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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: Deeper Integration in the Eurozone and Britain's Place in Europe
Policy Network conference / London
28 February 2013
Ladies and Gentlemen,
It is a pleasure to be here with you this afternoon, here in the heart of the City. There are few issues that could be of greater relevance to Europe's leading financial centre than the twin topics of today's conference: the prospects for revival in the eurozone and Britain's future in Europe.
This is a subject about which I speak with particular interest, as I have a special relationship with Britain. I have great affinity and affection for this country. My mother was an English teacher. I have a degree from a British university. Two of my cousins have British passports. I am a lifelong supporter of Manchester United. And I am an equally strong supporter of Britain being fully and actively engaged in the European Union, a Union of which Britain is an essential part.
Let me however begin by talking you through the rebalancing underway in the eurozone economy. The current picture is dualistic and can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past, and growing investor confidence in the future.
That confidence stems from important decisions taken in recent months by both the eurozone member states and EU institutions, not least by the European Central Bank. These have calmed markets and helped to banish fears that the integrity of the euro was at risk. Far-reaching structural reforms are helping to reverse current account imbalances in the eurozone, as competitiveness lost by some members in the decade before the crisis is regained.
As John Maynard Keynes, the greatest (British) economist and also the greatest British liberal since John Stuart Mill, noted before the Bretton Woods talks, such adjustment is “compulsory for the debtor and voluntary for the creditor”. Keynes knew what he was talking about, as he was representing the interests of a debtor nation.
But this does not invalidate the case for a more symmetrical external rebalancing within the eurozone, involving creditor as well as debtor countries. The Commission has recommended that surplus countries should implement reforms to strengthen domestic demand.
Germany could do this by opening up its services market and by encouraging wages to rise in line with productivity, two of the recommendations made to Berlin by the EU Council last July. There are signs domestic demand is strengthening and pay agreements in Germany in 2012 settled on rises of almost 5% on average.
But we should also be aware that 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. This means adjustment channels are influenced significantly by global economic interdependence. A reduction of surpluses in the north will not lead automatically to a corresponding increase of demand for exports by the south.
In fact, the principal beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains. A Commission analysis suggests that a 1 per cent increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05 per cent of gross domestic product. This would not get us very far.
This analysis is relevant in view of the academic debate about fiscal consolidation versus fiscal stimulus at the current juncture. Academic debate always has the potential to enrich the making of economic policy, and policymakers should always be open to have their ideas challenged. Debate is welcome, but there is a risk in simplifying complex situations to make them fit with a preferred narrative.
For there is no 'single issue movement' alone – be it fiscal discipline alone or debt mutualisation alone – that can solve this crisis. Fiscal discipline alone would suffocate growth, while debt mutualisation alone would lead to an unsustainable moral hazard. There is no silver bullet; if there were, believe me, we would have fired it.
That's why we need to continue our comprehensive crisis response, and intensify and adjust it, as necessary. We need to build bridges between the stability culture of the north and the solidarity culture of the south, and find solutions that reflect the need for both stability and solidarity. It is not only an economic and social imperative, it is a fundamental political imperative in the deeply integrated Europe.
In that context, when considering the calls for fiscal stimulus, we need to be aware that countries at risk of losing, or having lost, market access, or paying prohibitive costs for their sovereign funding because of excessive deficits and debt burdens, simply do not have the luxury to choose between consolidation and stimulus. The only choice they face is to restore sustainability to their public finances, or to not do so and face rising borrowing costs with all their negative ramifications for the real economy, for growth and employment.
While I am not sure if Keynes himself would be a Keynesian today, at least an unreconstructed one, I am in fact a Keynesian myself, if that is measured by one’s belief in the dangers of a liquidity trap and the rationale of counter-cyclical economic policy.
In other words, once you have room for fiscal manoeuvre, you can pursue counter-cyclical economic policies, with targeted investment for growth-enhancing purposes like research and infrastructures, as in Sweden today. But I also live in the real world, under the shadow of a confidence crisis and of public debt at 90% on average in Europe. Even Germany's public debt exceeds 80% of GDP. This is a world of hard choices, imperfect policy options, a still fragile financial sector, intense market pressure and political and financial constraints.
And in this real world where we operate, Europe is getting its public finances back on track. Deficits in the eurozone have fallen from around 6% of GDP on average in 2010 to around 3.5% in 2012. We forecast the average deficit will drop below 3% this year.
The number of EU countries in Excessive Deficit Procedure has fallen from 24 to 20 in eighteen months. And we may see a further six member states exit the Procedure in the spring, depending on the final fiscal figures that will be validated by Eurostat in April and on the findings of our own Spring Forecasts in May.
However, while deficits are being reduced in Europe, public debt is expected to stabilise only by 2014 and, as said, to do so at above the level of 90% of GDP. Serious empirical research has shown that at such high levels, public debt acts as a permanent drag on growth.
If debt levels are not reduced, they will become an ever heavier burden on our economies, swallowing up resources that could otherwise be channelled into productive investment. This is particularly important in view of the impact of population ageing, which is set to make itself felt ever more acutely. All this has to be weighed against the short-term costs of consolidation.
That’s why fiscal consolidation needs to proceed at a carefully calibrated but steady pace that is appropriate for each country. The Stability and Growth Pact focuses on improving the underlying budgetary position, taking out the effects of the economic cycle and of one-off measures. From the point of view of rational economic policy making, this focus on structural sustainability over the medium term is the right approach, and the one we are committed to pursuing. We demonstrated this commitment last year when extra time was granted to Spain, Portugal and Greece to correct their excessive deficits.
