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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Growth and deeper integration in Europe
Paris EUROPLACE International Financial Forum in New York
22 April 2013
Ladies and Gentlemen,
I am delighted to have the opportunity to address such a distinguished and international audience, in the wake of the G20 and IMF meetings in Washington.
During the G20 discussions, the overwhelming concern was how to boost growth and job creation. We discussed the short-term effects of fiscal policy in this respect, the continued need for structural reform, as well as the functioning and role of the financial sector in financing the structural change underway.
At the same time, the G20 acknowledged that the global economy has avoided some major tail risks and that financial market conditions continue to improve. As far as Europe is concerned, the key tools we needed for fire-fighting are now firmly in place, and the perceived tail risk of a break-up of the eurozone has not materialised. Instead, sovereign funding conditions have significantly improved.
In my view, this financial market view reflects both the acknowledgement of the remarkable reforms undertaken in Europe – because these reforms are the precondition for the credibility of the firewalls we have established – but also the clear expectation that this path will continue to be followed.
Still, despite these reforms, the ongoing process of deep economic rebalancing continues to impact on the European economy. We expect growth to return only gradually in the second half of this year, together with an acceleration of world trade.
Several countries in the euro area are still caught in a process of balance sheet adjustment. The build-up of the large current account imbalances within the euro area coincided with the introduction of the euro, which reduced sovereign risk premia across the euro area, while financial market integration in the EU progressed and some euro area countries were catching-up. The imbalances accelerated with the global credit boom, starting in 2003 where markets severely underpriced credit risks. The long build-up of large external liabilities had become a source of systemic concern in Europe.
This still has implications for future growth policies, namely structural policies, fiscal policy and our policy regarding the financial sector. In parallel, we must continue on our path to rebuild the architecture of Economic and Monetary Union towards EMU 2.0.
My first point concerns structural policies.
In some EU economies, debt levels of households, companies and governments are being reduced, but remain high. External adjustment is proceeding and needs to continue and intensify in some countries, which implies an ongoing shift of resources towards export-oriented sectors.
Fortunately, the adjustment is increasingly supported by a recovery in competitiveness in vulnerable countries. In some countries, where unit labour costs had accelerated considerably over the last decade, there has been a significant correction. In the surplus countries, increasing domestic demand is expected to support rebalancing over time as wages and unit labour costs increase relatively faster. However, the adjustment is inevitably weighing on the economy. In several countries, unemployment is unbearably high.
Openness to trade will support this process of adjustment. Europe must actively seek out global opportunities for growth. Protectionism would be the wrong medicine.
However, economic reforms take time to show their full effect. This brings me to my second point, fiscal policy.
A credible medium-term fiscal strategy and a comprehensive set of growth-enhancing structural reforms complement each other. Since the beginning of the crisis, the economic governance in the EU and in the Economic and Monetary Union has been significantly strengthened.
Fiscal policy has been the subject of much debate recently. This debate has often neglected the point of departure in Europe, namely the threat of market financing drying up, as positions in the private and/or public sector threatened to become unsustainable. Hence these positions needed to be corrected, in order to re-establish market confidence.
This is precisely why fiscal policy rules in the EU are implemented in a differentiated way, responding to country-specific situations. The main goal is to achieve structural sustainability of public finances in the medium-term. The June 2010 Toronto targets called for at least halving deficits by 2013 and stabilising the government debt-to-GDP ratios by 2016. And indeed, in the EU and the euro area the public deficit is forecast to fall from over 6% in 2011 to below 3% of GDP this year and the debt ratio is expected to stabilise by 2014. Consolidation continues to be necessary, but its pace is slowing in 2013 relative to 2012.
I believe that 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. We are not in a normal cyclical downswing, but one whose fundamental cause lies in the macroeconomic imbalances and the ongoing balance sheet adjustment process.
This process has led to – and is exacerbated by – a fragmentation of the financial market in Europe. There is no doubt about the structural adjustment needs. However, the reallocation of resources is hampered where excessively tight financing conditions for businesses and households prevail.
In my view, this is caused by the still-unfinished repair of the financial system and banking sector. Today’s liquidity trap is in fact a financing trap. This is my third point.
