Opening address by Olli Rehn, Vice President for Economic and Monetary Affairs and the Euro
Olli Rehn sounded a hopeful, if sober, message in his address opening the Brussels Economic Forum. Rehn, who is Vice President for Economic and Monetary Affairs and the Euro, said: “We are still in very troubled waters, despite the fact that the EU has taken unprecedented action to safeguard fiscal stability. The policies of the EU have helped to contain the crisis but have not yet tamed it.”
Vice President Rehn said that “there are no easy answers” to how Europe can overcome the intertwined banking and sovereign debt crises, and warned against “false debates”. Europe will not be able to overcome its problems by focusing only on the joint issuance of public debt without simultaneously focusing on fiscal stability, he claimed.
Another false debate, according to Rehn, is between fiscal consolidation and growth. Europe needs to combine smart consolidation with structural reforms. “The pact is not stupid but facilitates smart consolidation,” said Rehn, referring to the Stability and Growth Pact (SGP). The SGP allows for differentiation across Member States depending upon their fiscal space. Rehn cited several instances in which the Commission proposes or may propose an easing of fiscal measures imposed on certain Member States. In view of progress with fiscal consolidation made by Bulgaria and Germany, for example, the Commission has decided to lift the Excessive Deficit Procedure and Hungary may see a lifting of the suspension of its cohesion funds. The Commission may even propose giving Spain a one-year extension to the deadline for correctingits fiscal deficit, subject to certain conditions. Sounding an optimistic note, Rehn said that deficits in the EU should fall below 3% of GDP next year and debt would reach around 90% of GDP in 2013 and thereafter decline.
Despite the slightly brighter long-term outlook for Europe as a whole, wide divergences across countries persist. “The economic contraction seems mild now but the average cannot hide the fact that growth is uneven,” said Rehn. He cited widely diverging unemployment rates across Europe and high youth unemployment in certain countries, as well as on-going turbulence in bond markets.
Diverging rates of growth and employment are just indicators of more fundamental issues, however. Rehn noted that large current account imbalances had been building up until 2008 and were not sustainable. “An orderly unwinding of intra-EU imbalances is crucial for sustainable growth,” he said. Referring to recommendations made under the recent European Semester, Rehn added that the urgency of correcting imbalances is greater in deficit countries, which need to shift to economies based more on tradable goods. At the same time, surplus countries need to remove unnecessary restraints on domestic demand and the non-tradable sectors, said Rehn.
Vice-President Rehn concluded by quoting two statements by US economist Paul Krugman. In a recent editorial, Krugman said that ironically the Euro had engendered the shock that is destroying it. In 1990, however, Krugman noted that “a unified currency is almost surely an adjunct of political unification. And that is more important.” Rehn remains optimistic. Citing his home country Finland’s strategy to diversify its industrial base, Rehn said “it seems that the economic structure of a Member State matters less to its success than its policy choices.”Presentation [218 Kb] Speech
2nd Annual Padoa-Schioppa Lecture by Mario Monti, Prime Minister of Italy
Mario Monti, delivering the Second Annual Tommaso Padoa-Schioppa Lecture at the Brussels Economic Forum, underscored the role of investment and a stronger Single Market as the keys to growth in Europe.
Monti sought to use Padoa-Schioppa’s thinking as a red thread throughout his speech. Like Padoa-Schioppa, Monti is a strong advocate of the Single Market. “The further development of the Single Market is one, and maybe the key to further European growth,” according to Monti. He said that the focus should not only be on how to best re-launch the Single Market as a factor for integration but also on how to develop it as a factor for growth.
To re-launch the Single Market there is a “double need”, according to Monti, “a market component but also the public powers component.” He urged Europe to “proceed as quickly as possible in the dissolution phase of removing all obstacles.” Monti also said that the role of public powers as the providers of public goods needed to be strengthened at the EU level in order to make the role and working of public goods the same as at the national level. Merely advancing the legal construction of the Single Market would not be enough.
To stimulate growth, Monti advocated a greater role for investment, including public investment. “I think that investment is still an under-recognised component of European policies,” he said. While acknowledging the need to cap current expenditure, Monti said that Europe also needed to invest. Otherwise, Europe would be “inflicting on itself an anti-growth bias.” Of course, Monti also acknowledged that it is very hard to define in practice what constitutes a worthy public investment. Nonetheless, he said that we needed to find a way of “protecting Europe from fiscal profligacy without preventing investment.”
