Thank you very much for the invitation and opportunity to speak to you today.
Again, in a time of uncertainty. Political and economic uncertainty, this time stemming directly from a referendum in the UK.
And again, commentators throughout Europe contemplate the consequences of the possible next crisis.
I will argue today that we should not wait for the next possible event (which may never happen) but should look at the fundamentals and continue to work on improving those.
Economic outlook eurozone
There is quite a bit of doom and gloom about the eurozone, right now. And I don’t believe this is justified. Despite global headwinds, our economic growth is broad-based and increasing year by year, unemployment is slowly, but certainly going down, and deficits and debts are steadily declining. All as a result of the decisive measures we took.
I realise we are not there yet, and I don’t blame those pointing out risks that are still around, but we need to be realistic. We need to reset our expectations. Europe is an aging continent. and an ageing society means that potential growth will be lower. Average growth in the eurozone in 2015 was 1,7 per cent and if we pursue the right policies it can go up to 2% potentially but the growth levels some of us knew before the crisis will not return quickly.
It seems to me many of us are still in a post-traumatic stress mode. Any event that occurs is immediately framed as “the next crisis”. A striking example was the elevated volatility in stock markets at the start of this year, which immediately made everybody gloomy again. In the run-up to the G20 in Shanghai in February international organizations (like the IMF and OECD) were quick to lower their growth forecasts, calling for bold, urgent and collective action to avert the derailment of the global recovery. Also, today we witness increased volatility ahead of the referendum on Thursday. Let me say two things on that.
One, the volatility at the beginning of this year – certainly in the banking shares – was partly due to a healthy repricing of bank shares following the implementation of stricter rules for our Banking Union.
And two, volatility highlights the importance of having a clear message of where we are and where we are going. To have a steady hand. These two points combined strengthen my firm belief in the need to enforce what we have jointly set out to do in our fiscal measures and economic and financial governance framework. There should be no doubt about the EU’s determination to follow its rule book.
To those who say that politicians have not done enough, I would argue the opposite. Politicians have taken on a number of very difficult reforms, dealing with housing markets, labour markets and pension systems. They had to do this in difficult circumstances. At the height of the crisis, when people lost their jobs and saw the value of their houses drop significantly. And in a time when people felt insecure because of the threat of terrorism and the uncertain consequences of migration. Migration that puts pressure on our societies, on wages and on job prospects. Particularly of low skilled workers. Migration that forces us to answer bigger questions related to inequality, social mobility and the future of our European social model.
Despite all this, politicians in many of our countries have taken up the difficult task of making our social welfare system future proof and modernize their economies. And off course, they did not win any popularity contests in the process.
Finishing what we started
Throughout the post-war period – when we look back, I suppose – right up to the introduction of the euro, the EU was built by taking big, historic steps forward. The goal was clear; the EU was there to provide security and prosperity for all of us. And for many years, this is exactly what the EU delivered.
However, while thinking and working on expanding and deepening our Union, we forgot to deliver on these key issues: prosperity and security. The refugee crisis and the threat of terrorism on top of the financial crisis have painfully demonstrated our inability to guarantee the security and prosperity the European people rightly ask of us. The EU is not shock proof.
Two striking examples; we decided to abandon internal borders within Schengen – which makes a lot of sense -but then failed to protect our external borders. We established a monetary union but did not bother to think about the sovereign-banking nexus. We started projects but never really seem to finish them. By neglecting essential elements like these, no safeguards were built.
We need to focus again on delivering what really matters, which is bringing security and prosperity to the people of Europe.
For that reasons, I don’t believe that we should take next big steps in deepening or expanding the Union. In the eurozone some are pushing for a completion of the monetary union by creating a full political union, an Euro area economic government or even a euro budget, the fiscal capacity.
To me it is obvious; we need to strengthen what we have and finish it, but let’s not build more extensions to the European house whilst it is so unstable. Let’s take a pragmatic and step-by-step approach whereby we first make sure the fundamentals are in place. Above all, this means proving that we will finish what we have started.
So what does this mean for our agenda today? How do we make the EU more shock proof?
First, we should complete our Banking Union as it enhances the resilience of our banking sector. European supervision and stricter prudential regulation address risks in bank’s balance sheets and prevent the build-up of future risks. Bail-in limits the bank-sovereign nexus and helps getting the incentives of investors right. It avoids the use of taxpayers’ money for troubled banks. But more work remains to be done. This means first of all dealing with the risks that are still there. Establishing a solid leverage ratio for example and reducing existing national options and discretions. On the other hand this also means putting in place a common backstop to the Single Resolution Fund and a European deposit insurance scheme (EDIS). Ultimately, an adequate treatment of sovereign exposures is needed. Last week we agreed on a roadmap for further work to complete the EU’s Banking Union.
