The prospects for the European economy and the challenges for economic policy
Commissioner Olli Rehn
Paasikivi Society, Mikkeli, Finland, 18 September 2011
Ladies and gentlemen, dear friends,
Thank you for inviting me to the Paasikivi Society today. I will be speaking to you about the European economy and its current state.
Much as I would like to begin with some good news, I am afraid that as far as the economy is concerned, there is no good news to give on this occasion.
On Thursday, the Commission published its economic forecast, in which we warned of a deterioration in the outlook for the European economy.
Even so, we still forecast 1.6 per cent growth in the euro zone for the whole year, exactly the same as in the spring, because the first half of the current year exceeded our earlier expectations.
According to our forecast, the national product of the 17 States comprising the euro zone will grow by only 0.1 per cent between October and December.
Towards the end of the year the rate of economic growth will stagnate almost to zero, but on current data we do not forecast a new downturn.
A harsh verdict, but unfortunately this was pretty much to be expected. History shows that recovery from a financial crisis is generally a slow and bumpy ride.
However, recent developments have been marked by one particularly worrying feature: the turmoil the debt crisis has caused on the financial markets has started to weaken consumer and business confidence in the economy. It also makes bank funding more difficult and reduces lending. Together, these effects have started to erode growth and employment in the real economy. This goes a long way towards explaining why economic growth seems to be stagnating at the end of the year, and why that threatens to continue next year.
So what conclusion can we draw from this about where the focus of European economic policy should lie? To my mind it is clear that everyone who is truly committed to economic growth and employment should now concentrate on using all available means to calm the turmoil on the markets and thus strengthen confidence in the economy.
This was the objective of the decisions taken together by the euro zone Member States in July. They now need to be implemented in full.
- Greece needs to make decisions quickly to bring its budget deficit under control and to implement reforms that will support growth. Greece has until the end of September to do so.
- Other countries experiencing market pressures, such as Italy and Spain, must resolutely continue to balance public finances. This task is well under way.
- Reform of the European Stability Fund should be completed to ensure that it has the necessary flexibility and the resources required to counteract market speculation and market pressure. This reform will enter into force in early October.
- There is a need to reform the regulations of the Economic Union and to impose tighter sanctions. This was finally agreed on at the ministerial meeting on Friday in Wroclaw. The European Parliament will vote on the legislative package before the end of September. I am confident that this important reform will enter into force by the beginning of next year at the latest.
Much has been done, much is being done, but much remains to be done. The ministerial meeting in Poland did not lead to a breakthrough, although it was not a complete failure either. While we still struggle to make these decisions, the role of the European Central Bank remains crucial in calming the markets and providing liquidity.
When looking at the current situation, we should bear in mind that the economic crisis we are experiencing is the most challenging test the European economy has faced in peacetime since the Great Depression of the 1930s. Managing it and mitigating its consequences has required exceptional measures in both the Member States and the EU institutions, and will continue to do so in the future.
I would like to return to why the euro countries have taken these exceptional actions together as a joint effort.
In September 2008, the American investment bank Lehman Brothers collapsed. As a result of this, the international financial system was genuinely on the verge of collapse during that autumn. The general view in Finland at the time was that the crisis didn’t concern us. What happened next?
The crisis, which supposedly did not concern Finland, ultimately lost Finland around 8 per cent of its national product, in other words 15 billion euros in the year 2009 alone.
This resulted in the deterioration in public finances of more than 12 billion euros, which is a permanent loss. According to estimates by the Ministry of Finance, the financial crisis caused by Lehman led to a five-year financial loss for Finnish public finances. In other words, it cost the taxpayer more than 40 billion euros.
These losses following the downturn of the world economy are major compared to the commitments that Finland has made in giving loans to Greece and the other countries. Finland has so far lent Greece around 800 million euros and guaranteed a loan commitment including the guarantees totalling around 1.5 billion euros.
The economic downturn in Europe caused by the Lehman bank collapse that I mentioned previously is a good example of how today’s global economy does not respect geographical or political boundaries. This means that if the EU or euro countries were to abandon Greece now, the problems would not be confined to Greece alone.
