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Olli Rehn Speech at Oxford
 

Olli Rehn Speech at Oxford

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    Olli Rehn Speech at Oxford Olli Rehn Speech at Oxford Document Transcript

    •  Overcoming Europes sovereign debt crisis – the road to stability and growthSpeech by Olli Rehn, Vice-President of the European Commission and Memberresponsible for Economic and Monetary Affairs and the EuroSt. Antonys College, Oxford, 17 May 2012Ladies and Gentlemen,I am very honoured to return to my alma mater. I spent many memorablemoments here, at a time when the Cold War was coming to an end. As onechapter of history closed – another one opened with the optimistic beginning ofthe great European transformation, bringing with it both a deepening anda widening of the European Union.I remember Lord Dahrendorf very well. When I studied here, Sir Ralf – as he wasthen known – was Warden of the College, following his remarkable career as aleading sociologist of his generation, Member of Parliament and EuropeanCommissioner. Ralf Dahrendorf was a strong believer in open and liberalsocieties. In his book "Reflections on the Revolution in Europe", he analysed theopening of societies in Eastern Europe and the conditions of lasting liberty. Inthat context, he said that "the European monetaryunion will and should happen". But he also recognised it would be a "grand anddifficult project", with both technical and political challenges. He knew thatcountries would have to "have institutions and policies in place which sustain astable common currency."And this was written over 20 years ago! These words sound even wiser today asthey did when he first wrote them!Ladies and Gentlemen,Today, European monetary union is no longer fiction, but a reality. Some of theEastern European nations to which Ralf Dahrendorf was referring are membersof the euro – Estonia joined last year and a number of others are preparing tojoin.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  As we all are painfully aware, the eurozone is facing a new and most seriousstage in the sovereign debt crisis. Again, Greece is the epicentre of thisturbulence. And the effects are felt far beyond just Greece. Spain has recentlybeen under pressure. At the same time, the country is taking decisive action totackle its fiscal and banking problems.Let me now say a few words about the current economic climate.Our latest European Economic Forecast shows the EU economy to be in a mildand short-lived recession. A slow and subdued recovery is forecast to beginfrom the second half of the year on, and continue over 2012-13. But this willonly happen on the condition that confidence gradually returns and decisivepolicy action is taken.In the last quarter of 2011, Europe had fallen into recession. Yet, fresh datapublished this Tuesday shows that, for the first quarter 2012, growth was, infact, not negative. Germany, in particular, showed better data than we hadanticipated in our forecast. But I have been around long enough not to over-interpret one single data point.Although the economic climate remains fragile, this does not mean there are nopositive signs. At the beginning of this year, we saw global trade growthaccelerate once again. This was particularly beneficial for those EU memberstates that are more open to trade, especially the countries in Northern andcentral Europe, but also programme countries - Ireland and Portugal, whichhave recently seen their exports grow well.GDP growth will remain uneven across Member States. The same appliesfor unemployment, with some member states enjoying virtually full employment,with others suffering from rising unemployment. It is unbearably high for youngpeople who need hope, confidence and opportunity for their future.What we are seeing is a rebalancing of the macroeconomic imbalances that builtup in Europe before and after the crisis began. Over the last decade, ourintegrated financial market channeled savings from countries with slow growthin domestic demand into countries with current account deficits, wheredomestic demand was thriving with credit booms and increasing wages andprices. This applies both within the EU as well as across the Atlantic.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  To some extent, this was sign of our integrating EU economy, as some memberstates were catching up, and for whom the euro allowed better access tointernational capital markets. Macroeconomic imbalances were also the rootcause of the crisis. While the Greek case has been largely (although not only)a fiscal crisis, Ireland and Spain suffered mostly from serious imbalances in theform of credit booms and real-estate bubbles. To provide the right medicine toheal these economic wounds, we first need to get the diagnosis right.The US subprime crisis – especially the Lehman-moment in September 2008 –was the trigger of the financial and economic shock.In the two years that followed, the response by the EU and its internationalpartners was unprecedented, bringing together governments and central banksto effectively coordinate a global policy, using the resurrected Keynesiantoolbox of massive fiscal and monetary stimulus to the full. This