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José Manuel Durão Barroso
President of the European Commission
Keynote speech by President Barroso at the Brussels Economic Forum
Brussels Economic Forum
Brussels, 10 June 2014
Ladies and Gentlemen,
Let me welcome you to the 2014 edition of the Brussels Economic Forum. This is the fifteenth edition and I am again delighted to see the large participation and high-level interest.
It is once more a recognition of the fine and important work that DG ECFIN does throughout the year under the guidance of Vice-President Olli Rehn. This time – the latest Forum of this Commission mandate – it is particularly interesting to discuss what we have achieved over the last few years, and especially what challenges we will face in the years to come.
First of all, I would like to praise the work well done of Olli Rehn, my good friend Olli. As Vice-President of the Commission responsible for economic and financial affairs, he had to take very important decisions. And the fact that he was successful is clearly shown today by the fact that there are so many who want to succeed him in the next Commission. Indeed, it is not just about the next President of the Commission. I can tell you that talks are going on also about who could be the next Olli Rehn.
Ladies and gentlemen,
We certainly faced a tremendous economic and financial challenge in the last years, and it is fair to say that we have broadly tackled them successfully. The major elements of our crisis response are today in place and the results are now proving them right, even if we all agree that a lot still remains to be done. But let's not forget also where we come from: without a doubt, the biggest financial and economic crisis since the beginning of European integration, and the first we had to face especially in the euro area.
Let me highlight some of the measures or the initiatives taken by the European Commission. Some of them, people tend to forget.
- First of all, immediately after the crisis, and inscribed in the global macro-economic response advocated by the G20, was the Economic Recovery Plan which has proposed an expansion of some 1.5% of GDP. We have made it, clearly, Timely, Targeted and Temporary. These famous 3 Ts! I have to tell that not all the governments understood it as targeted and temporary, but there was, as part of the comprehensive response of the G20, a first answer in term of expansion. It was also a way for the European institutions to avoid what at that moment was a very clear temptation of some governments: simply to put in question the Stability and Growth Pact to go alone. And that is why, trying to put some order in the response we, together with the Member States, agreed on this plan. There was in fact a tendency, as I saw, of many to simply scrap our fiscal rules.
- Most importantly, we have strengthened our system of economic governance during these years. The crisis has shown that the system was not sufficiently credible. And now, we have more powerful and more coherent guidance of Member States fiscal and macro-economic policies, namely, which is an important innovation, the establishment of the Macroeconomic Imbalances Procedure. There was also a set of other reforms that were not so much noticed but that I would like to highlight here. For instance, the powers of the Commissioner in charge of economic and monetary affairs within the Commission, precisely to give him more independence, to avoid the politicisation of the decision, as President of the Commission, and under my competences, have decided to give this Commissioner, Olli Rehn, a new role in the system, not only nominated Vice-President for the Euro but also making a clear distinction. People sometimes speak in terms of Chinese walls, of the work done by ECFIN, that Commissioner and the rest of the Commission. This is to dispel the unwarranted criticism that the Commission is not independent. It was when we proposed the famous 6-pack legislative measures that these internal rules were put in place. And in fact, today you have a system where the Commissioner responsible presents the proposals. Naturally, at the end, the decisions are taken by the Commission, that also has a political role in our system, as you know, but for the College to depart from the responsible Commissioner's proposals, in this case Olli Rehn, the motives must be very strong, not country-specific and need to have the consent of the President. I wonder how many institutions have such an independent decision making process!
