Remarks by Vice-President Dombrovskis at the Atlantic Council
Don’t worry, I am not here to talk thermodynamics with you. But as a metaphor for both the logic and the limits of the European project in challenging times, the idea is an attractive one.
Growth through openness, order out of chaos… these have, in the past, been the key elements of the Europe’s success. And today, the same principles are at stake.
European integration has always been about adapting our governance structures to changing circumstances, both internally and externally. About using institutions to manage globalisation. In this, our openness as a society and as an economy is a strength. Even if, in a democracy, it is not always an easy one to manage…
Once again, this is the task we have ahead of us:
With the financial, economic and sovereign debt crisis, we saw how interrelated our economies are, and how the structures that previously brought us opportunities were insufficiently resilient to do the job when they were challenged. Since then, we have done a lot to strengthen the EMU architecture, but more needs to be done both at EU and at national level.
With the refugee crisis, we now find that the open borders at the heart of Europe’s integration are in themselves inadequate: in times of tremendous pressure from outside, a common market demands cooperation on managing external borders as well, and a shared idea of common goods such as defence and security.
And due to instability and geopolitical pressures in Europe’s immediate environment,from Ukraine to the Middle East and Africa, we find that the world’s problems come knocking on our door, whether we feel like opening or not…
And on top of that, all of these shocks are potentially divisive by nature: they affect diverse parts of Europe differently.
So they threaten to re-open gaps between richer and poorer countries, create disagreement between transit and destination countries, or increase pressure between principles of responsibility versus solidarity. And they are often perceived differently by countries with diverse democratic traditions… making the political recalibration all the more difficult.
But this realisation only reinforces our sense of responsibility, and my message is clear:
Never underestimate Europe’s will and ability to come to solutions. When faced with common problems, we eventually find common, systemic responses – that too is a lesson Europe’s history teaches us.
Ladies and gentlemen,
Never has Europe’s capability to create order out of chaos been tested as severely as it was in the wake of the financial crisis. It has been the main task for EU leaders over the past few years, and the change it has brought about is profound.
In economic terms, Prigogine’s ability to ‘withstand’ pressure meant enhancing our crisis management capacity and undertaking reforms to address the root causes of the crisis, such as tackling excessive debts, removing vulnerabilities in the financial sector and improving our competitiveness. It has also spurred us to further deepen Europe’s Economic and Monetary Union to make our institutional foundations even more solid.
And our capability to ‘dissipate’ shocks finds a parallel in Europe’s efforts to complete our single market and the integration of our Economic and Monetary Union. Part of this is to shape a real financial union so that opportunities are better spread and shocks are smoothed across the whole of our economy, while risks are effectively monitored and tackled with a functioning banking union.
We have come a long way to improve the effectiveness of this system. In the response to the crisis, we have introduced:
- An upgraded macro-economic governance framework to better coordinate economic policy among Member States;
- A macroeconomic imbalances procedure to detect and address economic imbalances early on;
- More sophisticated fiscal rules;
- A financial backstop – the European Stability Mechanism – to provide temporary fiscal support to Member States in difficulty;
- We have set up a banking union to weaken the bank-sovereign loop and ensure financial stability;
- And the European Central Bank has made full use of its monetary policy tools.
So today, the results are there:
Europe’s economy has now entered its fourth year of moderate but continued recovery. Last year, economic output either increased or was stable in every Member State. Next year, the economies of all Member States are expected to expand. Last year, the only exception was Greece but next year, provided Greece is on track, all Member States are expected to expand.
- Unemployment is on a slow but steady decline. Last year, it fell below 10% for the first time since 2011. This year, it is expected to reach 9.0%.
- Lending to the real economy has picked up in the euro area and real wages have started to increase.
- Government bond spreads – anxiously watched during the crisis – are now both converging and decreasing.
- Wages and productivity have aligned further, with nominal unit labour costs converging since the crisis.
- EU exports have also picked up. Indeed, they have even surpassed levels recorded before the crisis: total EU exports reached €6 trillion in 2015, as compared to €4.1 trillion in 2004 – a 20% increase even when compared with the boom year – or maybe bubble year – of 2007.
