Ladies and Gentlemen, Dear Friends,
It is great pleasure for me to discuss European perspectives in the global economic transformation in such distinguished company. I am particularly happy to see here so many close friends and great colleagues with whom I have had the pleasure and privilege to work on European integration and international political economy, and beyond, over the past decades. Judging from past experience, I dare to expect us to produce a lively and fruitful debate in the course of this afternoon.
In my intervention I would like to cover three interrelated themes: the long-and-short-term economic prospects of Europe in the world economy; the ongoing institutional transformation of the Economic and Monetary Union; and Europe's influence in economic global governance.
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To begin with, the EU is the largest economic area in the world with its 500 million citizens and consumers, and one of the key players in economic global governance. As we have witnessed over the past years, for better or worse, our actions or inactions vibrate around the globe. Conversely, our economy is increasingly affected by the policy choices made in other advanced, emerging and developing economies.
This context has been fundamentally affected by the fact that the crisis has shifted the balance of economic power more towards emerging markets. In some ways, the crisis of the past few years has significantly accelerated a re-adjustment the balance of global economic powers that would have taken place in any case over the medium term.
Measured in Purchasing Power Parities, the OECD estimates that the share of the Euro-area in the global economy will decline from around 20 percent a few years ago to around 15 percent in 2020. Meanwhile, and again in PPPs, China's share would rise from 10 to around 25 percent within the same timeframe. The rapid rise of China and other emerging economies, which is currently in full swing, has had and will have profound implications in the whole range of issues that matter for economic success, from the requirements of competitiveness to the search for new markets, from the necessity to reform product and labour markets to Europe's influence in economic global governance.
While these long-term trends are rolling on already at present and need to be taken into account in all policy-making, we must likewise be able to overcome our short-term economic challenges, which are formidable. After an improvement in 2010, the economic situation in Europe deteriorated sharply in the second half of 2011 due to the sovereign debt crisis and a less supportive global environment.
In the fourth quarter of last year, GDP contracted for the first time since 2009. The current first quarter of 2012 may not be much better, despite some tentative improvement in consumer confidence. We expect a gradual return of confidence and growth in the course of this year, but the recovery is not going to be stellar.
Three factors are taking their toll on Europe's short- to medium-term growth prospects.
First, given the fragile state of public finances in several Member States, fiscal policy has exhausted its headroom for stimulating the economy. The level of public debt in the Euro-area has risen from around 60 percent four years ago to close to 90 percent in the present year.
Second, in many Member States, the private sector is stranded with too high levels of debt. Deleveraging trends will continue to have a negative impact on consumption and investment for some time.
Finally, one major lesson from the research on economic history is that financial crises tend to harm potential output. The recent rise in structural unemployment, the slowdown in capital formation and a continued weak trend in total factor productivity do not bode well for a solid recovery.
But the growth outlook is also shaped by our policy response. All involved policymakers have recognised the need for structural reforms and enhanced economic governance at the European level. As a result of this mutual understanding, Europe has now taken decisive steps for a comprehensive crisis response in five points.
First, the uncertainty about the second programme for Greece has been removed and a broad set of measures are being taken to address the problems of other Member States facing pressure from financial markets.
Second, a better capitalisation of EU banks is well underway and funding stress has eased, not least thanks to the ECB's liquidity actions.
Third, we are progressively establishing a stronger and much more comprehensive framework for economic governance in the EU.
Fourth, structural reforms and measures to enhance our growth potential are being undertaken both at the Member State and EU level.
Finally, the Eurogroup took last Friday a very significant decision to strengthen the euro-area financial firewalls, as well.
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Let me elaborate a little on the EU economic governance, as reforms in this area are very far-reaching and have already deeply changed the way economic policy is conducted. In fact, the architecture of EU economic governance has been completely renovated over the past two years.
The most important change is very simple: we have moved from what has in effect been an ex-post assessment of member states economic and fiscal policies to what is in effect ex-ante coordination. Policy making is now shaped by the European Semester, which means in practice that priorities and main lines of economic and fiscal policies for 2013 are being agreed and coordinated now, in the first half of 2012.
It is perhaps not a surprise to this audience that in the design of this new way of policy making at European level we were strongly inspired by the well established and well functioning Finnish example in this regard. As we know, well planned is half-done.
But, it is not only about adjusting timelines of policy coordination. With six new EU laws adopted last year (the "six-pack"), we have also introduced whole new instruments for both fiscal and macroeconomic surveillance, which will fundamentally strengthen the policy coordination especially in the euro-area. We assess fiscal policies earlier and more thoroughly than before, we can issue country-specific recommendations for correction when necessary and, at the end of the road, there is a credible threat of financial sanctions, if recommendations are not followed.
