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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
From fire-fighting to structural change
Brussels Economic Forum (BEF)
Brussels, 10 June 2014
Ladies and Gentlemen,
Europe emerged one year ago from the Great Recession. Very importantly, the recovery has not been limited to the core, but has also benefitted the stressed countries. The recovery is becoming broader-based, even though it remains fragile.
Our economic strategy has been based on two objectives: to strengthen our growth potential and capacity to create jobs, while putting public finances on a more sustainable footing. Where do we stand on these objectives?
First, Europe’s public finances are being repaired. In 2011, no less than 24 Member States out of 27 were still in the Excessive Deficit Procedure. Provided the Council adopts our recommendations of last week, the number of excessive deficits will fall to 11 out of today's 28 Member States. This demonstrates that the Stability and Growth Pact is working and delivering.
Second, unsustainable current account deficits have been turned around, and progress has been made on structural reforms. Several countries have exited their financial assistance programmes, and the reform process is now firmly grounded in the European Semester.
And third, monetary policy remains accommodative; indeed it is now even expansionary. The ECB continues to act decisively within its mandate to deal with the risks of a prolonged period of low inflation and to improve monetary transmission.
At the same time, challenges remain. Debt is still high, and so is unemployment. This is very worrying for our social cohesion, and can seriously dent our growth potential for some time to come, in particular since the younger generation is the worst hit.
We still have a fragmented financial system where viable businesses, especially SMEs in some countries, find it very hard to obtain financing. At the same time, we need to ensure adequate, safe and sustainable pensions, despite unfavourable demographic developments. Both businesses and consumers must also be able to access affordable energy, and we need to face the immense task of mitigating climate change – the green economy is both a challenge and an opportunity for Europe.
This leads us to the issue of investment. The Banking Union is important to make banks perform better and thus help sustainable growth. But in addition, we need to tap alternative sources of funding, for example from pension and insurance funds, to finance investment. We have successfully introduced project-bonds. We are working on improving securitisation markets. The new EU budget from 2014 to 2020 will expand the use of financial instruments. The recent ECB decisions go to the same direction to support lending for SMEs.
At the same time, high debt levels continue to require sound fiscal policy. Consolidation on the expenditure side remains important. This is no contradiction to growth: Designing efficient innovation systems, for example, will help sound public finances and innovation at the same time. Together with Maire Geoghegan-Quinn I will say more on this later this morning. Similarly, consolidation and social fairness are not in contradiction either: Further intensifying the fight against tax evasion is also a matter of social fairness and civic ethics.
Ladies and Gentlemen,
One of the lessons of the crisis is that when you face a financial crisis with the real risk of a bank run and thus a big risk to financial stability, you need to act forcefully to counter the panic. Tim Geithner refers to this as the ”Powell Doctrine” in his recent memoir, advocating the use of overwhelming force – a combination of fiscal policy, monetary policy, and financial firefighting. ”You should err on the side of doing too much than doing too little… it’s easier to arrest a financial panic than to clean up after an economic disaster.”
This is, by and large, valid also on the basis of the European experience. In the first place, the Maastricht EMU 1.0 was completely unprepared for the kind of financial crisis we experienced. Such crises do not seem to have been on the mental map of the original EMU designers, and when such a crisis nevertheless happened, there were no firefighting instruments to deal with it.
And once you design such stability mechanisms to avoid a financial panic and subsequent economic disaster, it is better to have the famous ”big bazooka” and shoot big time – indeed, overshoot. In retrospect, in the eurozone the years 2010-11 were spent in immediate firefighting, which became a learning experience and involved a lot of internal wrangling among the institutions and governments. Since 2012 the eurozone got its act together better, thanks to the creation of the permanent firewall, or European Stability Mechanism, and to the ECB’s LTRO operations and OMT decision.
In parallel to the firefighting, the architects did their job. The economic governance of the eurozone was profoundly reformed and reinforced, which now provides a solid framework for consistent consolidation of public finances and advancement of economic reforms. The legal framework of financial regulation and supervision has been overhauled, for which I want to congratulate my colleague Michel Barnier – as well as the Council and the Parliament for legislating it.
As a consequence, today’s EMU 2.0 is much smarter, sturdier and more persistent to economic and financial shocks than the original. Now the eurozone must focus on the implementation and use of the expanded and reinforced toolbox. That’s in fact what the Commission’s policy recommendations to the EU Member States last week are all about. I trust the Council will next week endorse them and thus help Europe to stay the course of economic reform, which is a necessary condition to boost stronger growth and job creation.
