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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Policy Challenges in the United States and Europe
Conference: Transatlantic Economic Interdependence and Policy Challenges - New York
22 April 2013
Ladies and Gentlemen,
It is a pleasure to be with you this afternoon to discuss the policy challenges we face on both sides of the Atlantic.
Already back in 2007, the European Commission and the Federal Reserve of New York jointly organised a very successful conference on Transatlantic Economic Relations [The euro and the dollar: pillars in international finance]. In a way, today's event is the follow-up to that conference, where we take stock of the challenges we have faced and the progress made in strengthening policy coordination since the global financial crisis of 2008-2009.
That crisis was born of excesses in financial innovation and macroeconomic imbalances – global as well as regional – that were allowed to develop unchecked during the credit boom years of the 2000s. At the onset of the crisis, the leaders of the EU and the US leaders, at a meeting in Camp David, took the initiative to go beyond the G7 and make the G20 the key forum for international economic cooperation. Since then we have cooperated closely to fight the recession, reform the international financial architecture, and improve the governance of international financial institutions. We have also beefed up global financial firewalls and put in place stronger and more effective financial regulation and supervision.
Back in 2009, the financial turmoil was accompanied by an economic shock, and world trade came to a halt. This underlined just how important stable, open trade relations are for our economies. That’s why I warmly welcome the launch of talks on a Transatlantic Trade and Investment Partnership, with its goal of removing barriers to trade and investment between Europe and the US. We estimate the potential gains for the EU and the US of such an agreement to be above 200 billion euros [around 260 billion dollars]. A particularly welcome positive externality of our bilateral cooperation is that rest of the world could also benefit from such a partnership to the tune of close to 100 billion euros [around 130 billion dollars].
So we must work hard to make this Transatlantic Trade and Investment Partnership a reality. At the same time, we need to act on many other fronts, because despite the progress made in recent years, these challenges are still formidable.
Europe is still undergoing a profound and necessary economic rebalancing. What looked like a fast catching-up process in some countries during the global credit boom that accompanied the first decade of the euro, proved not to be sustainable. The shock from the financial markets left Europe saddled with high levels of debt, both private and public. The deleveraging process is going to take time, and we need to find new sources of growth to ease the burden of adjustment. That’s why opening up global trade opportunities is so very important.
Since the crisis hit, Europe has been implementing a comprehensive policy response, which we have adapted and broadened over time.
Let me outline the three main pillars of our strategy:
The first is to return to growth and reduce unemployment. The current weakness in economic activity and the high levels of unemployment show how crucial it is to accelerate growth in the EU. This requires a permanent reduction in external imbalances. This adjustment is underway: current account deficits are narrowing in the countries with the largest external imbalances, for instance in Italy, Spain, Portugal and Ireland, and also in Greece. But some will have to run surpluses for a long time to come in order to complete the necessary deleveraging.
Structural reforms are the key to raising the growth potential of the European economy. And Europe is rising to this challenge. Most European countries have enacted major structural reforms, especially of labour and product markets, in recent years. We expect these to lead to significant employment and output gains in the medium-term.
Having said this, the reform agenda is not yet complete, so we cannot afford any complacency or lowering of our guard. Work is underway and must be taken forward to deepen the Single Market and increase competition in network industries, as well as to support small and medium-sized enterprises and nurture research and innovation.
To address the unacceptably high levels of youth unemployment, we need to continue to tackle the structural deficiencies in European labour markets. We also need to be proactively find ways to give hope to young people so that they do not become stuck in inactivity. Initiatives such as the European Youth Guarantee scheme are being put in place to help every young person into a job, education or training.
The second pillar of our response is consistent consolidation of public finances that is complementary to the process of structural reforms.
After we had deployed the full Keynesian arsenal of fiscal and monetary stimulus in 2009-10, it became necessary to move to a phase of consolidation to prevent our public finances from veering onto an unsustainable path. We have subsequently reduced fiscal deficits in the eurozone from around 6% of GDP on average in 2010 to below 3% this year, and with the debt ratio now stabilising.