In parallel with this consistent commitment to sound public finances, Europe needs to embrace structural reforms to deliver the growth and job creation we so urgently need. This means tackling bottlenecks to growth by creating a growth-friendly business environment with better access to finance and simple rules to do business. Europe needs more entrepreneurs and businesses that are hungry and can grow.
In my view, the focus on fiscal policy alone is a much too limited view when trying to trace the reasons for slower-than-anticipated growth in Europe. Where is the primary problem, then? I would seek it in excessively tight financing conditions for businesses and households, which are caused by the still-unfinished repair of the financial system and banking sector. Today’s liquidity trap is in fact a financing trap.
The excessively tight financing conditions, especially in southern Europe like Spain, Portugal and Italy, are hindering the flow of credit to households and businesses and thus suffocating economic activity and export growth in these countries. While the US by and large proceeded with financial repair in 2008-9, which was crucial to its recovery, this process in Europe is still only partially achieved, which is working as a critical drag against returning to recovery.
That’s why we need to complete the repair of the financial sector, in order to unblock private investment. This is not about "bailing out bankers", it is about letting credit flow to create growth and jobs.
But we need to do even more to boost productive investment. Public banks such as the European Investment Bank have an important role to play here. The 10 billion-euro increase in the EIB's capital has agreed last year has expanded its lending capacity by 60 billion euros, which means around 180 billion euros’ investment in innovation, infrastructure and green growth in Europe over three years, starting this January.
We must also look beyond our borders for growth, by embracing a forward-looking and proactive trade policy. In Europe, about 30 million jobs, or more than 10 percent of the total workforce, depend on sales to the rest of the world, as Peter Mandelson, who fought valiantly for free trade as trade commissioner, knows very well. The initiative by the EU and the US to launch negotiations for a comprehensive and deep free trade agreement is of enormous importance in this respect. It has huge economic potential to boost growth and huge strategic potential to revitalise the transatlantic partnership.
And that brings me to the question of Britain in Europe. Because it is in everyone's interests for Britain to be an active player here. This is a game in which, if I were a British citizen, I would want my country to be playing as a midfield playmaker rather than watching from the sidelines. No one ever scored goals sitting on the bench.
For forty years now, Britain has been stronger thanks to its membership of the European Union. More dynamic economically. More equitable socially. More influential in world affairs.
To illustrate Europe's importance for Britain, I think Dr. Simon Sweeney, Lecturer in international political economy at the University of York, hit the nail on the head when he wrote as follows:
"What did the EEC/EU ever do for us? Not much, apart from: providing 57% of our trade; structural funding to areas hit by industrial decline; clean beaches and rivers; cleaner air; lead-free petrol; restrictions on landfill dumping; a recycling culture; cheaper mobile charges; cheaper air travel; single market competition bringing quality improvements and better industrial performance; break-up of monopolies; Europe-wide patent and copyright protection; no paperwork or customs for exports throughout the single market; freedom to travel, live and work across Europe; funded opportunities for young people to undertake study or work placements abroad; labour protection and enhanced social welfare; smoke-free workplaces; EU-funded research and industrial collaboration; European arrest warrant…".
I must stop here for the sake of time, as he listed dozens of other things that the EU has brought for Britain. But he coined it even better:
"All of this is nothing compared with its greatest achievements: the EU has for 60 years been the foundation of peace between European neighbours after centuries of bloodshed. It furthermore assisted the extraordinary political, social and economic transformation of 13 former dictatorships, now EU members, since 1980… We must play a full part in enabling the Union to be a force for good in a multipolar global future."
That's the point. And the European Union is stronger today because of Britain’s tremendous contribution to it. Our economy is more open and dynamic as a result of Britain’s liberal instincts, which are an important counterweight to the regulatory reflex which still sometimes surfaces.
The single market we have built up over the last two-and-a-half decades owes a lot to those liberal instincts. But let’s be clear about one thing. The single market needs rules, regulations and strong and effective institutions in order to function. Without those, there is no single market. Prime Minister Margaret Thatcher understood this when she signed the Single European Act and had it ratified.
Whatever choices Britain ultimately makes about its future in Europe, I trust this great European country will support the rebuilding of our economic and monetary union, in line with Chancellor George Osborne's political maxim that “the remorseless logic” of monetary union leads to greater economic union.
We have learnt the lesson that a banking union must be an essential element of the EMU. It will move decisively forward this year. The Single Supervisory Mechanism should be agreed in the coming weeks and we will propose a European Resolution Mechanism later this year.
The Commission will also soon take initiatives to complement the monetary union with a real economic union. Our guiding principle in rebuilding the EMU is that any steps towards more solidarity and mutualisation of risk should 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.
Ladies and Gentlemen,
We have before us many more far-reaching choices, in the eurozone and in the wider European Union. In that context, I believe it is firmly in Britain's interest to use its energy for reforming Europe rather than seeking to undo our Community, which would leave us all weaker.
In a nutshell, why not focus on reform rather than repatriation?
A former prime minister told the House of Commons in 1967 that British membership of the Community would be "healthier for Britain, advantageous for Europe and a gain for the whole world".
He was right on every count, and I can only agree wholeheartedly with his next remark: "I do not know of many economic or political problems in the world which will be easier to solve if Britain is outside rather than inside the Community."
So let's move forward together.