22 April 2013

VP Rehn: Growth and deeper integration in Europe

"Despite reforms, the ongoing process of deep economic rebalancing continues to impact on the European economy. We expect growth to return only gradually in the second half of this year, together with an acceleration of world trade."

I believe that the focus on fiscal policy alone is a much too limited view when trying to trace the reasons for slower-than-anticipated growth in Europe. We are not in a normal cyclical downswing, but one whose fundamental cause lies in the macro-economic imbalances and the ongoing balance sheet adjustment process.

This process has led to – and is exacerbated by – a fragmentation of the financial market in Europe. There is no doubt about the structural adjustment needs. However, the reallocation of resources is hampered where excessively tight financing conditions for businesses and households prevail. In my view, this is caused by the still-unfinished repair of the financial system and banking sector. Today’s liquidity trap is in fact a financing trap...

In contrast to the US, the European economy remains a bank-based system. Europe should certainly become more open to more capital market financing, and we have already launched some initiatives and are considering what more can be done. But for the time being, bank dependence will prevail.

The European Investment Bank is now filling the gap where private banks are currently not capable of supporting the real economy. Its loan book amounts to over €450 billion, making it the largest supranational public bank. The capital increase of €10 billion allows the EIB to increase its lending in the EU in 2013 by around 40 per cent. The EIB builds on contributions from the private sector, including private banks and capital market investors. We expect the EIB to unlock €180 billion of investment for growth over the next three years.

At the same time, we need to complete the repair of the financial sector, in order to unblock private investment. This is not about "bailing out bankers", it is about letting credit flow to create growth and jobs. The integrated financial market in Europe did not have the adequate governance arrangements in place, and recent events have demonstrated that vulnerabilities remain...

Europe is still undergoing a protracted balance sheet adjustment. This will be resolved over time, but it is weighing on economic activity in the short term. Yet there are clearly visible signs that the flows are moving in the right direction, and I think this is being recognised by market participants.

Economic policies are also moving in the right direction. The architecture of EMU has been reinforced, and this medium-term framework allows structural and fiscal policies to adapt to circumstances. We see structural and fiscal policies as a coherent whole, taking into account country-specific circumstances.

Countries receiving financial assistance are making progress. While at a somewhat different stage of their programmes, Ireland and Portugal have taken successful steps to re-enter the markets. 10 days ago in Dublin, finance ministers agreed to substantially lengthen the maturities of the official loans to support their efforts to regain full market access and successfully exit their programmes. Greece was already given more time last December, and the programme has been brought back on track. In Spain, the banking sector adjustment is progressing as planned.

The growth outlook in Europe today is a reflection of the imbalances of the past. But financing Europe today is about the growth opportunities of the future. Europe is making steady progress on the path to further integration, and decisive reforms, such as the single supervisory mechanism, have been agreed. I hope that every such step is a step further to underpining your confidence in Europe.

Full speech

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