- Afterwards of course, we also had to be clear in our competence on the issue of correcting the fiscal deficit. We secured a turnaround in budgetary positions – under extremely difficult circumstances – so that the number of countries in the Excessive Deficit Procedure has now dropped from 24 in 2011 to 11 now in 2014. You see how important this effort was;
- Very importantly, we have deeply reformed our financial system. We have now in place an updated and unified rulebook for the financial sector, with clear oversight and coordination of bank resolution when and where necessary. In the framework of G20, we can say that we are by far the constituency that has done more in terms of financial regulation at global level. We have in fact more than 30 proposals. Some of them unthinkable. It would be considered unthinkable some years ago, to give the European Central Bank the role of direct supervision of our banks. And it happened. And it would be, of course, unthinkable to give some powers that will be given now to the European Commission, putting it clearly at the centre of the European semester of European Economic governance including, by the way, with the power to check ex ante the national budgets. I am now highlighting this point because in the analysis that we see very often today, not only in economic terms but in the political and institutional analysis of the latest developments, people tend to forget that, that indeed in the last years this was the biggest transfers of powers from the national level to the European level since the creation of the euro.
- We have also proposed the creation of a permanent financial mechanism to assist the Euro area Member States in distress. The Commission's proposal was adopted on the morning of Sunday 8 May 2010, in order to allow the Ecofin Council to discuss on that same afternoon. As you probably remember, the decision was taken as a matter of urgency. The Commission proposal was the embryo to the European Stability Mechanism which was finally established in the fall of last year. May I personnaly tell you that I remember distinctively that 7-8 May week-end, it was indeed one of the positive points of the EU response to the sovereign debt crisis. I recall, inter alia, that the decisions taken by the ECOFIN Council allowed the ECB to start, the following day, with its Secondary Market Purchase (SMP) programme. And this is a pattern that we will be seeing in the future: the systemic decisions taken, even if very often they appeared in an uncoordinated manner.
- We have played to the full as Commission, and we are still playing, our role in the design and monitoring of the programmes of financial assistance, in particular those financed by the EFSF and the EFSM. And as you know, Ireland and Portugal exited successfully from the program. I take this opportunity to congratulate very sincerely Maria Luís Albuquerque, the Finance Minister of Portugal, whom together with the Prime Minister has been taken so important and courageous decisions, which precisely allowed Portugal to exit the program. And of course Spain has also exited the program for its financial sector.
- We have presented our vision for the completion of EMU in the Commission's Blueprint for a Deep and Genuine Economic and Monetary Union. This, also, in conjunction with my own contribution to the proposals made by the President of the European Council in cooperation with myself, with the President of the Eurogroup and the President of the European Central Bank. At the light of our Blueprint, we, afterwards, presented the proposals for the Banking Union. At that time, it was also not evident. You remember that several people, including in the European system of decisions, were opposing the very idea of a Banking Union. The fact that in such short time it was possible to agree on a Single Supervisory Mechanism and a Single Resolution Mechanism, I think shows that, in spite all of the twists and turns of the European decision-making process, it is in fact a system that has shown its resilience, because of its independence and because, at the end, of the political determination of leaders.
I will not know elaborate on other pieces of our contribution, speaking now on behalf of the Commission to the response to the crisis, namely of course, the very important decisions that were possible following our proposals in terms of investment. We have today a program for investment. People tend to forget that. When I see everyday people asking for a new programme of investment I think they tend to forget that we have a 1 trillion euros programme for investment in the seven years. It is the Multi Financial framework.
I hope that this time the governments will implement them, unlike before not making full use of it, for instance with lower absorption capacity of many of our Member States and that they can focus this investment in the areas where it can help better competitiveness and overall productivity of the European Union. We have also introduced in this MFF some important new features, for instance Connecting Europe, allowing for investment in the areas that matter very directly to economic growth for instance infrastructure on energy and transports, badly needed investment at European level. And I don't need to recall to you that in some of this our Member States the investment coming from the European budget is more than 60%, sometimes it reaches 85% of the total public investments in those countries. So to consider this irrelevant I think it is not appropriate.
Finally, I could speak to you also of the many initiatives the Commission took in the field of employment for the young, namely the Youth Guarantee. That, together with Youth Employment initiatives inserted in this MFF, is part of our targeted response for what I believe is the most important problem we have today in Europe, unemployment, especially of course, the unemployment of the young.
