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Vice-President and member of the European Commission responsible for Economic and Monetary Affairs and the Euro
The conditions for new growth in Europe
European Forum Alpbach 2013/Austria
29 August 2013
Meine Damen und Herren, Ladies and Gentlemen,
Herzlichen Dank für die Einladung zu diesem hochrangigen und wichtigen Symposium an diesem schönen Ort. Ich freue mich sehr darauf, mit Ihnen über die Wirtschaft in Europa zu diskutieren.
It was the great economist Joseph Schumpeter who said "Der Zustand des Geldwesens eines Volkes ist ein Symptom aller seiner Zustände." ["The condition of the monetary system of a nation is a symptom of all its conditions."]
Today of course, Schumpeter’s remark is applicable not only to single nations but to the seventeen – soon to be eighteen – European nations that have pooled their monetary systems. What, then, is the condition of Europe’s monetary union, and more fundamentally, of its economy?
To beat the crisis, we have taken action to deal with short, medium and long-term challenges. For the short term, we had to stabilise financial markets so as to avoid the free fall of our real economy. For the medium term, we need economic reforms for sustainable growth and job creation. And for the long term, we needed to redesign the architecture of the EMU.
Creating the conditions for new growth has required consistency and determination – not least as it involves the unwinding of large and unsustainable macroeconomic imbalances that had built up over many years, in fact over one decade.
This is no ordinary cyclical downswing. And it is not an ordinary return to growth, either.
In 2011 and 2012 the priority had to be to stabilise financial and bond markets. The newly created financial stability mechanisms [the EFSF and ESM] and the ECB's policies greatly helped in this sense. Consequently, the risk of extreme events in the European economy was substantially reduced.
Financial market stabilisation was a necessary but not sufficient condition for recovery in an economy that is as reliant on bank finance as is the eurozone. Since banks themselves were highly in debt across Europe, this major channel for growth has remained impaired. I will say more on this in a moment.
This summer, there are welcome signs that the EU economy has reached a turning point. Data for the second quarter of this year confirmed the beginnings of a gradual recovery. Positive signals are also coming from the vulnerable Member States, though of course they continue to face major challenges. We expect growth in Europe to pick up gradually in the second half of this year. There are still major divergences in growth in the eurozone, and there is an unemployment crisis in many EU countries, as we are painfully aware.
For the benefits of this nascent recovery to be fully felt in the real economy, requires continued policy action on at least three fronts: the real economy, the financial industry and the public sector.
The first condition for sustainable growth in Europe is to realise what is crucial in a monetary union is the capacity for real economic adjustment, a point that many forgot during the first decade of EMU. A very high economic and social price has been paid for that omission.
In politics, we like to use the term "competitiveness" for this, but to remain in the world of Schumpeter, I would translate it as "Wachstum durch Wandel": growth through change. This is about how our social and economic institutions influence the adjustment capacity of economic players to reap the benefits of economic exchange and free trade.
In the eurozone, businesses small and large face global challenges but also opportunities. Competitiveness comes from competition, and it depends on our capacity to innovate and to ensure that our workforce has the appropriate skills. This is why structural reforms are so important: to improve the functioning of our goods, services, labour and capital markets.
Structural shifts in global trade in the past decade, notably enlargement of the EU and China's accession to the World Trade Organisation, have so far affected countries across the eurozone in an asymmetric way.
Germany's current account surplus is by now largely determined by trade with non-eurozone countries, especially emerging economies such as China, India and Brazil. Also, more domestic demand in Germany would not necessarily benefit all eurozone countries to the same extent. Rather, the positive impact on growth would mostly be felt in its neighbouring countries including Central and Eastern Europe.
While Austria's economy is closely linked to Germany’s, it has been able to benefit immensely from the EU’s eastern enlargement – a mutual benefit, I am sure.
Though Austria has also been among the surplus countries since the euro was launched, it was a deficit country for almost three decades before. Surpluses were invested to a good extent as Foreign Direct Investment, not least in its eastern neighbours. Austrian unemployment is now amongst the lowest in the EU. I am curious to hear your views about the lessons the Austrian experience has for the rest of the eurozone.
