08 March 2013

VP Rehn: European Semester – Stable public finances and sustainable economic growth

The three main policy priorities for the EU remain:

First, it is essential to maintain the momentum of structural reforms to boost growth and job creation, strengthen the adjustment capacity of our economies and reverse the trend of European losses in global competitiveness. Reforms to create more dynamic and competitive labour and product markets are key, together with more efficient, business and citizen-friendly public administrations. We also need to step up our efforts to ensure high-quality education and support innovation.

Second, restoring lending to the real economy. The excessively tight financing conditions, especially in southern European countries like Spain, Portugal and Italy, are hindering the flow of credit to households and businesses and thus suffocating economic activity and holding back export growth. That’s why we need to complete the repair of the financial sector, to unblock private investment.

But we need to do even more to boost productive investment. Public banks such as the European Investment Bank have an important role to play here. The €10 billion increase in the EIB's capital has agreed last year has expanded its lending capacity by €60 billion, which means around €180 billion investment in innovation, infrastructure and green growth in Europe over three years, starting this January... Due to the capital increase of €10 billion, the EIB will increase its lending in the EU in 2013 by around 36 per cent, so we expect the loan volume to increase in Poland as well.

Third, as mentioned, a differentiated growth-friendly and consistent approach towards consolidation remains crucial, in line with the provisions of the Stability and Growth Pact.

While we still have ahead of us Poland’s Convergence and the National Reform Programmes and their assessment under the European Semester at the end of May, let me say a few words on Poland's response so far to the recommendations made to Poland last year.

First, regarding public finances, Poland was recommended to correct its excessive deficit by 2012. On the basis of our winter forecast, it is projected to have recorded a deficit above, but still close to the 3 per cent of GDP reference value of the Treaty. Given that and the fact that the debt is expected to remain below 60 per cent of GDP, Poland could benefit from a special rule that takes into account the net cost of a systemic pension reform including the setting-up of a mandatory second pension pillar.

However, for an abrogation of the Excessive Deficit Procedure, we need to see the actual data for 2012 and the costs of the pension reform validated by Eurostat. Moreover, our subsequent Spring Forecast should then confirm that the deficit has been durably corrected.

Prudent fiscal policy needs to be complemented with structural reforms which are essential to increase potential growth amid intensifying competitive pressures and negative demographic developments. In that respect, the progress Poland has made on increasing the retirement age to 67 is welcome. Also the continued focus on boosting investment will be vital to provide the necessary fuel to the economy.

At the same time, further efforts are required to tackle a number of recommendations addressed to Poland last year, in particular in the areas of youth unemployment, education, labour market reform and creating a more innovation-friendly business environment. I understand that the work is going on.

Last but not least, I am aware of the debate being launched about euro adoption by Poland. It is up to Poland to decide on the strategy and timing for joining the euro. But it is worth making the point that the benefits of the euro depend on a country’s capacity to operate smoothly within the framework of the monetary union. This means sound public finances and solid competitive position on the markets.

Since its accession, Poland has embarked on a steady catching-up process, benefiting from the sizeable structural and cohesion funds of € 80 billion which makes 2.5 per cent of GDP in 2004-2013. With exports being the primary engine of the Polish economy, it has also reaped the benefits of trade integration. While going through periods of slower and higher growth, it has avoided boom-bust cycles and the accumulation of damaging macroeconomic imbalances. Poland remained a beacon of economic growth in 2009 when all other European economies fell into recession.

Poland has benefited from its early embrace of structural reforms, but it will be important to maintain or where necessary, step up the tempo of reform, to continue to remove bottlenecks to growth and job creation. Staying the course of sound fiscal policies and addressing successfully structural weaknesses are key to take Poland to the next stage of economic development and in parallel to prepare the economy for a successful life in the euro area.

Full speech

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