Analytics, Banks, Business in Europe, Economics, EU – Baltic States, Financial Services, Legislation, Markets and Companies

Reviewing the EU monetary union’s conditions and the general economic situation, the Commissioner described the existing challenges.  

Facing the crisis, there are numerous challenges for the EU and the member states: in the short term, the EU member states have to stabilise financial markets so as to avoid the free fall of their economy. In the medium term, the states need economic reforms for sustainable growth and job creation. And in the long term, both the states and the Commission have to redesign the architecture of EMU.

Creating the conditions for new growth has required consistency and determination – not least as it involves the unwinding of macroeconomic imbalances that had built up over many years.

Challenges and opportunities

These challenges do not represent an ordinary cyclical downswing; it is not an ordinary return to growth, either. In 2011 and 2012 the priority for the Union and the member states had been to stabilise financial markets. The newly created financial stability mechanisms, i.e. the EFSF, ESM and other ECB's policies greatly helped in this sense. The risk of extreme events in the European economy was substantially reduced.

Financial market stabilisation was a necessary but not sufficient condition for recovery in an economy that is as reliant on bank finance as is the eurozone. Since banks themselves were highly in debt across Europe, this major channel for growth has remained impaired.

During summer 2013, there were positive signs that the EU economy has reached a turning point. Data for the second quarter of this year confirmed the beginnings of a gradual recovery. Positive signals are also coming from the vulnerable member states, though they continue to face major challenges.

The Commission expects growth in Europe to pick up gradually in the second half of 2013. However, there are still major divergences in growth in the eurozone, and there is an unemployment crisis in many EU countries as well.

It was Joseph Schumpeter who once said that the condition of the monetary system of a nation is a symptom of all its conditions. Presently, Schumpeter’s remark is applicable not only to single nations but to the 17 – soon to be eighteen – European nations that have pooled their monetary systems.

In order for the recovery to be fully felt in the real economy, it requires continued policy action on at least three fronts: the real economy, the financial industry and the public sector.

Reference: European Commission - SPEECH/13/662; 29/08/2013.

The first condition for sustainable growth in Europe is to realise what is crucial in a monetary union is the capacity for real economic adjustment, a point that was generally forgot during the first decade of EMU. A very high economic and social price has been paid for that omission, argued the Commissioner.

Structural reforms

In politics, we like to use the term "competitiveness" for this, but to remain in the world of Schumpeter, it has to be “growth through changes”. This is about how the member states’ social and economic institutions influence the adjustment capacity of economic players to reap the benefits of economic exchange and free trade.

In the eurozone, both SMEs and big businesses face global challenges but also opportunities.  Competitiveness comes from competition, and it depends on the states’ capacity to innovate and to ensure that present workforce has the appropriate skills. This is why structural reforms are so important: reforms would help to improve the functioning of goods, services, labour and capital markets.

Structural shifts in global trade in the past decade, notably enlargement of the EU and China's accession to the World Trade Organisation, have so far affected countries across the eurozone in an asymmetric way.

Trade with non-eurozone states

Germany's current account surplus is by now largely determined by trade with non-eurozone countries, especially emerging economies. Also, more domestic demand in Germany would not necessarily benefit all eurozone countries to the same extent. Rather, the positive impact on growth would mostly be felt in its neighbouring countries.

For example, Austria's economy has been able to benefit immensely from the EU’s eastern enlargement; it was definitely, a mutual benefit.

Though Austria has also been among the surplus countries since the euro was launched, it was a deficit country for almost three decades before. Surpluses were invested to a good extent as FDI, not least in its eastern neighbours. Austrian unemployment is now amongst the lowest in the EU. Austrian experience could be a good lesson to emulate for other states.

The return to growth still depends very much on country-specific factors, be it public and private debt or their different social systems, and of course responsibility for many structural policies still lies at national level, added the Commissioner.

A large degree of consensus for reform greatly facilitates the turnaround. Ireland, which is on track to successfully exit its economic adjustment programme by December 2013, is a clear example. Latvia, which exited its programme a year ago and will join the euro in January 2014, is another.

Financial issues

The second condition for sustainable growth is that the necessary structural change and new economic activity must be financed. And this financing is today being held back by vulnerabilities in the banking sector. Many SMEs still struggle to access finance.

That is why the Commission will continue building the regulatory and supervisory architecture for Europe's integrated financial market summarised in the banking union.

Banks are now subject to far tougher rules than they were at the onset of the crisis. Moreover, Commission will soon have a single bank supervisor for the eurozone. The Commission has made a proposal to complement this with an authority to resolve failing banks, by using a common resolution fund. This is not about using public money to “bail out bankers”, because the fund will be financed by the sector itself.

The banking union will not be completed overnight. But it must be given a good start, the Commissioner added. Rigorous asset-quality reviews and stress tests scheduled for early next year are crucial to address the remaining weaknesses.

The role of European Investment Bank

The current gap in private sector lending has to be bridged by other players, for example the European Investment Bank, whose €10 billion capital increase is now effective. This increase has allowed the EIB to boost its lending volume for 2013-15 by 40%, which is mostly directed towards financing SMEs, innovation, infrastructure and green growth.

For example, the EIB signed more than € 8 billion loans in Austria between 2008 and 2013. Recent projects include €100 million loan for the expansion of high-speed internet; €1 billion for the extension of the railway line connecting Vienna and Salzburg, one of Austria's busiest rail corridors; € 250 million loan for research and development projects and several wind farms.

Together with the EU budget, EIB resources are also being used to attract other investors, such as pension funds and insurers. Last month, a large underground gas storage project in Spain was the first to issue project bonds under the pilot phase of the joint Commission-EIB initiative – an encouraging sign of confidence in the country.

Sound public finances

The third condition for sustainable growth is sound public finances. This includes sustainable social security and a growth-enhancing allocation of public spending in education, innovation and infrastructure.

In the coming decade, a major drag on growth will be the decline in the working-age population. Reforms are important not only to overcome the current crisis but also to address the long-term demographic change.

In view of the progress already made in reducing deficits, the Commission was able in the spring of 2013 to recommend to several countries to slow down consolidation. The Commission hopes that this additional time must be used effectively to intensify the implementation of structural reforms. This is the case for France, Italy, Spain, Belgium and Slovenia, among other states.

The two largest eurozone economies, Germany and France, together hold the key to a smoother and more effective rebalancing of the European economy. In a nutshell, this calls for competitiveness-supporting economic reforms to the labour market, business environment conditions and pension system in France, and for structural measures to further reinforce domestic demand in Germany. If Germany and France together can achieve this, they will do a great service to the entire eurozone by providing stronger growth, creating more jobs and reducing social tensions.

Conclusion

Contrary to the doom-mongers' prophecies, the euro has not broken up. The latest economic indicators show that the EU economic strategy is starting to deliver.

But the road to new growth will continue to require difficult choices and persistence. The EU and the member states must continue reforming the European economic and social model. This model shall not be dismantled as it is based on the combination of stability culture, entrepreneurial drive and social justice.

The EU needs genuinely reformed and modernised social market economy, for the sake of sustainable growth and job creation.

“Taking Europe or the eurozone in isolation cannot work”, said the Commissioner. And added: “Our economic reality is global. Europe must develop a common perspective, in a global context. But this cannot be an excuse for any one stakeholder to not assume his or her individual responsibility”.

Reference: http://europa.eu/rapid/press-release_SPEECH-13-662_en.htm?locale=enSPEECH/13/662;

= Speech: The conditions for new growth in Europe