The return to growth still depends very much on country-specific factors, be it public and private debt or their different social systems, and of course responsibility for many structural policies still lies at national level.
A large degree of consensus for reform greatly facilitates the turnaround. Ireland, which is now on track to successfully exit its economic adjustment programme by December, is a clear example. Latvia, which exited its programme a year ago and will join the euro in January, is another.
The second condition for sustainable growth is that the necessary structural change and new economic activity must be financed. And this financing is today being held back by vulnerabilities in the banking sector. Many SMEs still struggle to access finance.
That is why we must continue building the regulatory and supervisory architecture for Europe's integrated financial market, summarised in the banking union.
Banks are now subject to far tougher rules than they were at the onset of the crisis. Moreover, we will soon have a single bank supervisor for the eurozone. The Commission has made a proposal to complement this with an authority to resolve failing banks, by using a common resolution fund. This is not about using public money to “bail out bankers”, because the fund will be financed by the sector itself.
The banking union will not be completed overnight. But it must be given a good start. Rigorous asset-quality reviews and stress tests scheduled for early next year are crucial to address the remaining weaknesses.
The current gap in private sector lending has to be bridged by other players, for example the European Investment Bank, whose €10 billion capital increase is now effective. This increase has allowed the EIB to boost its lending volume for 2013-15 by 40%, which is mostly directed towards financing SMEs, innovation, infrastructure and green growth.
For example, concerning Austria, the EIB signed more than EUR 8 billion loans in Austria between 2008 and today. Recent projects include a EUR 100 million loan for the expansion of high-speed internet; EUR 1 billion for the extension of the railway line connecting Vienna and Salzburg, one of Austria's busiest rail corridors; a EUR 250 million loan for research and development projects and several wind farms.
Together with the EU budget, EIB resources are also being used to attract other investors, such as pension funds and insurers. Last month, a large underground gas storage project in Spain was the first to issue EU backed project bonds under the pilot phase of the joint Commission-EIB initiative – an encouraging sign of confidence in the country.
The third condition for sustainable growth is sound public finances. This includes sustainable social security and a growth-enhancing allocation of public spending in education, innovation and infrastructure.
This is not just to combat the current crisis! In the coming decade, a major drag on growth will be the decline in the working-age population in Europr. Reforms are important not only to overcome the current crisis but also to address the long-term demographic change.
In view of the significant progress already made in reducing deficits, we were able in the spring to recommend to several countries to continue but slow down consolidation. In return, this additional time must be used effectively to intensify the implementation of structural reforms. This is the case for France, Italy, Spain, Belgium and Slovenia, among others, for whom we proposed an extension of the correction of the excessive deficit.
If you look at the Eurozone in its entirety, the two largest eurozone economies, Germany and France, together hold the key to a smoother and more effective rebalancing of the European economy. In a nutshell, this calls for economic reforms that support competitiveness-supporting economic reforms to the labour market, business environment conditions and pension system in France, and for structural measures to further reinforce domestic demand in Germany.
If Germany and France together can achieve this, they will do a great service to the entire eurozone by providing stronger growth, creating more jobs and reducing social tensions.
Ladies and Gentlemen,
Contrary to the Cassandra's prophecies, the euro has not broken up. The latest economic indicators show that our economic strategy is returning us to the road of recovery. But the road to new growth will continue to require difficult choices and stamina and persistence.
With some inspiration from the surrounding Alpine landscape, let me recall the words of Edward Whymper, a famous mountaineer, who once advised: "Do nothing in haste, look well to each step, and from the beginning think what may be the end."
It is good advice for the Eurozone as well. We must continue reforming the European economic and social model. Not nostalgically clinging to the status quo, since that would only lead to a permanent economic decline of Europe. Not dismantling the European model, because we believe in the combination of stability culture, entrepreneurial drive and social justice.
But instead, genuinely reforming and modernising the social market economy of Europe, for the sake of sustainable growth and job creation.
That is our policy agenda and I count on this forum making a valuable contribution to that goal.