So, in all these developments I am proud to say that the European Commission participated actively. We were either at the original response or we were together working with our other institutions and with our Member States playing loyally and efficiently our institutional role. We have always said that Europe will come out of the crisis more robust and more competitive than it was before, and I believe you can say that today.
Europe has still very important problems to solve. But I think today it is, let's say, conventional wisdom in Europe that countries need to reform, even if there are different approaches and different levels of commitment to reform, and that now all Member States are, with some differences we have to say, working for a more competitive economy that makes them fitter for the globalisation age.
The positive results of this EU-wide response are becoming evident: Growth is returning. Employment is set to rise from this year onwards, albeit slowly, since there is, as you know, usually a time lag before growth translates into jobs. Financial markets have stabilised. And public finances are today much healthier.
But the recovery is fragile and uneven, and we are not yet where we need to be, especially given, what I have already mentioned, the extremely high levels, in some cases unacceptably high-level rates of unemployment. More effort will be required to lift Europe firmly out of the crisis and get back to solid, sustainable growth.
Our strategy of combining differentiated and growth-friendly fiscal consolidation with structural reforms and targeted investment remains valid. Let me say a few words on investment. Investment has had a dismal performance in the EU over the last years. This is true also about public investment, which is in any case just a small fraction of total investment. If this trend is not reversed, then it is the growth potential of Europe which will decrease. We cannot allow this to happen, in particular because our populations are ageing. So we have to address seriously this issue of investments.
We must analyse carefully why investment has not performed well. Especially as regards private investment. Our analysis shows that of course there is not a single explanation. The Commission's In Depth Reviews (IDRs) produced in the context of the macroeconomic imbalances procedure threw some light into this. In some case the demand expectations are low. In other cases the cost of labour is too high, damaging profitability. In others, private entrepreneurs claim that the public capital stock, mainly roads, is in derelic. Finally, in some cases the cost of capital is too high, in particular when firms are faced with the fragmented credit market in the euro area.
And what about the public (physical) capital stock? Of course there is also a role for public investment, but here the deficit and debt constraints must be respected. Debt levels are still too high in some Member States. If you have to borrow to invest then public debt will naturally increase.
This does not mean that the human capital stock must be disregarded. On the contrary. Debt reduction should not come at the expense of investment in education, research and innovation.
We must also address the issue of fairness. The necessary adjustments some Member States had to go through led to increase in unemployment, in particular among the young, and, as you know, social disparities. I have constantly highlighted the problem of the limits of the policy if we don't take into proper consideration the social factor. When we design a policy it's important to look also at the social and political conditions in which that policy has to be implemented.
And I believe growth is the only way to solve these issues in a sustained way. The EU and the Member States should however, under the exiting constraints, do their best to bring about a more just society. For example shifting taxation away from labour to more recurrent property, consumption and environmental taxes. Of course this has to be seen in each country's context. There isn't, as you know, a "one size fits all" approach. Strengthening tax compliance and fighting fraud will also bring in much-needed revenues. In that matter there were, in some of our countries, spectacular results in the last years - but not in all, I have to say.
Finally the financial fragmentation in the EMU must be brought to an end. In this respect I wholeheartedly welcome the bold measures announced by the ECB last week. Naturally, cleaning up any remaining black holes in the banking sector is also necessary. And the ongoing asset quality review, being carried out by the ECB, gives us full reassurance on this issue.
Ladies and gentleman,
I believe the fundamental challenge Europe is faced with is primarily political: How do we keep up the momentum for reform in the European Union now that the most immediate threat of the crisis no longer hangs over our heads? How do we bring economic growth to an higher path? There are indeed some risks. Because of lack of determination for continued reforms and also by political instability we put at risk some of the achievements and namely what still needs to be done. So I would say, using economic analysis, that the downside risks are mainly political.
That is the background for the country-specific recommendations the Commission has presented last week. Now in their fourth year, this dialogue of economic governance is the way to help guide the European Union firmly out of the crisis and back to stronger growth. This dialogue between the Commission and the Member States, and notably also among the Member States themselves, has become a real focal point in our economic calendar.