If Greece were left to its fate, it would rapidly run out of money and the national banking system would collapse almost immediately. The government would not be able to meet its payment obligations, but would be forced to lay off more officials, reduce minimum wages and cut pensions on a completely different scale than it has done up to now.
Withdrawing from or abandoning the euro project because of Greek bankruptcy would not be a preferable option either. This would be immediately provoke a bank run and capital flight, bank balances would be wiped out, access to funding would dry up, and the national economy would be paralysed. The deep recession we have now would turn into an even deeper slump.
And these likely consequences of a Greek bankruptcy are 'only' the economic effects – the social and political impact would be massive and long-lasting.
I cannot see how such a scenario would be compatible with support for the rights of the marginalised or the poor, nor how Europeans could think of themselves as a family ever again. I cannot avoid mentioning the word ‘solidarity’ here. I know that it is almost a swear word in Finland nowadays, but that is not the Finland I knew, and not the Finland I have always been proud to be from.
When we talk about society being destroyed by crises, we should not forget the people who always end up suffering the most: children, young people, the poor and the disadvantaged. There was an article in Friday’s Helsingin Sanomat that mentioned how even now, some Greek children go to school with no school books or a regular timetable. Universities are occupied, teachers and professors have been dismissed. No European country can afford to leave future generations without an education, least of all Greece. It is the surest way of lengthening the shadow of this crisis for decades to come.
Even now in Greece trade unions strike almost daily and young people and skilled Greeks are seeking work in other EU countries because the situation in their own country is threatening to get out of hand. What would it be like if Greece were in a state of utter chaos? A wave of emigrants fleeing Greece and riots in the streets would be practically inevitable.
With this in mind, the comments - which became public last week - made by the chairman of the Finnish Parliament’s Administration Committee concerning the return of the military junta to the streets of Greece show a complete lack of judgement and a disregard for Greece's troubled past. For Greeks, the military junta is part of a real, painful recent history. The junta was only toppled in 1974. Six years later, Greece joined the European Union.
I know this is not a happy picture, but I am trying not to be all doom and gloom. I just wish to make the point that leaving Greece to its fate will have consequences that have to be borne in mind. There are no easy options, and there never have been. For my part, I am trying to ensure that Greece’s problems do not under any circumstances destroy the opportunities for Europe’s economic recovery.
The impact on other euro zone countries would also be significant. Many banks, insurance companies and pension funds in other EU countries own capital in Greece that would be wiped out by a Greek bankruptcy. This fuels the uncertainty and lack of trust which is currently reflected in the problems of lending between European banks, making it harder for businesses to find funding and for households to obtain loans, thereby threatening the economic growth and recovery in the employment market that is still in the making.
Given that economic growth has already slowed down and confidence in the sustainability of the public finances of Member States that are larger than Greece is waning, Europe is in such a fragile situation that it really does not need the kind of shock that would come from an uncontrolled Greek bankruptcy.
In the light of the financial figures of the last weeks, it will take longer than we expected in the spring to get Europe’s economy back on its feet after the financial crisis. But I am convinced that Europe can find its way out of the crisis. In a short period of time, we have made significant changes in how European economic policy is formed now and in the future. The task is still under way, but we are getting there.
European economic union calls for closer economic policy cooperation to achieve balanced public finances and put economic growth on a sustainable footing. In other words, no part of Europe can continue living beyond its means. Sustainable growth and jobs are not created by a casino economy, but by keeping the economy stable and making sure that work and entrepreneurship always pay off.
During the half-century it has existed, the European Union has shown perseverance in coping with all kind of crisis. Despite its current difficulties, Europe is still prosperous and still the world's largest integrated economic area. Europe and European values are also an example to the nations living south of the Mediterranean and striving for democracy.
The glue holding Europe together has been mutual solidarity and a commitment to common European values, that is to say human dignity and democracy. All Europeans, not least we Finns, share a common interest in maintaining peace and stability by mutual cooperation.
These principles have been put to the test recently, but by working together we can find a solution to the crisis and move towards a brighter future.