saved the worldeconomy from a long and deep depression. But the downside is that public debtin the EU has risen from around 60% to almost 90% of GDP.Ladies and Gentlemen,Over the past two and a half years, the eurozone has taken unprecedentedaction to safeguard financial stability and economic recovery in Europe.Vulnerable member states have stepped up fiscal consolidation and structuralreforms. We have built financial firewalls with robust firepower. In addition, theEuropean Central Bank has played an important role to ensure notonly monetary but also financial stability.The banking sector is being recapitalised, and in many countries, restructured.We have overhauled and strengthened European financial regulation andsupervision. We have reformed economic governance in a way that anchors astability culture in EMU and facilitates lasting growth.The EUs comprehensive strategy has contained the crisis - but notyet tamed the crisis. There is much more to be done. We need to complete ourcrisis response; that is, stay the course on fiscal consolidation and reinforcegrowth through structural reforms and enhanced investment.Thus, our strategy is based on three building blocks.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  First, sound public finances are – and will remain – the cornerstone of ourstrategy. They are a prerequisite for sustainable growth. Relaxing consolidationcould at best provide short-lived relief, but very soon endanger fiscalsustainability in many Member States – especially in the medium and long term.At the same time, an adequate rate of economic growth is central to successfuland sustainable fiscal consolidation.Some politicians and pundits are promoting the misperception that the EU fiscalframework forces all member states into a one-size-fits-all consolidationstraightjacket. But the Stability and Growth Pact is not stupid. Yes, the EU fiscalframework is rules-based, with clear reference values for public deficit and debtfor triggering the excessive deficit procedure and, if needed, sanctions. But, atthe same time, the Pact entails considerable scope for judgment, based onsound economic analysis, which is an integral part of the Pacts legal provisions.The Pact underlines the structural sustainability of public finances over themedium-term and implies differentiation among the member states according totheir fiscal space and macroeconomic conditions.This is clearly reflected in the "fiscal exit strategy" agreed by EU Economic andFinance Ministers three months ago. They agreed that those Member states withgreater fiscal space should to let the automatic stabilisers function fully.Meanwhile, vulnerable Member States under close market scrutiny need toconvince both market forces and policy-makers of their capacity to tackle theirfiscal and other economic challenges and, once again, create confidence.Second, we need growth-enhancing economic reforms to ensure lastingcorrection of fiscal imbalances and enhance the credibility of our strategy.Indeed, macro-economic imbalances have reduced significantly. The largestcorrections have been recorded in deficit countries, but surplus countries arealso adjusting. For example, wage growth in Germany is forecast to be almost2% in 2012 to 2013, compared to around 1% in the euro area and -1% in Spain.Recent wage negotiations in Germany point further to this direction.However, more adjustment is still to come. The remaining accumulated stocksof internal and external imbalances continue to pose a formidable challenge.Some deficit countries still need to achieve surpluses to bring their external debtonto a declining trajectory. This requires inter alia further improvements in bothprice and non-price competitiveness. It also goes hand-in-hand with the needfor private sector deleveraging and consolidation of public finances.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  This is also the key rationale of EU-IMF programmes, which are much moreabout economic reform to return to growth than only fiscal adjustment. In otherwords, they are essentially about internal devaluation.The programmes of Ireland and Portugal are on track. Ireland returned to growthlast year, and for Portugal this is expected next year. Outside the eurozone,Latvia has gone through an internal devaluation with the help of an EU-IMFprogramme, while Estonia and Lithuania have done so without a programme. Allthree Baltic states are forecast to grow next year with rates of about 3½ - 4%.As we all know, in Greece, adjustment has been slower and return to growth isdelayed. Why? Mainly because of the obstacles to reform and growth createdby vested interests, lack of national unity and weak administrative capacity. Thereform programme is geared to overcome these obstacles and enable Greece tostay in the euro, which we want. The forthcoming elections are about thecommitment to the reforms and the euro. It is a democratic choice of the Greekpeople.All in all, we need to maintain the momentum of the wave of reforms that iscurrently moving in Europe, especially in the countries that need them most.Italy and Spain are taking decisive action in this regard.We have many encouraging examples. They show that restoring confidence inpublic finances