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. This is acting as a critical drag on progress towards economic recovery.
In contrast to the US, the European economy remains a bank-based system. Europe should certainly become more open to more capital market financing, and we have already launched some initiatives and are considering what more can be done. But for the time being, bank dependence will prevail.
The European Investment Bank is now filling the gap where private banks are currently not capable of supporting the real economy. Its loan book amounts to over 450 billion euros, making it the largest supranational public bank. The capital increase of 10 billion euros allows the EIB to increase its lending in the EU in 2013 by around 40%. The EIB builds on contributions from the private sector, including private banks and capital market investors. We expect the EIB to unlock 180 billion euros of investment for growth over the next three years.
At the same time, 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.
The integrated financial market in Europe did not have the adequate governance arrangements in place, and recent events have demonstrated that vulnerabilities remain.
The banking union is essential to reverse the process of financial fragmentation in Europe and, thus, to preserve the integrity of the Single Market in the EU for financial services. It is also critical to ensure economic recovery and underpin the smooth functioning of the Economic and Monetary Union. Heads of state and government in Europe agreed on this last summer, and in view of recent events, there is a wide understanding that this work must now be accelerated to bring clarity. This is certainly the firmly held view of the European Commission, and I am glad that our view received so much backing from G20 partners.
Eventually, the banking union should comprise a single supervisory mechanism, a single resolution mechanism, a common, industry-financed resolution fund and, as a last resort, a fiscal backstop.
The banking union will reinforce financial stability by assuring more uniform and high-quality arrangements for the supervision and resolution of banks.
With the political agreement on the single supervisory mechanism, which entrusts the ECB with prudential supervision, Europe has made an important step towards a banking union. I say deliberately Europe and not the euro area, because the single supervisory mechanism is open for non-euro area Member States to participate in.
To my mind, the single supervisory mechanism is further evidence that Europe is addressing its challenges. Europe has often been criticised for slow decision-making, but in this dossier – which is a fundamental break with the past – it only took about 9 months from the first draft to the political agreement on the legal text.
More legal proposals are under discussion, in particular one on bank recovery and resolution, which is important as it clarifies, among other things, the rules on bail-in. The lack of common rules was one of the reasons why the events in Cyprus caused so much volatility.
Before the summer, the Commission intends to present a proposal on a single resolution mechanism. Already last September, the Commission said that a common resolution mechanism would be "the natural complement to the establishment of a single supervisory mechanism".
Over time, a resolution fund, provided by the industry, should contribute to achieving the goal of minimising the cost to taxpayers of bank resolution in the future. Finally, the euro area is making progress in defining the rules under which the ESM could recapitalise banks directly, which is also a necessary feature of banking union.
Taken together, these elements will further reinforce financial stability by diluting the link between banks and their national sovereign.
The banking union cannot be completed overnight. After the agreement on the single supervisory mechanism the European Central Bank is expected to assume its tasks in full by July 2014. But we are committed to build on the progress with single supervision and to rapidly bring all the elements together.
Ladies and Gentlemen,
Let me conclude.
Europe is still undergoing a protracted balance sheet adjustment. This will be resolved over time, but it is weighing on economic activity in the short term. Yet there are clearly visible signs that the flows are moving in the right direction, and I think this is being recognised by market participants.
Economic policies are also moving in the right direction. The architecture of EMU has been reinforced, and this medium-term framework allows structural and fiscal policies to adapt to circumstances. We see structural and fiscal policies as a coherent whole, taking into account country-specific circumstances.
Countries receiving financial assistance are making progress. While at a somewhat different stage of their programmes, Ireland and Portugal have taken successful steps to re-enter the markets. Ten days ago in Dublin, finance ministers agreed to substantially lengthen the maturities of the official loans to support their efforts to regain full market access and successfully exit their programmes. Greece was already given more time last December, and the programme has been brought back on track. In Spain, the banking sector adjustment is progressing as planned.
The growth outlook in Europe today is a reflection of the imbalances of the past. But financing Europe today is about the growth opportunities of the future. Europe is making steady progress on the path to further integration, and decisive reforms, such as the single supervisory mechanism, have been agreed. I hope that every such step is a step further to underpining your confidence in Europe