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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
European Semester – stable public finances and sustainable economic growth
Conference on the European Semester/Warsaw
8 March 2013
Deputy-Prime Minister Piechocinski, Ladies and Gentlemen,
I am very glad to be back in Warsaw to discuss with you our common strategy for sustainable growth and jobs in Poland and in Europe.
Action at the European and national levels has the same goals: economic dynamism, financial stability and social inclusion. For this action to be effective in these challenging times, it needs to be implemented in a coordinated, timely and consistent manner.
That is precisely why we have overhauled and reinforced Europe’s economic governance. A big part of that work took place under the Polish Presidency in 2011, which acted as a midwife to the so-called Six-Pack, the legislation that confirmed and reinforced the Stability and Growth Pact and created the Macroeconomic Imbalances Procedure. These are the key instruments of the new governance, and the Commission is making full and effective use of them. The Member States’ commitment to stronger policy coordination for sound public finances has been again confirmed with the Fiscal Compact Treaty, which has just been ratified by Poland.
And we are already in the third yearly cycle of economic policy coordination known as the European Semester, which brings together in a single framework the fiscal discipline of the Stability and Growth Pact, the structural reforms for growth and employment and the mechanisms to prevent macro-economic imbalances.
Ladies and Gentlemen,
Before we move to discuss this year's policy priorities, let me recall where we stand at the moment in the European economy on the basis of our Winter Economic Forecast. The situation is difficult, 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 concerning the future.
The situation in the real economy reflects the large adjustment challenges that some Member States are still facing – despite the significant adjustment already made. The unavoidable rebalancing after the credit-fuelled boom experienced in many countries is underway. But this will continue to weigh on growth and public finances for some time to come, especially in highly-indebted countries.
For this year we project zero growth in the EU, although quarterly growth figures are likely to develop more dynamically over the course of the year. For 2014, we expect growth in the EU to become more solid at 1.6%.
The current economic weakness in Europe is inevitably taking its toll on Poland too, where growth prospects will be also affected by falling investment and weak consumption. We forecast growth this year of just 1.2%, with a rebound to 2.2% in 2014, spurred by external demand.
As regards public finances, fiscal consolidation has reduced the average deficit in the euro area from around 6% of GDP in 2010 to 3.5% in 2012. We forecast a further reduction to below 3% of GDP this year, with slightly higher percentages for the EU as a whole.
Yet, public debt in Europe is expected to stabilise only by 2014 and to do so at above 90% of GDP. Serious empirical research has shown that at such high levels, public debt acts as a permanent drag on growth. If it is not reduced, it will become an ever-heavier burden on our economies, swallowing up resources that could otherwise be channelled into productive investment.
If a country has room for fiscal manoeuvre, it can pursue counter-cyclical economic policies, with targeted investment for growth-enhancing purposes like research and infrastructures, as in Sweden today. But European countries with such high debt levels simply do not have that luxury. They face hard choices and imperfect policy options. In many cases their options are further constrained by still fragile financial sectors and intense pressure from the markets.
That’s why a fiscal stimulus cannot be the answer for these countries. Stimulus was the right choice in 2009, given the depth of the economic growth shock caused by the financial crisis. But by 2010, market sentiment had turned, as investors became seriously concerned at the sustainability of public finances, especially in countries with high private sector indebtedness, given the implicit or explicit public liabilities arising from that.
The rebalancing that is underway today is first and foremost a reflection of imbalances accumulated in the decade before the crisis, fuelled by credit booms in countries such as Ireland, Spain and the UK, or an accumulation of unsustainable debt levels in the public sector in Greece and Italy. Whatever the initial reasons for the debt accumulation, it is essential today that the governments address the problem through consistent fiscal consolidation.
Of course, fiscal consolidation needs to proceed at a carefully calibrated but steady pace that is appropriate for each country. That is why the Stability and Growth Pact focuses on improving the underlying budgetary position, removing the effects of the economic cycle and of one-off measures. From the standpoint of rational economic policy making, this focus on structural sustainability over the medium term is the appropriate approach, as long as the Member States have proven the credibility of their medium-term fiscal strategies by concrete action. We applied this approach last year when extra time was granted to Spain, Portugal and Greece to correct their excessive deficits.