and undergoing ambitious structural reforms does work.Countries that have best weathered the storm are those that have gone throughthis kind of adjustment in the recent past. Just look at Denmark and theNetherlands in the 1980s, Finland and Sweden in the 1990s, and Germany in thefirst decade of this century.Ladies and Gentlemen,To support sustainable and dynamic growth in Europe, the single marketremains our joint instrument. It still has untapped potential to deliver newsources of growth and jobs. Let me mention a few points for action:The Commission will soon come forward with proposals to get more out of theServices Directive.Going digital: Estimates show that EU GDP could grow by 4% by 2020, if wetake the necessary steps to create a modern digital single market. As part of theResearch League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  Europe 2020 strategy the Commission has made proposals to build a digitalsingle market.Boosting innovation: the introduction of the long-awaited EU patent wouldreduce costs from € 36,000 to € 4,700 for patents on average; and meeting our3% target for R&D spending would create 3.7 million new jobs and boost EUGDP by € 800 billion by 2020.Drawing on external sources of growth: we need to accelerate trade andinvestment negotiations with dynamic partners outside the EU.Finally, competition and efficiency in our utilities infrastructure: Long anduncertain procedures delay and inhibit much needed investment – theCommission has made proposals to reduce delays and to have a singleauthority to deliver permits for cross border investments.The third part of the building block is the very strong case for more investment.The single market is our main engine for growth, but we need extra fuel to boostthat engine.The main problem we are facing at the current juncture is the fragile bankingsystem that cannot provide the funds needed for the structural change.Investors risk aversion has resulted in fewer and fewer new projects. Andfinancing opportunities are limited because the private banking sector is stillreeling from the harsh impact of the crisis.This is why we have to be innovative. Last year, the Commission proposed thecreation of project bonds for infrastructure investment, as a new tool to unlockprivate funding. Project bonds are not entirely unfamiliar to the UK. Before thefinancial crisis, monoline insurance companies took over risk from long-termprojects.Given the social returns to infrastructure, our key idea is thatwe can and must use public banks better. For the EU, this is the EuropeanInvestment Bank, or EIB. The EIB and the EU budget can be used moreeffectively to achieve major leverage through limited risk-sharing with privateinvestors. We are just about to put the legal provisions in place, so that we canlaunch the first project as early as this summer.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  Moreover, the Commission has been urging the EU member states, who areactually the EIB shareholders, to agree to a capital increase. The EIB could thenexpand its lending volume, which is a quick and effective way of channelingbadly needed financing to the real economy. In addition, the EU Budget wouldgive capital relief to the EIB, so more risky projects could be funded with theparticipation of private capital.Ladies and Gentlemen,In my introduction I said that the recovery (albeit a slow recovery) projected forthe second half of this year is conditional as it depends on a gradual return ofconfidence; confidence can only result from decisive implementation of thestrategy I have set out.These agreed policies point unequivocally to one direction – and that is tofurther and deeper integration of the Economic and Monetary Union.Lessons of the past decade have taught us of the need to complement thisprocess by more political integration.In such an integrated union, the economists amongst you may be easilyconvinced: it would make economic sense to create a deep, liquid and stablemarket for government bonds with the joint issuance of common debt – Eurobonds. At least, once we have reinforced our economic governance furtherto ensure fiscal prudence and thus avoid moral hazard.At the same time, the political scientists amongst you may have some doubts.This road namely would require a fundamental debate about the sovereignty in aunion that pools its risks.Conscious of the academic audience today, I would like to encourage you –economists and political scientists – to reflect on what shape you think theEuropean Union should take to move towards deeper economic and politicalintegration, in a way that would also allow joint issuance of debt to make sensefor all Member States sharing the common currency.You may object that there is a contradiction with individual freedom. Indeed,individual freedom is the pre-condition to bring about the structural change thatEurope needs to overcome this crisis.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com 
    •  At the same time, such freedom can only reach its full potential if it has itself theright institutional foundation: a deeply – economically and politically integrated –European Union.Thank you.Research League Contact: Mike Baum 415.817.1985 mike@researchleague.com