19 February 2013

VP Rehn: 10 years on, where is the euro headed? The economic and political future of the European Union

We face three main challenges. First, we need to find a solution to the challenge of sustainable growth. Second, we need to continue with ongoing efforts to meet the challenge of fiscal sustainability. Third, we have to meet the challenge of rebuilding the Economic and Monetary Union.

The first challenge, sustainable growth, calls for us to reverse the trend of European losses in global competitiveness. We need to ask ourselves: what more can we do to create jobs? What more can we do to improve productivity?...

We need to keep focus on boosting productive investment - both public and private. At a time when the financial sector is still not functioning as it should, public banks such as the European Investment Bank have an important role to play. The increase in the EIB's capital agreed last year is a very concrete example of this.

At the same time, we must not forget that private investment is the prime driver of growth and jobs. To unblock private investment, we must complete the repair of the financial sector to restore the flow of credit to households and business. It is not about "bailing out bankers". It is about growth and jobs. Public and private investments are not contradictory, both are crucial in order to restore growth...

The second challenge, fiscal sustainability, requires staying the course of reform and growth-friendly fiscal consolidation. Public debt in the EU has risen from around 60 per cent of GDP before the crisis to around 90 per cent of GDP now. On the basis of extensive economic research, we know that when public debt rises above 90% it tends to have a negative impact on economic dynamism, which translates into low growth for many years.

Nevertheless, public finances in the EU are gradually improving thanks to, on the one hand, enhanced EU governance tools, and on the other hand, determined effort by governments. This is mirrored by an increase in markets' confidence in the actions being taken by EU governments. Deficits halved between 2010 and 2012, coming down from above 6 per cent to just above 3 per cent of GDP, and we expect a further fall to well below 3 per cent this year.

The situation does, however, vary substantially among Member States, which is why we apply a differentiated approach to consolidation, taking into account the specific challenges of each and every Member State when determining the structural fiscal adjustment effort needed. If growth deteriorates in an unexpected manner, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort and does the necessary structural reforms to underpin medium-term stability and growth.

Finally, our third challenge is rebuilding the Economic and Monetary Union. At the end of last year, the Commission presented a blueprint setting out its vision for a deep and genuine EMU. In setting out a roadmap with actions necessary in the short-, medium- and long term to bring about a genuine EMU, the blueprint balances both increased responsibility and increased solidarity within the eurozone.

For the short term (6 to 18 months), we foresee several concrete proposals within the current Treaties, starting with the banking union. The agreement on the Single Supervisory Mechanism reached in December was an important step. But we must limit taxpayers' exposure to the banking system. Thus developing a European Resolution Mechanism is a key priority for this year. A resolution fund should build on contributions from the financial industry itself.

In the medium-term (18 months to 5 years), we could envisage further integration involving Treaty changes. Our guiding principle is that any steps towards increased solidarity and mutualisation of risk would have to be combined with increased responsibility; that is, with further sharing of budgetary sovereignty and deeper integration of decision-making.

But a deal on the so-called “Two-Pack” reform to further reinforce economic governance remains a necessary condition for any real progress toward an EMU 2.0. That's why I am glad that we have in recent days seen serious progress within the European Parliament towards an agreement on the matter. I look forward to continue building on this agreement. This is a test of Europe's credibility on our road towards a stability union of both responsibility and solidarity.

Full speech

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