We have further reinforced our economic governance and budgetary coordination, as reflected in the reformed Stability and Growth Pact. We have clearer, stronger rules that allow us to achieve the structural sustainability of public finances over the medium term. The pace of fiscal consolidation can be adjusted to reflect evolving economic conditions and to take into account negative cyclical effects. It is of course essential to strike the right balance between the impact of consolidation on growth and the need to ensure debt sustainability.
Now, we have received plenty of advice, also in recent days, on the pace of fiscal consolidation in Europe. Well, I will let you into a secret: the pace of consolidation in Europe has already been slowing down since last year. What has made this possible? There are three factors that have enabled us to have a smoother path of adjustment. First, the increased credibility gained since 2011 as a result of progress in balancing budgets. Second, the stabilisation effect of the measures taken by the ECB. And third, the reinforced economic governance that provides an effective medium-term framework for economic and fiscal policy. This year, in fact, the structural fiscal adjustment in the eurozone will be around ¾ of a percentage point, roughly half the level of last year (around 1.5 percentage points); while in the US, it is expected to be around 1.75 percentage points in 2013.
The Administration and Congress face the important task of making further progress towards a credible medium-term fiscal consolidation plan, as reflected in last Friday’s G20 communiqué. As in Europe, difficult decisions have to be made, for example on entitlement reform and the tax code.
The third pillar is the reform of the financial system. As in the United States, in Europe we needed a complete overhaul and redesign of financial markets regulation and supervision. In Europe we now have Basel III firmly in law, and we advanced the capital requirements already in a coordinated exercise in 2012.
Europe is firmly committed to complement better fiscal governance with better governance of the financial system. The construction of a banking union will reinforce financial stability through more uniform and high-quality arrangements for the supervision and resolution of banks. It will further reinforce financial stability by diluting the link between banks and their national sovereign.
Less than a year since the idea was first put on the table, the European Union has agreed on a single supervisory mechanism. We will not delay in putting in place the second pillar of the banking union, a single resolution mechanism, with a single resolution authority and common resolution fund, financed through levies on the sector itself, to deal with failing banks in an orderly and predictable way. The Commission is committed to come forward with a proposal to that end before the summer.
The possibility and rules for direct recapitalisation of banks by the European Stability Mechanism is the other important feature of the banking union we are building. The Eurogroup aims to agree the essential rules and details of a direct recapitalisation instrument for the ESM by June. This is a decision of the finance ministers of the eurozone but the European Commission has been providing technical expertise to facilitate an agreement and we will continue to do so in the coming weeks.
Taken together, these steps represent a decisive contribution to the repair of the banking system in Europe. The banking union cannot be completed overnight, but markets should take note that this is for us an essential priority. We are committed to moving it forward and to completing it as quickly as possible.
Ladies and Gentlemen,
This year the Federal Reserve System will be one hundred years old. Over a century it has delivered price stability, at least most of the time, and supported economic growth. In this respect, let me pay homage to Paul Volcker, who, at the head of the Federal Reserve, tamed inflation at the end of the 70s and early 80s, allowing the US to return to a sound growth path – a great achievement indeed. So it is not surprising that the Federal Reserve is now considered not only a US, but also a global public good.
Although much younger (it is just turning 15), the European Central Bank is an ‘early matured adolescent’ that has delivered on its mandate, despite the difficult and challenging times we have lived through. I don't think it will be regarded as political interference if I say that these two institutions have done a very valuable and mostly successful job in the last five difficult years.
But as central bankers eagerly – and in my view, rightly – underline, monetary policy alone cannot cure flaws in economic fundamentals. This task is the responsibility of governments, of course with other economic actors and social partners.
And that is why we must stay the reform course. We need to deliver in terms of free trade, financial sector reform, structural reforms that boost growth potential, and consistent consolidation of public finances. We must do so in order to create the foundations for sustainable growth and job creation. Facing these challenges, we are indeed partners on both sides of the Atlantic. Thank you.