04 December 2013

VP Rehn: The recovery of the European economy

Since the summer, we have been seeing an economic turnaround in Europe, albeit a tentative one at this stage. We expect the recovery to gather strength next year and further in 2015. We all know that this has been no ordinary cyclical downturn. Its origins lay in the large and unsustainable macroeconomic imbalances that accumulated over too many years. It is no ordinary cyclical upswing and return to growth, either. The macro-economic imbalances became cemented in economic structures. The credit boom brought a massive misallocation of resources in the previous decade. This is why addressing the debt overhang must go hand-in-hand with addressing the structural challenges in Europe.

The Commission has not advocated a one-size-fits-all policy but a strategy of differentiated fiscal consolidation according to fiscal space, together with economic reforms that support the economic turnaround.  Debt will stabilise in the euro area next year before beginning a gradual decline.  Overall the pace of fiscal consolidation in the euro area as a whole is set to slow down substantially in 2014, which is consistent with the nascent recovery. This slowing down has been made possible by three factors:

1. by the increased credibility of fiscal policy, which the euro area Member States have achieved since 2011.
2. by the decisive action the ECB has taken to stabilise the markets.
3. by the reform of EU economic governance, which now provides an effective framework for a consistent consolidation of public finances over the medium term and the advancement of structural reforms.

Social fairness is not in contradiction with sound public finances. And while sometimes requiring difficult decisions for particular groups, structural reforms help to spread the benefits from growth across society. I naturally see a role for public investment here. But I also think we must use ways to better mobilise private capital with some form of risk-sharing with the public sector. The project bond initiative is one example, and with the new MFF from January on, the Union budget will make more use of risk-sharing schemes in general.

Of course the private banking sector will remain the dominant source of financial intermediation in Europe, and this is why the upcoming stress tests are so important to complete the repair. This is also essential for a sound start into the Banking Union, which should build confidence and reduce financial fragmentation. This is not about bailing out bankers, it is about strengthened responsibility and financial stability, so that banks can go about their core business of lending to the real economy, and get credit flowing so that companies can invest and create jobs.The Banking Union is one key pillar for a deeper and genuine Economic and Monetary Union.

As regards economic and fiscal policy, with our autumn package, including the assessments of euro area draft budgetary plans, Europe has taken a major leap forward in economic policy coordination. In the context of the macro-economic imbalances procedure, you have noted that in-depth reviews will be conducted for several countries with current account surpluses. These are not exercises in central planning but in-depth analyses of developments and economic structures that could act as impediments to growth and job creation.

In my view, the way for further fiscal integration to emerge is through a profoundly democratic process, both at national and at European level. This is necessary in order to achieve the required legitimacy when dealing with the twin issues of solidarity and sovereignty. Realistically, a deep fiscal union will not be created overnight.

Full speech

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