The good news is that Member States increasingly regard their economic policies as a matter of common concern – as it should be in a monetary union, and as it is also written in the Treaty. The independent policy advice from the Commission enables Member States to peer-review each other. It is not a one-way street, but a mutual process for all, based on partnership between the Commission and each Member State, where the ownership of reforms by the Member State concerned is of essence.
At the same time, the Member States retain ultimate responsibility for their budgetary policies and structural reforms – and thus ultimately for sustainable growth and job creation. The European Semester recommendations rest on the power of argument. The quality of analysis is the foundation of its credibility and legitimacy.
I would like to take this opportunity to recognise and thank all of my colleagues in DG ECFIN for their invaluable work and tireless dedication these past four years in redesigning and implementing Europe’s economic governance mechanisms, and in helping to pull Europe out of the crisis and set it on the road to recovery.
Ladies and Gentlemen,
There is no denying that the structural adjustment that Europe is undergoing still calls for difficult choices and strong political will. The responsibility and democratic accountability of our crisis resolution strategy rests on many shoulders and hands. I am very honoured that four of such strong pairs of hands have joined this panel today.
Let me say to Maria Luis Albuquerque that I have great admiration for the often difficult decisions that have had to be taken, and the efforts made by the Portuguese people, over the past three years in order turn around the economy. On the back of improved competitiveness, financial stability and sounder public finances, Portugal is today seeing a moderate economic recovery and falling unemployment. We are well aware that securing and building on these achievements continues to involve hard choices.
Latvia too has been through a painful adjustment process, one in which the voters backed the will and persistence of the government, as Valdis Dombrovskis can tell us. The fast-growing Baltic states show that change can be achieved rapidly. Latvia introduced the euro this year, and I am looking forward to the "Baltic full house" next year, when Lithuania joins as well. Finding an inclusive approach to euro area "outs" or "pre-ins" while taking possible further steps in integration by the "ins" will remain vital for the Union, and I am glad that we can benefit from Valdis' insights from both the sides.
In Jörg Asmussen, we have a strong and steady advocate of stability in Europe. I am not only thinking here only of respect for fiscal rules, which goes without saying. I am also thinking of Jörg’s role in the dramatic weekend of 9-10 May 2010, when Europe rapidly had to create structures that were not foreseen, the EFSF and the EFSM, for a situation that was not foreseen, either. Those decisions paved the way for the creation of the euro area’s permanent firewall for financial stability, the European Stability Mechanism.
It was also at this time that the Troika came into existence. By putting together the experience and expertise of the three institutions, the Troika model has proved to be a necessary institutional innovation – if not necessarily a loved one – for dealing with the challenges that the euro area and the programme countries have been facing. With its knowledge and professionalism, the IMF contributed crucially to fighting the crisis. I am glad that Reza Moghadam could join us and share his experience and insights with us today.
Ladies and Gentlemen,
Let me conclude. From firefighting to structural reform: that has been the changing focus of European economic policy over the past four years. Today, a wave of reforms is underway to remove long-standing obstacles to growth and employment.
We must build the kind of Europe that opens up chances for our citizens to innovate and create new businesses and jobs. A Europe that combines entrepreneurial drive and a stability culture. A Europe where citizens and businesses can benefit from a genuine single market. A Europe that guarantees civil rights in the digital age.
Green growth is a case in point. The EU is the global leader when it comes to fighting climate change. By being both resource-efficient and cost-efficient, we should turn it into a competitive advantage that delivers not only technological innovation but also growth and jobs.
The same goes for digital services and e-commerce. Businesses, especially SMEs, must be able to make their digital services available to all 500 million European consumers without artificial barriers. It is absurd that the movement of goods, people and capital in Europe has been ensured for decades already, while bits and megabytes still too often come to a halt when they commercially reach a national border.
Ladies and Gentlemen,
The anniversaries (1914, 1944, 1989) we are marking these days do remind us that the European Union is a great project for peace and prosperity – it is a project for a free Europe with democracy, the rule of law, the protection of citizen rights and a social market economy.
Twenty-five years ago, in 1989, the great transformation began to overcome the post war division of Europe. Look at Warsaw, at Riga, at Prague and Bucharest, how they have changed. The key lesson of the past 25 years is that opportunities can be opened up with a strong commitment to structural reforms, to entrepreneurial spirit, to social fairness, and to the respect for the rule of law.
I will not attempt to predict exactly how the Economic and Monetary Union will be further deepened. It will need time, leadership and wide legitimacy. But in the meantime, what we need is realistic reformism. We need sustained efforts both in the EU and in the member states to open up opportunities for growth and jobs, to the benefit of all our citizens. That’s what today’s Economic Forum is very much about.
Looking forward to a stimulating discussion. Thank you very much.