Importantly, strong gains are also recorded in the countries worst hit by the crisis, and hence being some of the most active reformers since then.
As for the overall credibility of the monetary union, it’s important to note that market reactions to the last Greek crisis were notably subdued. It has seen as a Greek problem – serious enough in itself, and the work on correcting the problems certainly continues – but there were very little spillover effects to other euro area countries. This underlines the fact that the reforms of the euro area governance structure – including the banking union and the European Stability Mechanism – have really paid off.
But we still have work to do. We cannot yet be satisfied of the performance of the euro area. European integration as a tool for convergence in and among Member States needs to be fully restored. Last year, a report of the presidents of the five most important EU institutions laid out a roadmap for a more resilient, prosperous and fairer Economic and Monetary Union. We are working on its implementation.
The European Commission’s Annual Growth Survey, which sets out the economic priorities, focuses on three immediate concerns: re-launching investment, structural reforms to modernise our economies, and responsible fiscal policies.
While the systemic work continues – further reinforcing the institutional foundations on which our economy rests – a boost in investment must help to revive our growth prospects. Our bond with the US is a great source of energy in this, and one we want to exploit even further.
There is plenty of liquidity available in Europe, as well as strong international interest to invest in Europe. Yet investment does not take off as it should. Current investment levels in the EU are well below what is considered a sustainable trend level of 20-21% of GDP.
Why is that so? Uncertainty plays a major role – a lack of risk financing and a lack of certainty regarding projects – and regulatory barriers and fragmentation continue to hamper investment.
For that reason, the European Commission has launched the European Fund for Strategic Investments (EFSI), using public funding to attract private capital, create clarity and increase the broader momentum for investment in Europe.
Since the EFSI has entered into force in July 2015, the European Investment Bank has approved 54 projects for financing under the EFSI framework, to the tune of €7.2 billion, the main beneficiary being SMEs and mid cap companies. The European Investment Fund has approved more than 150 SME financing agreements, with total financing of €3.4 billion. Together, these operations are expected to have triggered total investments of €82 billion already. This means the aim of EFSI, with limited amounts of public funds, to unlock substantial private investments, is really working.
The same rationale underpins the Commission’s work on fostering a capital markets union – one of the areas where differences between Member States remain large and there are plenty of opportunities left to integrate them.
To compare: the EU economy is larger than the US’s, but our equity markets are less than half as large and our debt markets less than one-third. Here in the US, small and medium-sized companies raise about five times as much funding from capital markets as in the EU. And venture capital markets as deep as the US could have provided us with an additional €90 billion over the past five years.
So we are working hard on knocking down barriers and synchronising rules so that European capital markets fully live up to their potential. A truly European capital markets union would be able to better transmit monetary policy effects to the real economy, promote private risk-sharing and resilience.
This is also a natural complement to the banking union, which we set up to stabilise and properly manage EU banks, drawing on the lessons learnt from the crisis in the past.
The US is a key ally in this. Global trade and investment was one of the drivers of Europe’s renewed growth since the crisis. But as a result of economic rebalancing in China, nervousness on international financial markets and volatile oil prices, the immediate global outlook is more uncertain. So we need to make the best possible use of our assets, and the transatlantic bond is one of them.
Ours is already the biggest investment relationship in the world: the US accounts for some 32% of Europe’s outward stock of FDI and 39% of inward FDI stocks. And it is as strong as ever: since the start of this century, Europe has attracted 55% of total US global investment – more than in any previous decade (and by comparison: China still accounts for only 1.4%). The Transatlantic Trade and Investment Partnership would cover 30% of the world’s trade in goods and services, 40% of FDI and 45% of the output.
We can use this tried and tested combination to improve growth, for instance in important areas like public procurement. And we should use our combined weight to set the standards in the global economy, as is part of the aim also in the latest TTIP negotiating round on sustainable development, labour and environmental rights, and on regulatory issues in sectors like cars and medicines.
But all this can only truly benefit our growth and jobs prospects if it doesn’t ‘fall on rocky ground’: continued structural reform and responsible fiscal policies are as necessary as ever to reinvigorate our social and economic systems.