Let me tell you, and I will give you my personal experience, the way this dialogue has evolved is indeed very positive. Before we have introduced the European Semester, the European governance system, I don't remember – and I've been to the European Council for many years, not only for the last ten years, but already in the early 90s, in another capacity – a true discussion on economic policy in the European Council in terms of the national policies.
There was a discussion in general about where Europe can go. I remember very well when my distinct predecessor, Jacques Delors, presented the plan for competitiveness, growth and jobs. We were 11 at the time, comparing us with other parts of the world, the United States, Japan, and at that time the South East Asia countries, we didn't speak yet about China, it was quite clear and quite interesting comparing our discussions in 1992, 1993, 1994 or 1995, to how they are today. But what is new today and completely different from the past: the European Council discusses what is going on in some countries. We have discussed for our country-specific recommendations between the Prime ministers and the Commission what is Luxembourg doing, what is Malta doing, what is Belgium doing, for example.
I insist on this point because the critical issue in the euro area, at least in the euro area but hopefully for all of the European Union, is the ownership of these reforms. Is that we avoid the idea that is so common today – and that was in fact one of the problems of the latest elections – that these measures are measures imposed by Brussels, which is simply not true. The European Commission makes proposals but the decisions taken are taken collectively, in the Eurogroup and in the Ecofin. Most of them, I would say all the important ones, were taken unanimously. Not by unanimity less one, but unanimously. So it's very important that afterwards those who take the decisions assume the responsibility of those decisions and don't go back to their countries pretending that it's either the European Commission or the other European institutions that are imposing on them what they have not agreed, because this is simply not true. Country-specific recommendations are proposed by the Commission as a draft document that the Council may or not adopt afterwards.
But what was new in this process? I would like to highlight that once again: it's the fact that it was not just a dialogue between, let's say, our DG ECFIN and their counterparts in the capitals. It was a dialogue very much developed by the Commissioner responsible and his colleagues, the finance ministers, and even at the end by the European Council. And the European Council, in all cases, has broadly approved our proposals.
This is important for the future. So that in the next cycle of the European institutions and the European Parliament in the next five years, we can build on what was achieved and deepen this dialogue, so that there is a real economic governance in the European Union. Before it was not at all the case, as we have seen, and today it's still work in the making. Let's be honest, we are not yet where we want to be. But if you look at the way these governance issues in economic terms are now made at European level, it's a paradigm shift. I can assure you, based on direct experience at least in the European Council. And, of course, other distinguished members of this panel, and others, can give you probably some more interesting elements of what happened in the Eurogroup, what happened in other levels of decisions.
With these recommendations – and I'm now focusing on the last ones -, the Commission is pointing the way forward. We believe that Member States must now play their part in seeing these reforms through, even if we know that sometimes they are politically unpopular. There are reforms to do at national level, and there are decisions we have to take and implement at European level. The Member States which share the common currency have a responsibility to reflect in their national policies the effects which they will have on the rest of the euro area. And this is now, I would say, broadly accepted.
Only by working together under the European Semester - this collective exercise of dialogue between the European Union institutions and the Member States - can we deliver a stronger recovery. Citizens want results, they want growth and jobs, and we owe it to them to step up our efforts. So now that many people are trying to engage in theological discussions about what went wrong and what we can do right about European integration, I have a very simple answer: citizens want results. They want to see employment going up, they want to see growth going up. If this happens – of course we can address other issues that are also important – I can assure that the level of satisfaction with the European and national institutions will increase. No doubt about it.
Another element which makes this moment so interesting is the ECB decision of last week, which is a very powerful contribution of monetary policy to the efforts for growth and therefore for job creation. The ECB bold action is also a strong recognition of the work that has been done throughout the European Union in other fields, especially on fiscal consolidation and economic reform.
