, which leans on innovation and skills and embraces the opportunities offered by expanding world trade.
It means finding new ways to boost productive investment and access to finance, so that our SMEs can create prosperity and increase their payrolls.
It means intensifying the fight against youth unemployment, because we cannot allow ourselves to waste a generation.
It means staying the course of fiscal consolidation, because there can be no sustainable growth without sustainable public finances.
And it means continuing the rebuilding of our Economic and Monetary Union.
Our patient may be out of intensive care, but it will still take some time before she can be given a clean bill of health. That's why any lapse into complacency would be unforgiveable. We need to stay the reform course to revitalise the European economy..