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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Building Europe’s recovery, rebuilding its monetary union
European American Press Club, Paris
1 October, 2013
Ladies and Gentlemen, Mesdames et Messieurs,
I am delighted to be with you this evening in Paris to speak about the about the reform and recovery of the European economy. And since we are in Paris, let me begin with a word on France. Last Thursday, I welcomed Pierre Moscovici to the European Commission for a discussion on France’s draft budget for 2014 which the Government had adopted the previous day.
This was an important gesture that symbolises not a transfer of sovereignty from Paris to Brussels, but rather a stronger partnership between Paris and Brussels. It is a partnership geared to advancing sound economic and budgetary policies for the benefit of all French and European citizens. In this context I am looking forward to a further constructive discussion tomorrow afternoon with Prime Minister Ayrault.
The new rules for closer coordination of budgetary policymaking agreed by all EU Member States earlier this year – let me stress all Member States, as well as an overwhelming majority in the European Parliament – are designed to achieve precisely that. In this new economic governance, which is a reflection of our profound interdependence in the eurozone, the role of the Commission is not to veto national budgets.
That is a power we do not have. Our role is rather to provide independent policy advice, early enough in the budgetary process for it to be useful for national parliaments. For the first time this autumn, the Commission will publish in mid-November its assessment of the draft budget plans which all euro zone countries will send us by 15 October. We will carry out this exercise taking into account our autumn economic forecasts, which we will publish on 5 November.
This will not involve us going through every budget line with a fine tooth-comb. The aim is not to scrutinise the added value of every proposed rond-point in Rouen or tramline in Toulouse.
Rather, the aim will be to assess whether the draft budget plan will put each country on track to achieve the budgetary commitments made at the European level, commitments designed to create the conditions for sustainable growth, investment and job creation.
For France, the second largest economy and founding member of the eurozone, the respect of these commitments is a gauge of credibility, not only of this country’s policies but of those of the eurozone as a whole. I therefore welcome the real efforts being made to put France’s public finances onto a sustainable path, and the moves to remove some of the long-standing bottlenecks to growth and employment.
Of course, there remains much to be done, and some important details are still missing before we can make a full assessment of some of the measures that have been announced. In particular, we still need to see how the increase in employer contributions foreseen in the pension reform will be compensated, so as to ensure that the already high cost of labour does not rise further.
Since the spring, we have seen increasing signs that a gradual recovery is underway. We expect this recovery to grow firmer in the coming months and to gather speed next year. Last Friday, we saw that economic sentiment in the eurozone and the EU rose sharply again in September: for the EU as a whole it rose above the long-term average benchmark for the first time in 27 months. This is a further sign that our strategy of differentiated fiscal consolidation and economic reforms that support competitiveness is paving the way for a sustainable recovery.
The slowing down in the pace of fiscal consolidation in Europe that has happened over the past year has been made possible by three factors. First, the increased credibility of eurozone members’ fiscal policies since 2011. Second, the decisive action the ECB has taken to stabilise the markets. And third, the reform of EU economic governance, which now provides an effective framework for a differentiated fiscal adjustment and the advancement of structural reforms.
Of course, there are substantial economic divergences between our Member States. While the recovery is firming in some, it remains elusive in others. In many parts of Europe, unemployment remains at dramatic levels. Excessively tight lending conditions, especially for small and medium sized enterprises, remain a very serious bottleneck to growth. That’s why I continue to stress that any claims that "the crisis is over" are premature.
In this context, let me say a word on Italy. It is of course for Italy's political leaders to find the right way forward in the interests of their citizens. At the same time, we need to be aware that there is a lot at stake for all European citizens now. Italy is the third largest economy in the euro area and the impact of what happens in Italy does not end at the country's borders. It is felt throughout Europe. Italy's progress or lack of progress, its achievements or lack of achievements, are also Europe's. That is why I want to express my strong hope that Italy will return to political stability as soon as possible, in order to be able to take the many important decisions that are needed for the sake of returning to growth and job creation.
Ladies and Gentlemen,
This crisis was not caused by any ordinary cyclical downturn. Its origins lay in the large and unsustainable macroeconomic imbalances that were allowed to accumulate in the first decade of this century: the years that were once somewhat misleadingly known as “the Great Moderation”.
We are still living through the correction of the excesses of those heady, hubristic years – a difficult but necessary adjustment at the end of a long credit cycle. Many European countries are experiencing a balance sheet recession, following an unsustainable build-up of debt, whether private, as in Spain, or public, as in Greece. A return to sustainable growth will thus be contingent on a major rebalancing of the economy.
The three keys to sustainable growth in Europe are: the adjustment capacity in the real economy, a well-functioning financial system for efficient investment; and a credible framework for sound public finances. Let me address these in turn.
First, the capacity for real economic adjustment is crucial in a monetary union. But this was forgotten during the first decade of EMU. A very high economic and social price has been paid for that neglect.