This is often underestimated: the progress in fiscal consolidation, structural reforms and institutional guarantees not only have merit on themselves but also create the conditions for the ECB to set its policy stance. I want to make this point clear, and I see here people that know well how the decisions in the European Central Bank are taken. In full respect of the independence of the ECB, the reality is that at European level, or euro area level, our decision making is by definition a system. I mean with this that we should not look at decisions taken as the decisions taken by there by the Commission, there by the ECB, there by the other institutions or by the Member States, namely in the Eurogroup, or, for instance in the programmes, by the IMF. It's a system of decisions. Decisions are by definition systemic. And the momentum at different levels and over different policy areas goes hand in hand with full respect of the independence of each actor. This is important to highlight as a lesson for the future.
Ladies and gentlemen,
The conference today will focus on a number of issues to improve our understanding of the way to deepen the recovery. The conference comes at a timely moment because it is necessary to examine the challenges ahead of us in the next phase of European integration from the point of view of first, the politics needed, second the policies needed and only third, the institutions or constitutions needed to achieve the first two.
In that order.
Because all too often, European debates on policies are waged merely in institutional or constitutional terms. Instead of making decisions, we discuss how to make decisions and who gets to make them. This way, we risk putting the cart before the horse.
The first session of this Forum will look at which lessons can be learned from the crisis response for the way forward.
As I made clear in my Humboldt Lecture last month in Berlin, we need to focus on the political context and climate for economic reform. The financial and economic crisis and the pressure of globalisation make a new phase of European integration necessary, at least for the euro area. But at the same time the political pressure – as proved by some of the outcomes of the European elections - make reform more challenging.
Three gaps need to be addressed to make Europe's transformation successful:
- The governance gap, since Member States on their own no longer have what it takes to deliver what citizens need while the European institutions lack part of the equipment to do so.
- The legitimacy gap, because citizens perceive that decisions are taken at a level too distant from them.
- And the expectations gap, because people often expect more than the political system can deliver.
These gaps need to be addressed, but not necessarily only at European level. There is a need for a debate to define the communality of what we want, and that will determine where Europe can play a role and where the Member States can take the lead. Cooperation between the different levels of decision-making at European level has become even more crucial.
Adapting the European Union to remedy these gaps will not happen through revolution but through permanent reform, in which it is important to maintain certain principles. One core principle is the need to reconcile further integration of the euro area with the integrity of the internal market and our Union as a whole. I am convinced that the current Treaties and the Community method offer the best guarantees for that balancing act.
But only if we get the politics of the European Union sorted out first.
Based on the identified gaps and principles, and based on my experience of the last 10 years, and not only that experience, I have proposed a number of key policy fields: the further deepening of Economic and Monetary Union, in line with the Commission’s blueprint; more effective external representation of the Union; strengthening of Union values and citizenship; a better regulatory division of labour; and the need to further perfect our political union.
I make that point about political union here in the seminar on economic policy because indeed at the end it is a political issue that is at stake, namely for the euro area. As I've said very often, during the most acute moments of the crisis, the questions we had to answer, in the G20, from the President of the United States, the President of China, the President of Brazil or the President of Russia, was not so much about the deficit of this or that country, but about the political resolve and the institutions resolve to have a real common currency. And that was the question mark they were putting themselves too.
That's why it is important now, even when the apparent pressure of the markets is not so important, that while taking the decisions step by step we make clear there is an horizon for the deepening of our political union, at least in the euro area. If not, we are not risk-free from further turbulence when there is a different mood in the markets. That's why I insist on the need to make progress, not only the banking union decisive process that we have already, but also going further in the fiscal union, in the economic union, and in some aspects of perfecting our political union.
So I see that you have a very ambitious programme today. I will not be all day with you, but I'm sure your answers are going to be very stimulating.
With all this on our hands, this is an exciting time for European politics and policy making.
We have started a very ambitious and very necessary round of reforms. We have seen that they are the right way forward. We know that we cannot allow the momentum to slip. And that we should keep the reform drive with great determination.
You are an important part of that effort, so this is an excellent place to start the debate.
Thank you very much and I wish you a very successful seminar.