Ladies and gentlemen,
Let me start by thanking my esteemed colleague in the Eurogroup and your Minister of Finance Hans Jörg Schelling for his kind invitation to visit beautiful Tyrol.
Since February the spotlight has been on Greece. I was not very happy about that. We spent many meetings before reaching an agreement on a new program. Greece is in many respects lagging behind the positive outlook for the Eurozone. Almost all countries are leaving the crisis behind. Eurozone-averages on growth, employment and deficits have all improved and continue to do so. Only a year ago the eurozone was considered a liability to the global economy, now it is one of the stronger regions internationally.
Greece will require ownership and strong implementation of the program and of course political stability, which is key. Other former program countries have recovered strongly; Ireland even leads the growth-chart.
That’s where we are now: Greece deserves attention, the rest of the eurozone is getting back on track.
Yet we cannot sit back and relax. The potential growth in the eurozone is not high enough, our capacity to adjust and compete is not good enough. In order to strengthen our monetary union economically and politically we need to restart the convergence-machine.
That is why, in the report president Juncker, Draghi, Tusk, Schulz and myself wrote before the summer, we put much emphasis on realizing reforms to strengthen and create competitiveness of all of our countries and convergence within the Eurozone.
We need convergence in a number of areas like labour markets, product markets and investment. But convergence can’t be achieved automatically. It doesn’t come easily.
When the euro was launched, many politicians assumed that trailing member states would spontaneously catch up with higher-income economies.
And in fact, in the first years of the new millennium per capita GDP actually rose among the euro’s early adopters with relatively weaker economies.
As a consequence, the economy of the eurozone as a whole flourished, which in turn helped boost public support for monetary union. Unfortunately a lot of the growth was based on cheap credit. Credit used for consumption and investments in the wrong sectors of economy, in stead off improving the structural strength of the economy. We incurred debt to finance prosperity. So the rise turned out to be temporary.
When the global financial crisis struck, the catch-up process was rapidly reversed. Member states even started drifting further apart. Now it’s time to restart the convergence process in order to strengthen the eurozone.
It’s no coincidence that per capita GDP development is expected to be above the eurozone average in countries without economic imbalances. Countries like the Baltic States and Slovakia. And countries that have implemented ambitious reform agendas, like Spain, Portugal, and Slovenia, have also followed an upward trajectory. However, more still needs to be done.
It’s a legitimate question whether the lack of convergence is a problem for the eurozone as a whole. Does the discrepancy in income levels put the monetary union in jeopardy? Can the eurozone survive despite diverging member states? Maybe it can. But it would be difficult to stop public support from unraveling either directly or indirectly because of increasing economic differences. Public support is the basis for our work on achieving sustainable growth and preserving the European social model. In the Eurogroup we are very aware that the EMU’s existence is justified only as long as people are convinced it enables them to build a prosperous life. Without that support, the union has little in the way of foundations.
There are of course other, more economic arguments for fostering convergence. Let me mention three I see as especially compelling.
Firstly, within the euro area business-cycle symmetry seems to be higher for countries with comparable income levels. This increases the effectiveness of monetary policy. Secondly, the policies that stimulate convergence in our union also strengthen the resilience of its member states to economic and financial shocks. And thirdly, our internal market makes it possible for the eurozone as a whole to benefit from a higher real income in individual member states.
Although the argument for convergence is convincing, I’m aware there is also an aspect that’s less appealing to member states. Eurozone countries cherish their individuality. We are used to doing things our own way. But we must realize that we can’t be part of a union and at the same time approach economic policy as a purely domestic matter. Sustainable convergence will require more policy coordination. But there will still be plenty of room for the member states to make their own choices.
Now let’s take a look at Austria. Its strong economic performance in terms of GDP per capita over the last two decades certainly sets an example. Unemployment is relatively low and labour force participation is high.
This country has been able to make full use of its less restrictive and less complex rules and regulations for its product markets. You’ve also increased your R&D expenditure to three per cent. That’s well above the eurozone average.
The question is how other parts of the eurozone can adopt the policy elements that have led to these successes. And you in turn might consider how Austria can learn from its fellow member states in order to boost its GDP further.
The tax burden on labour is a good example of an area in which we have a lot to gain. As you know, the tax wedge in euro area member states is among the highest in the world. This reduces the incentive to find a job and to hire new staff. Shifting the tax burden away from labour will boost growth, external competitiveness and employment. We’ve discussed this issue in the Eurogroup and made countries aware of it. We’ve compared ourselves in this area and affirmed our commitment to reducing the tax wedge and making reforms.
We’re seeing the first results already. Let me give you some examples. Estonia has taken several measures across the board to reduce the tax wedge on labour. France and Italy have lowered the tax burden on labour for low-earning households.
Spain has introduced a simpler tax system, including lower personal income tax rates. This summer the Belgian government announced a tax shift from labour to revenue sources that are less harmful to growth. In the Netherlands we’re about to announce lower cost for both workers and employers. And last but not least, Austria is taking action as well. This government has presented a comprehensive tax reform that will reduce the entry rate for personal income tax.
At the next Eurogroup meeting we will explore the scope for benchmarking the tax burden on labour, and we will closely follow the progress made.
But the tax wedge is just one area we need to focus on. We should also address the broader issue of labour markets, opening up product markets and improving our investment climate. And more importantly, if we want to remain a strong and competitive partner for trade and investment, we simply cannot afford to be average. We need countries to commit to catching up with – or even exceeding – the eurozone’s highest level.
As mentioned, we’ve reiterated the importance of convergence for the EMU’s smooth functioning in the Five Presidents’ report.
Stepping up economic policy coordination in the eurozone requires political ownership. It should be a concerted effort, in which the member states wave the baton as much as the European Commission. I will promote these discussions in the Eurogroup to help identify the policy areas which are essential for real convergence.
We need to translate this into a common ambition by setting simple, measurable benchmarks that foster best practices and concrete timelines. And let me stress again that, for the eurozone, achieving the average is not ambitious enough.
Ladies and gentlemen,
Time for me to conclude. After a period of crisis management the Eurozone has come out of the crisis in a strong way. The situation in Greece has not damaged the recovery path of any of the other countries. We have build a new fiscal policy, the ECB has done “whatever it takes”, we have realized in record-time a banking union which has made a successful start. Now we must deal with our structural issues. To become once again a leading economic region.
And the Eurogroup will play an active role in this. To quote conductor Claudio Abbado, who once said about the Vienna Philharmonic: ‘I don’t conduct them; I make music together with them.’ And when the musicians play together in tune, the orchestra never ceases to amaze the world.
The Eurozone must do the same.