To prevent problems, Monti said that greater surveillance of investment would be needed. The Stability and Growth Pact has done a reasonably good job of monitoring public spending, but a comparable surveillance of the dynamics of private sector indebtedness has been lacking, according to Monti. The resulting problems were “not an occurrence that should have come as a surprise”, he said.
Perhaps reflecting Tommaso Padoa-Schioppa’s humanism, Monti emphasised the link between the market and the social in the construction of a “highly competitive social market economy.” He noted that there is one group of countries in Europe such as France and Germany that tends to have more “sympathy” for an intensive social economy with the market but with some degree of caution on integration and liberalisation, while another group, which includes countries such as the United Kingdom, Poland, many of the new Member States and the Scandinavian countries, gives more prominence to the market and competition. Monti believes that a compromise needs to be struck between the forces for social integration and the forces for economic integration. “Without taking this topic head on, namely how to integrate the market and the social, we will not achieve a single market and the powerful growth that we seek,” said Monti.
Concluding his speech, Monti recalled how the last time he saw him shortly before his death, Padoa-Schioppa underlined the need for an EU growth policy, not just the coordination of national policies. “Tommaso was so prophetical, so deep, so wide in his thinking about Europe,” said Monti.
Brussels Economic Forum panelists were asked to address the challenges of public finance in a time of crisis.
"The current situation in Europe sometimes reminds me of German reunification more than 20 years ago,” said Thomas Steffen, State Secretary at the German Federal Ministry of Finance. By re-absorbing eastern Germany, west Germany was asked to “build up a country that had suffered from the sins of the past,” Mr Steffen told the Brussels Economic Forum. He was addressing the difficulties now faced by some European Union countries, where governments are under pressure to do more to help the weak periphery. “We spent a lot of money,” Mr Steffen recalled. West Germany helped its east Länder to build up a stable legal framework designed to encourage investment. But growth was not immediately forthcoming. “There is no button you can push to demand growth,” the State Secretary underlined.
Can anything be done to help European Union Member States mired in recession and struggling with unemployment? Panelists participating in the debate entitled “Addressing the public finance challenges and breaking negative feedback loops” were divided.
Lucio Pench, fiscal policy director at the European Commission’s Directorate-General for Economic and Financial Affairs, underlined that austerity could not be avoided. “I don’t see a truly different alternative to what we are doing,” Mr Pench said. “Just putting end to austerity is an impossible hope”.
While not denying the emergency faced in certain countries, Mr Pench stressed that there was a need to accentuate the positive. Deficits across the European Union had been cut by half, on average, between 2009 and 2012, he said. “Progress has been widespread,” he told the Forum, “though this should not be obscured by some admittedly very critical and problematic cases”. And that improvement could be named "virtuous" in the sense that 2/3 of it resulted from expenditure reduction (i.e. only 1/3 due to increased revenue).
Mr Pench said that debt-reduction or “fiscal consolidation” should not be delayed because “experience has shown again and again that waiting for better times leads to no consolidation”. But Philippe Aghion, Professor of Economics at Harvard University, argued for a more flexible approach. There was, he said, a need “to balance the budget while creating growth”. Why not use the European Union’s structural funds to help countries through the difficult adjustment period, Professor Aghion suggested? Structural funds could target investments in strategic sectors, perhaps by helping found “universities of excellence” that would boost European know-how.
Fiscal consolidation needed to be accompanied by both growth and social justice, providing the basis for a so called "magical triangle" of self-reinforcing policies. Professor Aghion argued, adding: “Without social justice you don’t get sustained effort”. The Greek people had reacted badly to budgetary adjustment because it was considered to be socially unbalanced, he claimed. Rather than the theory of the “minimal state”, according to which low taxation creates high profits for companies that subsequently hired more in a so-called “trickle down” fashion, the Harvard professor said he espoused a “smart state” approach. Investment in “growth enhancing” sectors needed to be combined by fiscal reform in order to achieve popular support, he insisted. Fiscal discipline, growth and social justice: this was the “magic triangle” to which governments should aspire, it was claimed.
The professor, who said he had lunched recently with the newly elected President of France, Francois Hollande, touched briefly on the subject of “eurobonds” – a proposal for the pooling of European debt. Eurobonds, he advised the French President, were “nice” but should be more of a long-term objective. Better use of existing budgets, namely of structural funds, should be the priority.
Matt Brittin, Vice-President of Google Europe, added his informed business like view to the debate. He reminded the Brussels Forum that Europe was in the middle of a “period of unprecedented pace of change” that would see five billion people online by the end of this decade.
