SPEECH/09/2

Joaquín Almunia

European Commissioner for Economic and Monetary Policy

What moves Europe? Global crisis and the euro

HN Club Discussion Forum
Bratislava, 8 January 2009

Ladies and Gentlemen,

It is a great pleasure for me to join you in Bratislava during this historic moment for your country. I'd like to begin by congratulating Slovakia for its remarkable achievement.

Your commitment to a comprehensive economic reform process has allowed Slovakia to join the euro less than five years after accession to the EU. And I am pleased to report that the changeover is progressing smoothly and swiftly – all those who have been involved in careful preparations for this moment over the last months must be commended for a job well done.

This is now the fourth enlargement of the euro area and Slovakia's entry brings us to a total of 16 members and around 329 million citizens that share our single currency. Slovakia can feel proud to be part of the world's largest market and holder of a global currency that rivals the US dollar as a medium for international trade and finance.

Both consumers and businesses will benefit from the euro's stability-oriented policy framework, enhanced competition, cheaper borrowing and lower transaction costs. Indeed, Slovakia has already seen the advantages of the single currency. The markets' anticipation of euro adoption has acted as an important stabiliser during the onset of the current financial crisis.

Now all attention must be focused ahead. First, to make sure that Slovakia successfully completes the changeover to the new currency and then to smoothly integrate into the euro area.

Special efforts will be needed because this country joins the euro area at a truly exceptional time for the world economy. Looking forward to the new year ahead, we face substantial challenges.

But before I come to those, let me focus on another piece of good news. Because this is, in fact, a double celebration. Not only are we marking Slovakia's euro adoption, we are also celebrating the tenth anniversary of our single currency.

10 successful years of the euro

It is a full decade since the euro's founding members launched the euro on 1st January 1999. Sceptics argued a European Economic and Monetary Union could not be done, that it would not last, that it would lead to economic and political disaster.

Those critics could not have been more wrong. The euro has proved a major success, and no more so than in these difficult times.

Over the last 10 years the euro has emerged a strong and stable global currency. By combining a sound macroeconomic policy framework with an independent central bank, EMU has brought multiple economic benefits for its members: historically low inflation and interest rates, a boost to trade and investment, 16 million new jobs.

The euro has also anchored stability in the euro area, a fact which has never been more in evidence than in the last few months.

Indeed, the single currency is protecting its members from the worst of the economic and financial crises in several important ways:

First, the euro has eliminated the possibility of exchange-rate turbulence and speculative currency attacks that its members could have expected in the current turmoil.

Second, the euro area benefits from a European Central Bank whose swift actions to ease liquidity constraints and coordinate monetary policy have recently helped to avert a financial meltdown. Such rapid, coordinated steps by 16 national central banks would have been unthinkable.

Third, the EMU’s stability-oriented macroeconomic framework has better prepared euro-area countries for the downturn in the economy. The fiscal rules of the Stability and Growth Pact helped the euro area achieve its soundest budgetary position in 2007. This meant that many European Union countries have entered the crisis with greater room for manoeuvre.

All in all, the euro is proving a major asset in these difficult times. Slovakia is now ready to profit from these advantages. But it also has to bear in mind that it joins the euro area just at the moment when EMU faces its toughest test in its short history.

The economic and financial crisis: Europe's response

We will remember 2008 largely for the major economic and financial crisis, the scale and speed of which was at times almost overwhelming. And 2009 will not bring much respite. We will have to deal with huge challenges as we manage the fallout from these crises.

The economic situation is deteriorating very quickly. Global growth has slowed dramatically and today the US, Japan and the euro area are all in recession. Worst still, the slowdown is also spreading to emerging economies.

The latest GDP data for the third quarter of 2008 showed that growth contracted by 0.2% in both the euro area and the EU. We will release a new forecast on the 19th January to provide a clearer picture of the economic prospects for the EU in 2009 and 2010. I cannot give any figures today as the work is not yet finalised. However, I can say that the outlook for the year ahead currently looks rather bleak.

Demand for exports is falling as the world experiences a global downturn.

Across the board, confidence indicators are reaching historically low levels.

And fragile conditions in the financial sector are continuing to impact the flow of credit to households and businesses.

However, we are not powerless in the face of this crisis. Europe is taking decisive action to break the spiral of economic contraction and job cuts.

Macroeconomic policy response

The European Central Bank, together with central banks around the world, has made aggressive interest rates amounting 175 basis points since October.

But monetary policy alone cannot provide the full stimulus needed by the European economy. Macroeconomic policies also need to support demand.

Realising this, the Commission reacted quickly in November last year. We proposed an ambitious economic recovery plan that brings together a fiscal stimulus to boost demand in the short term and a program of 'smart' investments to strengthen growth prospects in the medium and longer run.

