The document discusses the fragile economic recovery in Europe and calls for coordinated policy actions to strengthen it. It proposes a new "pact on reform and credit" with three elements: 1) countries like France and Italy intensify economic reforms, 2) the ECB provides more monetary stimulus once reforms start, and 3) Germany and other surplus countries boost domestic demand to support growth. This pact would reinforce reforms, stimulus efforts, and growth across the Eurozone to save the recovery.

1. Saving Europe’s
Economic Recovery
Dr. Olli Rehn, Vice-President of the
European Parliament
Capital Markets Top Seminar, 25 Sept 2014
Aalto University, Helsinki

2. European economy in recovery mode
• Damaged by the financial and debt crisis since 2008, the
European economy was stabilized in 2010-2012.
• The stabilization was achieved through inevitable
consolidation of public finances and decisive action in
containing financial market turbulence.
• Europe’s economy returned to growth in Spring 2013.
• Recovery is still fragile and in danger and weakened by
geopolitical tensions and deflation dangers.
• Saving the recovery calls for bold and well-coordinated
policy mix by EU institutions and member states.

3. Economic activity in Europe 2007-15
100
95
90
5
4
3
2
1
0
-1
-2
-3
q-o-q% index, 2007=100
2.0
0.1
1.6
2.0
07 08 09 10 11 12 13 14 15
GDP growth rate (lhs)
GDP (quarterly), index (rhs)
GDP (annual), index (rhs)
forecast
3.2 0.4
-4.5
1.6 -0.4
Figures above horizontal bars are annual growth rates.
Source: Commission services

4. European growth map 2012
Source: Commission services

5. European growth map 2014
Source: Commission services

6. Ghost of geopolitics &
danger of deflation
• Europe’s nascent recovery is now haunted by the
re-born ghost of old-school geopolitics, and by
the scary spectre of deflation.
• The conflicts in the Middle East and the fallout
from the war in Ukraine – and from Russia’s
economic stagnation – are weakening investor
confidence and dampening economic activity,
and thus exacerbating deflationary pressures.
• The danger of deflation is there, and we already
suffer from a too long period of low inflation.

7. 7
Inflation
5
4
3
2
1
0
-1
%
07 08 09 10 11 12 13 14 15
Energy and unprocessed food [pps.]
Other components (core inflation) [pps.]
HICP, all items
Source: European Commission
forecast

8. Better EU policy mix
• To save Europe’s recovery, the EU’s policy mix should be geared to boost
sustainable growth and job creation. Need better coordination than today.
• Monetary policy will continue to need to be accommodative – and
perhaps, if need be, become still more expansionary.
• In fiscal policy, consistent consolidation to continue, focus on the
sustainability of public finances over the medium term.
• Structural reforms should be intensified in the Member States to make
Europe more competitive, innovative and flexible.
• In EU policy-making, the focus should now move from “macro to micro” =
from “sheer” economic stabilization to boosting sustainable growth,
competitiveness and employment:
• Complete the Single Market (including in energy, services & digital services)
• Seek growth beyond our borders and pursue new free-trade deals (TTIP)
• Improve access to finances, especially of growth-oriented SMEs
• Capitalise on the potential of the green economy

9. A new pact on reform and credit
• Need a new pact on reform and credit, to be made
up of three policies and three+ players. Its three
elements would reinforce each other and growth.
• The key actors - Italy and France, the European
Central Bank and Germany - need to work out the
details of such a pact this autumn and then agree on
it at the European Council in December.
• This project should be initiated and facilitated by
the incoming European Commission.

10. The Pact, part 1
• Need to intensify serious economic reforms in the
countries that have for years delayed them.
• Economic reforms in France and Italy could boost
growth and reassure the ECB that its monetary
stimulus would have the desired positive effect.
• The same goes for Finland, which have delayed the
necessary reforms and is in dire straits today.

11. The Pact, part 2
• Once France and Italy have become serious about
economic reform, then the European Central Bank
should without any unnecessary delay go all the way
it needs to combat the deflationary spiral.
• The ECB’s willingness to go all the way in monetary
policy – up to a QE2 if needed – would help kill the
spectre of deflation and justify both to the political
leaders of France and Italy and their voters that the
economic reform is worth the political cost.

12. The Pact, part 3
• The surplus economies of the eurozone, particularly
Germany, should further boost domestic demand and
investment, both public and private, to support
economic activity throughout the eurozone, ashas for
many years been advocated by the EC.
• A concrete signal by the German government that it
will use its substantial fiscal space as Europe’s major
surplus economy would have a significant impact on
the European economy and an equal psychological
impact on the European public.
• It would also help to convince France and Italy of the
case for tough economic reform.

13. Investing in growth and jobs
• In the long run Europe can compete with the
emerging powers only by investing in education,
research, innovation, and green economy.
• Private investment: the Banking Union, including the
AQRs and STs, is a must to finally restore the health
and resilience of the European banking sector, to
lend to the real economy.
• Public investment: a 300 be investment programme
proposed by the Commission President Jean-Claude
Juncker, worked out with the EIB, must be concrete
and well targeted for the growth and jobs.

14. No single-issue movement,
no silver bullet will succeed.
Instead, we need to work on all fronts
to save Europe’s recovery and
reinforce growth and job creation.
A new pact on reform and credit
would do the job. Can we do it?
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