Small business, he said, were leading that way and this was where Europe should be investing. Small businesses were growing much faster than big businesses, because of low entry costs. “The challenge for Europe is to capitalise on that opportunity,” he said. The internet was already worth 4% of European gross domestic product, a figure set to shoot up to 12% by 2015. The European single market was necessary to ensure this growth continued, he said. EU law-makers should help create a level playing field in mobile communications, postal services, payments and consumer protection.
Keynote address: Nemat Shafik, Deputy Managing Director, IMF
“My German mother-in-law once said, ‘everything is better with butter’. In economics, everything is better with growth,” said Nemat Shafik, Deputy Managing Director of the International Monetary Fund (IMF). Shafik delivered the keynote address at the Brussels Economic Forum. She said that even a few tenths of a percentage point gain in growth makes everything easier: fiscal consolidation, debt reduction, and poverty alleviation.
But strong growth remains elusive. While acknowledging that the threat of a global economic slowdown has eased in the past few months, Shafik said that the recovery is extremely fragile. Moreover, according to Shafik, “Europe is at the epicentre of the current crisis.” Despite Europe’s efforts on the ground in individual countries and at the EU level, Shafik warned that “financial and sovereign stresses remain elevated in many countries.” Moreover, she worried that high levels of youth and long-term unemployment in Southern Europe risk creating a “lost generation,” with lasting consequences. “Hope is very much in jeopardy,” she warned.
Shafik examined the measures needed to stimulate growth in both the short-term and medium-term. “Regaining competitiveness is a bit like running a marathon,” she said. “Many reforms, especially of the structural kind, take time to show results, and it is easy to hit a wall when vested interests resist change. To make it to the finish line, it is crucial that European policymakers keep up momentum.”
Turning to measures needed in the short-term, Shafik said that like the attributes of a good sprinter, macro economic policies needed speed, agility and power. She cautioned against fiscal consolidation that can stifle growth and said that when a number of countries try to consolidate simultaneously, the effect is compounded. “Getting the pace of fiscal consolidation right is therefore of paramount importance, especially given the current context of weak growth and employment,” she said. Nonetheless, Shafik said that frontloaded consolidation would be essential for those countries that are most heavily indebted.
Spurring growth in the long-term is like running a marathon, according to Shafik. It requires determination, resilience and endurance. She sees two key challenges facing the EU: the need for countries to implement comprehensive structural reforms and the need to complete the architecture of the European monetary union. Shafik observed that: “Regaining competitiveness is like painting your house. If you have an exchange rate you can move your brush back and forth. If you don’t have an exchange rate you have to move the whole house.” Therefore, in a context where the exchange rate cannot be devalued and productivity increases only take hold over time, improving competitiveness unfortunately requires a reduction in costs, including labour costs. In fact, she asserted, the current crisis is in large part inducing a correction of the very large increases in wages that took place in the period up to the global economic crisis. Adjustments are already underway, according to Shafik.
Potential benefits from structural reforms are likely to be substantial over the medium term. Shafik presented simulations by the IMF staff for the 17 euro area countries that suggest that eliminating 50% of euro area countries’ gap with OECD best practices in labour and product market policies could boost GDP growth by up to 4,5% over five years.
So how can Europe get more ‘butter’? “We need in the period ahead to have the skills of both sprinters and marathoners,” said Shafik. She warned that in many countries reform fatigue is setting in, however. In making adjustments of this kind, she said, the IMF has learned the hard way how important it is to protect social cohesion.Speech [75 Kb]
Brussels Economic Forum participants suggested a variety of solutions for the economic crisis.
"It's time to place full employment centre stage once again," Deepak Nayyar, Professor of Economics at Jawaharlal Nehru University, told the Brussels Economic Forum. "We have to shift focus from the financial sector to the real economy".
Asked to participate in a debate entitled “Growth challenges facing the global economy”, professor Nayyar was very clear. "Real wages have lagged behind productivity growth," he told a packed forum audience. “Fiscal consolidation by deficit countries and indebted consumers,” he warned, “will lead to global deflation and stagnation.”
In short, this means a new focus on the pursuit of full employment as well as higher wages: objectives the professor said had fallen out of fashion in some countries. If the global economy was to overcome its imbalances, these polices would have to change, the academic said. Employment creation should be at the top of government priorities. “The prime concern should not be stability of prices alone,” professor Nayyar said.