The structural shifts in the global economy have so far affected countries across the eurozone in an asymmetric way. Germany's economy, currently the engine of growth in Europe, went through significant structural change over the last decade. Integrating its eastern neighbours into its production chain, its growth rates were low for a long time.
But then competitiveness gains coincided with rising demand for German products worldwide, so that Germany's current account surplus is now largely determined by trade with non-eurozone countries, especially emerging economies.
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 goods, services, labour and capital markets. Economic rebalancing does not mean suggesting to companies in any one country that they should become less competitive on global markets.
As the two largest eurozone economies, Germany and France, together hold the key to a return to growth and employment in Europe. In a nutshell, this calls for economic reforms in the labour market, business environment and pension system to support competitiveness in France, and for structural measures to further reinforce domestic demand and boost investment in Germany.
If Germany and France together can implement what the European Council has recommended to them, they will do a great service to the entire eurozone, as this would help us by providing stronger growth, creating more jobs and reducing social tensions.
The second key to 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 in southern Europe in particular still struggle to access finance.
In the US, decisive monetary policy action and the rapid and robust moves addressing the vulnerabilities in the banking system played an important role in containing the crisis and restoring confidence. In Europe, we have done a lot, but we have not yet finished the financial repair necessary to restore confidence fully. In contrast to 2007-9, the uncertainty about balance sheets today is not about obscure toxic assets, but is linked to the economic adjustment process. The rigorous asset quality reviews and stress tests due next year will thus be a key complement to our structural reform agenda, and indeed decisive for the return to sustainable growth and jobs.
The European Council in June concluded that in this context, Member States taking part in the Single Supervisory Mechanism will make all appropriate arrangements, including the establishment of national backstops, ahead of the completion of this exercise. In case the balance sheet assessments reveal capital holes, the bill should be footed first via private solutions and internal resources – shareholders and junior creditors – before resorting to public backstops. Where state support is necessary, the new state aid rules in force since 1 August apply.
As regards the treatment of capital injections under EU fiscal rules, these are normally considered as "relevant factors for financial stability" and/or as one-off measures not included in the structural balance and not counting against the Member State in the context of the Excessive Deficit Procedure. As such, there is no disincentive to effective public backstops caused by these fiscal rules.
Cleaning up balance sheets is a pre-condition for growth but also for resuming the path towards more genuine financial integration in Europe – what we call the banking union. The single banking supervisor under the ECB will be complemented by a single resolution mechanism in order to restructure non-viable banks while protecting the system. This is not about using public money to “bail out bankers”, since the proposed resolution fund will be financed by the sector itself.
The banking union will not be completed overnight. That's why the current gaps in private sector lending have to be bridged by other players. For example the European Investment Bank, as the EU’s policy-driven bank, is playing an ever more important role in the adjustment process. Its loan book amounts to over 450 billion euros, making it the world's largest supranational public bank.
In France, between 2008 and 2012, the EIB signed more than 25 billion euros of loans, covering a range of sectors including energy, transport, and research, as well as support for SMEs. Recent examples include 500 million euros in loans to the Aquitaine region for the construction and refurbishment of schools to improve energy efficiency, and 300 million euros towards the high-speed rail line between Le Mans and Rennes.
The third key to sustainable growth is sound public finances. This includes sustainable social security and a growth-enhancing allocation of public spending in education, innovation and infrastructure. Sound public finances and structural reforms that lift the growth potential go hand in hand. Over the past years, Europe has reinforced its economic governance to ensure progress on both these fronts.
I am well aware that these achievements do not yet constitute the final stage of the Economic and Monetary Union 2.0. However, with the important reforms undertaken so far, the options for further fiscal integration have been exhausted under the current EU Treaty.
We live in a paradoxical situation where EU Member States have given the European institutions more responsibility in a context of greater economic and fiscal integration – and yet at the same time they criticise us for our well-grounded economic policy recommendations.
This suggests that a deep fiscal union will not be created overnight. It can only emerge through a profoundly democratic process, both at national and at European level. In view of this week's budgetary drama in Washington, I am sure that our American friends are sympathetic to that.
The essential guiding principle for us is that any step towards increased solidarity and mutualisation of economic risk is combined with increased responsibility and fiscal rigour – that is, with further sharing of sovereignty and deeper integration of decision-making.
Ladies and Gentlemen,
The latest economic indicators show that our economic strategy is starting to deliver. But Europe’s road to recovery will continue to require difficult choices and persistence, as well as tapping external sources of growth. That’s why I strongly support the 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, with the rest of the world also expected to benefit from such a partnership to the tune of close to 100 billion euros.
A successful conclusion of these talks would, I believe, also give an important boost to the transatlantic relationship beyond the economic sphere. It would inject new dynamism into the special relationship which binds Europe and America and which will become more, not less relevant in a multipolar world.
In the meantime, 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 a stability culture, entrepreneurial drive and social justice.
But instead, genuinely reforming and modernising Europe’s social market economy, for the sake of sustainable growth and job creation.