It sets out priorities and milestones for the coming years, in terms both of sharing risks and addressing outstanding risks and challenges. Risk reduction and risk sharing are both taken on, to put the incentives right.
Second, we need to establish a Capital Markets Union. Well-functioning capital markets will strengthen cross-border risk sharing through deeper integration of bond and equity markets. That will open up a wider range of funding sources for our economy, providing a shock absorber of a kind we currently lack. The proposal on securitization was agreed at record speed in the council. This month we reached an agreement on the Prospectus-directive, on the money market funds, and hopefully we can complete the trilogues with the European Parliament on all of these elements very soon.
Third, we should truly deepen the single market. A market that gives 500 million Europeans access to goods, services, jobs and business opportunities. Yet today many barriers still remain. Removing them would mean new opportunities to boost our economies. We should open up the enormous number of regulated professions that are still there. This would be difficult as it affects vested interests, but way more beneficial for our citizens today than pursuing “the ever closer union”.
These key reforms, finishing the Banking Union, setting up a Capital Markets Union and the internal market can contribute to raising the current potential growth levels in our countries. And make our economies much more shockproof.
On top of these initiatives taken at European level, member states need to see what they can do to increase potential growth. This requires some difficult reforms of the structures of our economies, markets and administrations. Difficult because our electorates, everywhere in Europe, are very concerned what these reforms mean to their daily lives.
This touches the heart of the European ‘social model’. No other region of the world has such high standard of social-economic security. And, as a consequence, such low levels of inequality. This is the result of generations of politicians, mainly from the political centre, giving priority to combining a good business climate with strong collective arrangements for pensions, education, healthcare and unemployment schemes.
Unfortunately, however, on top of our aging population, the financial crisis and the refugee crisis have clearly put pressure on this unique social model. Pressure on wages and on employment opportunities I spoke about earlier. And this at a time of high public debts and deficits that already needed to be adjusted. So we need to adjust.
So what should we do? Above all we have to be realistic. For example, considering migration as a potential solution for aging is nice in theory, but hard in practice. Having a strong social system requires defining the scope of our solidarity. Who’s part of it, and who’s not. What obligations should go with social rights. Entering the social economic model is much more difficult for migrants than many are aware. On top of which we have to solve social and cultural issues that make integration difficult.
We need to adjust but at the same time maintain this unique social model. This requires well designed, well timed structural reforms. A lot has been done in many European countries, but more needs to be done. Let me give you some examples.
First, we can modify our tax and transfer systems. All eurozone countries (except for Ireland) have a higher tax wedge on labour than the OECD average. So let’s lower the tax wedges for the lower half of our labour market to create new jobs. This is something we’ve been working on the eurogroup and many countries have already taken initiatives this year.
We can safeguard the capital income tax base, limit tax avoidance by companies and increase tax compliance. It is important the EU is at the very forefront of the fight against tax avoidance. I am therefore glad that after intense negotiations, the Council took a major step last Friday in responding to aggressive corporate tax planning by agreeing on the Anti Tax Avoidance Directive. This is a turning point for all of us after many years of tough tax competition, now working together to create an even tax base between us. This agreement which became definite last midnight, is only a first yet important step in this respect.
Second, we can create much more business opportunities for starters and young entrepreneurs. Let’s open up our service- and product markets, allowing for new competitors to challenge and improve our companies. Strong regulation and qualification requirements might be necessary for some professions, but should not be used to protect insiders and earn excessive profits. That is socially unsustainable.
Third, we need to look carefully at the quality of our public spending rather than increasing our deficits and debts at the expense of future generations. The OECD’s 2016 report Going for Growth indicated that where labour productivity is concerned, the biggest gain can be attributed to educational reforms. So we need to invest in education, vocational training, improving the quality of our teachers and providing early childhood education. This is by far the most socially beneficial type of reform thinkable, because it promotes equal opportunities for all.
Let me conclude by saying a few words about the UK referendum the day after tomorrow.
The UK is not alone in its scepticism and criticism towards the EU. This criticism is a phenomenon in all our countries. Populist parties – on the right and the left – are gaining ground. But that in itself is not a reason to leave. It is a reason to build a better EU, an EU that brings security and prosperity again. A EU that has focus, gets things done, and in which member states never shrug their own responsibility. So, If the UK votes to remain, I would urge the Brits to play a stronger role, take the lead again with us, and make sure we get it right.
We have to make the EU work. That does not mean we need a full political union. It means we need to strengthen what we have.
Call me an optimist but I still believe we can do that. And I am determined to do it. We can put the fundamentals in place, not by huge leaps in the dark but by finishing what we started. By strengthening what we have build so far. Let’s concentrate on that. We can preserve the social model Europe is known for, despite the heavy pressure on our welfare state. Let’s work on that. We don’t have to take inequality as a given. With the right set of policies, we can make it a thing of the past. And create new opportunities for next generations. So let’s do that and make that our common goal for the future.