Europe faces profound economic and social challenges. And that is precisely why we need to stay the course of reform, which was the key message of our Annual Growth Survey last November, which set the overarching policy framework for this year’s European Semester, and which I trust the European Council will strongly endorse next week in Brussels.
The three main policy priorities for the EU remain:
First, it is essential to maintain the momentum of structural reforms to boost growth and job creation, strengthen the adjustment capacity of our economies and reverse the trend of European losses in global competitiveness. Reforms to create more dynamic and competitive labour and product markets are key, together with more efficient, business and citizen-friendly public administrations. We also need to step up our efforts to ensure high-quality education and support innovation.
Second, restoring lending to the real economy. The excessively tight financing conditions, especially in southern European countries like Spain, Portugal and Italy, are hindering the flow of credit to households and businesses and thus suffocating economic activity and holding back export growth. That’s why we need to complete the repair of the financial sector, to unblock private investment.
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 increase in the EIB's capital has agreed last year has expanded its lending capacity by 60 billion euros, which means around €180 billion investment in innovation, infrastructure and green growth in Europe over three years, starting this January.
In 2012, the EIB gave loans to the Polish economy of about €4.4 billion. Among these loans were financing of the new rolling stock for line 2 of the Warsaw metro, the upgrading and extension of power grids and the construction of a science and technology park in Bialystok.
Due to the capital increase of EUR 10 billion, the EIB will increase its lending in the EU in 2013 by around 36%, so we expect the loan volume to increase in Poland as well.
Third, as mentioned, a differentiated growth-friendly and consistent approach towards consolidation remains crucial, in line with the provisions of the Stability and Growth Pact.
Ladies and Gentlemen,
While we still have ahead of us Poland’s Convergence and the National Reform Programmes and their assessment under the European Semester at the end of May, let me say a few words on Poland's response so far to the recommendations made to Poland last year.
First, regarding public finances, Poland was recommended to correct its excessive deficit by 2012. On the basis of our winter forecast, it is projected to have recorded a deficit above, but still close to the 3% of GDP reference value of the Treaty. Given that and the fact that the debt is expected to remain below 60% of GDP, Poland could benefit from a special rule that takes into account the net cost of a systemic pension reform including the setting-up of a mandatory second pension pillar.
However, for an abrogation of the Excessive Deficit Procedure, we need to see the actual data for 2012 and the costs of the pension reform validated by Eurostat. Moreover, our subsequent Spring Forecast should then confirm that the deficit has been durably corrected.
Prudent fiscal policy needs to be complemented with structural reforms which are essential to increase potential growth amid intensifying competitive pressures and negative demographic developments.
In that respect, the progress Poland has made on increasing the retirement age to 67 is welcome. Also the continued focus on boosting investment will be vital to provide the necessary fuel to the economy.
At the same time, further efforts are required to tackle a number of recommendations addressed to Poland last year, in particular in the areas of youth unemployment, education, labour market reform and creating a more innovation-friendly business environment. I understand that the work is going on.
Last but not least, I am aware of the debate being launched about euro adoption by Poland. It is up to Poland to decide on the strategy and timing for joining the euro. But it is worth making the point that the benefits of the euro depend on a country’s capacity to operate smoothly within the framework of the monetary union. This means sound public finances and solid competitive position on the markets.
Since its accession, Poland has embarked on a steady catching-up process, benefiting from the sizeable structural and cohesion funds of € 80 billion which makes 2.5% of GDP in 2004-2013. With exports being the primary engine of the Polish economy, it has also reaped the benefits of trade integration. While going through periods of slower and higher growth, it has avoided boom-bust cycles and the accumulation of damaging macroeconomic imbalances. Poland remained a beacon of economic growth in 2009 when all other European economies fell into recession.
Poland has benefited from its early embrace of structural reforms, but it will be important to maintain or where necessary, step up the tempo of reform, to continue to remove bottlenecks to growth and job creation. Staying the course of sound fiscal policies and addressing successfully structural weaknesses are key to take Poland to the next stage of economic development and in parallel to prepare the economy for a successful life in the euro area.
Ladies and Gentlemen, dear friends,
In this context, implementation of the country-specific recommendations under the European Semester is even more essential for Poland. They are intended to support the goals of sustainable growth, dynamic job creation and sound public finances.
The European Semester is built on the concept of partnership. Let me assure you that the European Commission is and will remain Poland’s partner on this journey.