Forum participants were treated to another view from outside Europe, this time from South Korea. Jong-Wha Lee, Senior Advisor for International Economy to South Korea’s President, recalled the Asian crisis of the 1990s and offered advice based on the solutions found back then. “Fiscal policy alone cannot bring sustained growth,” he warned. “It should be combined with structural reforms”. In South Korea, one third of all financial institutions were either closed or merged in order to cleanse the system, Mr Lee said. Early closure of troubled institutions was “very important”.
Exchange rate depreciations were “OK” but structural reforms were “key”, he continued. The crisis hit South Korea hard: the economy shrank by 6%; unemployment shot up to more than two million; while 230,000 small and medium-sized enterprises went bankrupt. But quick action soon turned the situation around; within a year, growth was back up to almost 10%.
“Getting out of crisis takes time but I think we should learn from our experience,” said Mr Lee. If Europe wanted to maintain its currency union, the bloc would have to “sort out” its “significant” competitiveness gaps.
Mr Lee sympathised with European governments that were desperate for short-term growth. It was, he said “very difficult” to achieve. European Union Member States might like to try “spending more” or “higher inflation”. Demand, he suggested, “can be created”.
Beatrice Weder di Mauro, Professor of International Macroeconomics and member of the board at UBS, put forward technical solutions for the crisis. "In the long run and possibly much faster, the euro area needs a banking union”, she said. It would, she said, be an “absolutely crucial element for decoupling sovereign [debt] from banking [debt] at a national level”. Deposit insurance at a European level was also said to be desirable.
While a truly federal “United States of Europe” was considered unrealistic, as it would involve federal taxing and a substantial federal budget, a less ambitious, smaller “federal state” was nevertheless more achievable in the long run, Ms Weder di Mauro told the Forum. An essential element of such a state would be a “restructuring regime” applicable automatically when individual countries breached a specific debt ceiling – for instance 60% of gross domestic product. Such a regime could be operational only after member states have completed their fiscal consolidation efforts.
Growth was the elusive element to any solution Forum attendees heard. Despite decades of research, governments were still largely in the dark regarding ways to create growth. Jump-starting growth was “not sustainable”, while nervous markets had in any case taken policy making out of government hands to a certain extent. “All of this will take time,” Ms Weder di Mauro concluded. “How do we get time?” she asked.
Maarten Verwey, deputy director-general with the European Commission’s Directorate-General for Economic and Financial Affairs, ended the debate on a more upbeat note. The current crisis was bad but not as bad as the Great Depression of the 1930s, he said. "Until now, international and regional cooperation has held up quite well in this crisis," he pointed out. The G20 had emerged as a leading forum for international economic cooperation, while the International Monetary Fund had been strengthened. “We have seen some bank runs, but compared to earlier episodes, not a lot,” Mr Verwey said. “Complete meltdowns have been avoided”.
Solutions were required both in Europe and outside, he pointed out: "It is essential that the US puts in place a credible fiscal framework". Flexible exchange rates between the big economic blocs were also desirable.
Participants in Session III felt that structural reforms could have a positive impact on growth.
Participants in Session III of the Forum: “Growth enhancing policies in Europe – which way forward?” felt that structural reforms could have a positive impact on growth, even in the short-term, but that several other growth drivers should be taken into account as well, including the Single Market, macroeconomic rebalancing and the EU budget.
“In dealing with the issue of sources of growth, it is absolutely essential to understand the nature of the crisis,” said Marco Buti, Director-General of DG ECFIN and the first speaker during Session III: Growth enhancing policies in Europe – which way forward? The session was moderated by Wolfgang Münchau of the Financial Times.
Buti said that the European Commission does not consider the crisis a “normal recession”. “This is essentially what has been dubbed a balance sheet recession,” he said, “arising from an excessive accumulation of debt.” According to Buti, the massive accumulation of debt will require simultaneous de-leveraging in both the private and public sectors. Continuing in the same vein, Buti said that “the classic distinction between short-term and medium-term is basically wrong" and inapplicable at the current juncture. Fire-fighting in the short-term followed by structural reforms in the long-term, would not be effective in the current recession – the two must be done at the same time. To stimulate growth, the European Commission sees three poles of intervention: structural reforms at the national level and EU level with the deepening of the internal market, demand side stimulation via strengthening the capital of the European Investment Bank and the launch of project bonds, and consolidation at the national level.