This means that a euro-area country breaching its fiscal target may face a fine of 0.2 % of GDP, and if repeated, up to 0.5 %. This can be decided by the so-called reversed qualified majority. This 0.2 % may not sound much, but I can tell you already from the first experiences that, when translated into hundreds of millions of euros, the figures help concentrate minds and facilitate necessary decisions, when they are put on the table.
With the six-pack, we also extended the surveillance to macroeconomic imbalances, which in many ways were the root cause for the crisis we are now tackling. While the Greek case has been largely (though not only) a fiscal crisis, Ireland and Spain suffered mostly from serious imbalances in the form of credit booms and real-state bubbles. And we have to get our analysis right to be able to decide on the right medicine.
The first decade of the euro saw an accumulation of substantial external and internal imbalances. Low financing costs and other factors fuelled a misallocation of resources to less productive uses, feeding unsustainable levels of consumption, housing bubbles and accumulation of external and internal debt. We are now systematically addressing these matters, to prevent repetition of such events. We will monitor carefully, conduct in-depth studies when we see risks and issue recommendations when necessary. We are currently preparing 12 in-depth studies to be presented in late May, including on countries like Finland, France, Belgium, Italy and Spain. [If recommendations are not followed, the Council may consider a sanction at the proposal of the Commission.]
This may sound rigid, but the developments that led the EU economy into the current crisis made these reforms necessary. There is nothing wrong with the principles of the EU Treaties that underline sustainable public finances and economic policies as a common concern.
The new rules will greatly improve the probability of the EU avoiding in future a repetition of the developments of the past years that led us to the current crisis. The Commission and the member states must now implement the rules with vigor, to convince all that Europe has changed its habits. The signature by 25 member states recently of the Treaty on Stability, Coordination and Convergence is a powerful confirmation of the member states' governments' commitment to these rules and principles.
Ladies and Gentlemen,
Finally, let me say a few words about what this means for the evolution of Europe's role in the global context during the coming years.
The EU therefore has a strong interest in a well-functioning global economy and in rule-based global economic governance.
Against this background, the current crisis has been a watershed in global economic governance. The G20 Leaders' process has become the 'prime forum for international economic cooperation'. We strongly contributed to the creation of this forum, which has proven very effective for engaging our international partners.
We have also played an instrumental role in shaping the G20's economic surveillance which borrows many ideas from our enhanced surveillance process, since the process to define the indicative guidelines aimed at reducing external imbalances was inspired by the two-step approach used to set up the Macroeconomic Imbalance Procedure.
However, because of the fragmentation of our representation in international financial institutions and fora, Europe, as a whole, does not have the influence and leadership commensurate to its economic weight. It has become increasingly clear that it is both the size and the expression of unified positions by Europe that will matter in influencing the policy responses in global fora in the coming few years.
For instance, the EU has not always been able to push through its position in the G20 as the EU G20 Members occasionally have diverging views. We need stronger coordination of European positions to push forward the European agenda in the G20. In the IMF, the Commission is also actively pursuing the objective of a more unified external representation of the euro area.
In economic global governance, the EU is at a crossroads: if the status quo prevails, its influence will decline; if it moves towards a unified representation backed by strong coordination, it can maintain and even improve its role of a key international player. The increasing weight of emerging economies can be matched by a stronger European voice only if we make sure that we push forward a single credible position.
Ladies and Gentlemen,
Policies considered traditionally to be at the heart of national sovereignty are now increasingly coordinated, steered and agreed jointly at European level. Some claim this means a further pooling of sovereignty and see a looming political union around the corner.
But, in fact, the pooling of sovereignty took place already much earlier, when the Economic and Monetary Union was established. It is only now being implemented in practice, which does indeed mean an effective deepening of integration. In my view, this only means that we are finally putting in place the structures and policies that should have been there already from the start of the EMU. In fact, we are completing, or at least making important progress, in the work that was considered necessary and unavoidable already fifty years ago.
Walter Hallstein, the then President of the European Commission put it well in 1962 when explaining the European project to a US audience:
"In building a customs union and an economic union, we are also achieving political union. First, our motive has been political since the launching of the European community initiative in the Schuman Plan. Furthermore, we have created federal institutions, distinctly political, from which emerges a new economic and political entity."
And Hallstein continued:
"Finally, the matters we deal with as a Community are distinctly political. The objects of our Community merger are State activities affecting our economic and political life – in short, politics."
This is at least as much true now as it was fifty years ago.
Let me also stress, in this context, that the project of European integration is not an objective in its own right. It is valuable and worth pursuing, as it has proven to deliver peace, stability and wellbeing to European citizens on a scale never seen before in European history.
But to continue this European success story, inside the EU, we need to reform our economic structures and policy architecture, and externally, to unify our influence to remain a key power in the future. With domestic reforms now gaining ground and external representation becoming better organised, can better pursue European values and protect our interests.