This plan was endorsed by all 27 Member States at the European Council in December. It was a clear recognition that only by coordinating our response can Europe avoid a deep and long lasting recession.

Member States have now agreed to employ a coordinated budgetary stimulus amounting to 1.5% of GDP. Of this figure, 1.2% is to be financed at the Member State level, but naturally each country will contribute depending on its specific circumstances.

It is crucial for their effectiveness that these plans are well designed: timely so as to counter the downturn; targeted for maximum effect on demand; and temporary to avoid the need for damaging permanent tax increases.

Indeed, measures should not compromise the long term sustainability of public finances. Plans must be anchored within the rules Stability and Growth Pact while drawing on the flexibility introduced in 2005. This is crucial to avoid a huge burden being placed on future generations.

Now that we have reached a consensus on these principles, our main task is to translate this political agreement into concrete action.

We are making good progress. Member States have so far adopted discretionary measures totaling around 0.9% of GDP in 2009 out of the stated goal of 1.2% and without taking into account the new German plan disclosed this week. Given the short time since the onset of the crisis this is a remarkable amount.

We must also advance with our agenda of investments and structural reforms that will increase our competitiveness and growth potential. The downturn is not an excuse to fall behind with our reform agenda – rather it makes it imperative that we accelerate efforts to improve Europe's ability to compete globally.

Hence we are working on providing better access to finance by improving the framework conditions for future investments; we are supporting business and entrepreneurship by reducing administrative burdens; and we will sharpen Europe's competitiveness by speeding up innovation.

Priorities for financial sector reform

Also high on the agenda in 2009 is to further our reform of the EU and international financial sector. When I attended the G20 meeting in Washington last November with President Barroso, there was unanimous agreement that the global community needed to act together and act swiftly to ensure that a crisis of this magnitude cannot happen again.

Europe, for its part, has already made huge progress. For over a year the Commission has been working hard on a package of measures to restore confidence and reinforce stability in EU financial markets. We have taken steps to protect bank depositors, regulate the activities of credit rating agencies and strengthen rules on capital requirements.

Our priority now is to ensure these proposals are adopted and implemented without delay. To look closer at improving transparency for derivatives and hedge funds and to finally tackle the issue of cross border supervision in Europe, an area where progress is now urgently overdue.

In this respect, we are looking forward to hearing soon the first report of the High Level Group chaired by Jacques de Larosière. The group will make concrete proposals to strengthen European supervisory arrangements and resolve the mismatch between the EU's largely pan-European financial markets but national based supervision. It will also propose means of reinforcing cooperation between European supervisors and their international counterparts.

International coordination is essential to building a new financial architecture and anchoring stability in the global financial system. November's G20 meeting has now set this process in motion. The summit launched a detailed action plan on which numerous working groups are now making good progress.

The follow up meeting on 2nd April that will take place with the participation of President Obama, will be a chance to take stock of how far we have come and to build on this progress. We need to use the once in a lifetime opportunity that this crisis provides to make our financial systems more transparent and secure and to push for a more effective multi-lateral surveillance system for the global economy.

Driving forward our energy and climate change agenda

Indeed, we should look on this crisis as a chance to galvanise action in other areas, particularly towards our long term objective of fighting climate change and using cleaner energies.

The European Council's endorsement in December of the Commission's climate change package has reinforced Europe's place as world leader in this field. Our commitment to meet our renewable energy and efficiency targets by 2020 has not been shaken by events in the economy. On the contrary, as our recovery plan makes clear, action on climate change must be part of the solution to the economic and financial crisis.

This is why we are making way for new investments in energy infrastructure and in cleaner technologies that will create jobs and growth and combat global warming. Pursuing these goals in tandem is central to achieving both economic and environmental sustainability.

On the other hand, in the context of the current dispute on gas provision between Russia and Ukraine and its consequences on gas delivery to Central Europe, energy efficiency, together with sources diversification, is certainly one of the main elements for a stable solution in the future.

Conclusion

Ladies and gentlemen, let me conclude.

This crisis has shaken the foundations of the global economic and financial system. We expect the changes it brings to be deep and long lasting. As the world adjusts to a new reality in 2009, the EU is working hard to ensure that these changes are for the better. We are taking every measure to cushion the economic and financial shocks, to prepare for the challenges of globalisation and to ensure the sustainability of our economic system for future generations.

Slovakia's adoption of the euro now brings your country right to the heart of the EU. I have already mentioned today the many benefits of euro membership. But I must stress that it brings new responsibilities too. Nevertheless, I have every confidence that Slovakia will build on its current success and will prove a major asset for the euro area on the difficult road ahead.