Pier Carlo Padoan, Deputy Secretary-General and Chief Economist at the OECD also challenged our thinking. The ideas that “structural reforms take time to deliver their fruits so they’re good for the long-term and structural reforms are all that we need to revamp growth” are true only up to a point, he said. “There are some short-term benefits of reforms, you begin to see them the first year,” Padoan claimed. Product market liberalisation, for example, translates quickly into investment and employment gains, and pension reform has a nearly immediate impact on labour. Moreover, “in order to fully exploit the benefits of structural reforms you must think of them as one component of a much more complicated policy package,” said Padoan.
Giving the example of the euro area, Padoan said that structural reform alone would not be sufficient. “The euro area cannot be fully resumed unless there is a sustainable re-balancing between the North and the South.” And an essential component of rebalancing is that relative wages must adjust. According to Padoan, however, the impact of wages on performance depends on the structure of the economy. The same wage adjustment in Ireland would have a much greater impact than it would in Greece. Therefore “in addition to area-wide measures, you need to do country-specific measures.”
“We need a lot of ambition today when we think about growth,” said Danuta Hübner, Member of the European Parliament. “It’s not just a continuation. There is a new economic map of Europe emerging from this crisis.” Hübner said we must be extremely creative in thinking about growth packages as space for public investments will be extremely limited in years to come and many growth channels will be blocked. Echoing Padoan’s remarks, Hübner said that any growth policy must also address macroeconomic imbalances. “Investing in internal convergence is a must,” she said, “simply because if we don’t do it, it will be a break-up force.”
Hübner felt that the Single Market and EU budget are two relatively untapped drivers of growth. She suggested a more nuanced approach to the Single Market as opposed to looking at it in very sectorial terms, however, and said we should go beyond mere harmonisation to exploit the growth potential that comes from collaboration. Similarly, to Hübner, the EU budget is about more than just money, the policies behind the budget can also impact growth.
Benjamin Friedman, professor of political economy at Harvard University said that Europe was facing two separate crises: a sovereign debt crisis and a banking crisis, and suffering from a flaw in the architecture of the European Monetary Union: the inability to deal with divergent price levels and therefore divergent competitiveness levels. In this context, Friedman said that market reforms should be seen not merely as productivity enhancing but also as a way of promoting shifts in quantities – such as income flows and labour flows – that are necessary to achieve equilibrium in the absence of the ability to achieve shifts in price. Without the resolution of the twin crises and a solution to the architectural flaw, Friedman said flatly “there will be no economic growth in Europe.” Sounding a more optimistic note, however, he added that the pressure of the disequilibria created by the inability of price to adjust would bring into existence the “parallel institutions” – such as Eurobonds and banking union – needed to manage the European economy.
The European Investment Bank’s role in stimulating the EU economy is more important than ever.
However, the main message delivered by EIB President Werner Hoyer at the close of the 2012 Brussels Economic Forum was that "The EIB can be one element of the solution but it is not the solution itself. The EU bank cannot sweep aside the need for structural transformation".
The bank, which is owned by the EU’s 27 Member States, has been pulling out all the stops since the crisis began in 2008, Mr Hoyer told the Forum. Long-term investment projects have been front-loaded in an attempt to make as big an impact as possible in the short term.
The bank passes on its triple-A credit worthiness to both large and small enterprises and aims to invest in sectors suffering from specific funding constraints– trade finance was one example given.Trade finance shrank “threateningly” at the height of the 2008 crisis. A lack of finance to support legitimate, profitable trade could become a problem in certain parts of Europe once again. This was possibly an area that needed an EU-wide solution, Forum attendees heard.
While the EU’s Member States undertake reforms to support structural transformation, the EIB can focus on removing funding bottlenecks, Mr Hoyer said. Infrastructure, innovation and green technology are just three areas to have received substantial amounts of funding.
The EIB is “exceptionally well placed” to restart growth in Europe in general and Europe’s periphery “in particular”, Mr Hoyer said. Financing contracts totalled EUR 61 billion last year, a return to pre-2008 lending levels for the first time.
The banks “lends, blends and advises,” said the President. As well as issue loans, the bank has the ability to merge loans with other forms of EU aid. Its team of scientific and technical experts can help ensure the projects financed get off the ground. “We blend loans with guarantees and grants from EU budget,” Mr Hoyer explained.
“Accelerating technological development is important but so is the financing of small innovative companies,” he said. Human capital development, climate policy and investments in mature renewable technology and energy efficiency remain key among the bank’s focuses. Around 20% of the bank’s lending goes to small and medium sized corporations. The European SMEs sector would be a “core” element of tomorrow’s economy, it was reported. Small and medium sized enterprises expanded their workforces at a faster pace than established corporations, the bank President pointed out.Speech [75 Kb]