Investment support alone – or, for that matter, monetary impulses – cannot fix our economy in the longer term. It can only make it easier for us to do so.
As global economic uncertainties are on the rise, we need to strengthen business and investor confidence. The best way to do so is to tackle structural weaknesses head-on. I am therefore convinced that Europe must accelerate implementation of reform agendas, to consolidate confidence, and to allow reform effects to feed into economic growth as soon and as much as possible.
We also know that such efforts pay off: research shows how Member States that thoroughly reformed labour market and social protection systems before to the crisis have fared better than others. The effect of structural reforms undertaken since then has also become clear, and they can be especially helpful when pursued across the Eurozone. Overall, labour market resilience is growing but problems regarding long-term and youth unemployment remain. Increasing poverty and social exclusion, growing inequality and the erosion of the middle class still need to be addressed.
So reform priorities include flexible and reliable contractual arrangements, lifelong learning strategies, modernising social security systems and focusing taxation systems on enhancing growth and jobs. Creating competitive product and services markets and a favourable business environment – which also means making our public administrations more efficient – remains high on our agenda.
The challenge is clear: staying the course, especially now that the worst of the crisis is behind us. It is never too soon to start reform.
The same is true for our efforts to cut public deficits. We are also making progress there: this year, public debt should go down to 86.9% of GDP, and deficits are expected to go down to -2.2%.
Sound public finances are a precondition for sustainable growth. We need to keep up efforts to unburden Europe’s economies of excessive debts, so that governments have the fiscal space to play a countercyclical role when necessary. We also need them to maintain the credibility of our overall reform project. To prove to partners, markets, investors and citizens that we have the staying power to do what we promised.
So if I come here with largely the same message as in my speech last year: that is precisely the point. Our main economic policies remain unchanged – we need to concentrate on implementation.
The political and societal context, I’m sorry to say, is not at all the same.
Political minds are focused on the refugee challenge. The terrorist threat is tangibly present. Geopolitical fragility threatens to overshadow everything else.
Yet we need a strong economy – and the related sense of unity as a European Union – to cope with all of these challenges. Our place in the world – our soft as well as hard power – will always depend on our ability to safeguard our economic fundamentals and on the success of our social-economic model.
Take migration: our reaction since the start of the crisis have been aimed at making sure all countries’ shoulder their part of the responsibility as much as possible, as well as guarantee that there is some form of solidarity – especially when and where the pressure goes beyond individual countries’ capacities.
For this, we need more effective and unified border management, coordinated at EU level. It also demands sufficient funding to underpin agreements with countries like Turkey but also in the Middle East and across Northern Africa, who are indispensable partners in our fight again illegal migration and in meeting our responsibility towards those that truly deserve asylum in Europe. And as the inflow of refugees evolves into an integration challenge, it also demands economic opportunities, well-performing labour markets and sustainable public finances. We won’t be able to meet this challenge unless we have strong and stable economic foundations.
Another example is Ukraine, where attractive European markets and concrete European assistance are the best tools we have.
Within the Commission, we are thinking about how to strengthen our Macro-Financial Assistance Facility, which we use in Ukraine, to allow us to contribute more – and more effectively – to financial stability in regions of strategic importance for the EU. This is a key part of our efforts to safeguard’s Europe’s security and to address the root causes of the refugee crisis. But this too demands a flourishing economy.
And it demands a collective European response – notably to maintain sanctions on Russia – that can only be sustained if the benefits of the EU in the broader sense are beyond doubt. That we are ‘in it together’ and, together, we are a power to be reckoned with.
Because essentially, of course, the bigger picture is political: it all starts with the political will to move ahead together.
Within Europe, as well as among our partners around the world, there is a clear sense of what is at stake: to overcome these challenges, we need more cooperation, new forms of integration and solidarity. Their legitimacy can only be based on the fundamental values and logic underlying the European project. On the broad realisation that, through European unity, we can better defend our interests, strengthen our voice and upgrade Europe’s power internationally.
The sovereign debt crisis has been met by not only – famously – saying but by showing that we will do ‘whatever it takes’ to uphold the euro.
Rest assured that, now, the political will is there to do whatever it takes to uphold the European project.
Compliments of the European Commission