25 February 2013

VP Rehn: The future evolution of the Economic and Monetary Union

We face three over-arching 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 and job creation, calls for us to reverse the trend of European losses in global competitiveness. Most of all, Europe needs more entrepreneurs and businesses that are hungry and able to grow. This implies tackling bottlenecks to growth by creating an entrepreneur-friendly business environment with better access to finance and leaner and more efficient business administration.

We need to focus on boosting productive investment – both public and private. Public banks such as the European Investment Bank have an important role to play here. The increase in the EIB's capital and thus lending capacity 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 letting credit flow to create growth and jobs. Public and private investments are not contradictory, both are crucial to restore growth.

We must also look beyond our borders for growth, by embracing a forward-looking and proactive trade policy. In Europe, about 30 million jobs, or more than 10 per cent of the total workforce, depend on sales to the rest of the world. The decision last week by the US and the EU to initiate procedures to launch negotiations on a ground-breaking, comprehensive and deep free trade agreement – the Transatlantic Trade and Investment Partnership – is of enormous importance in this respect.

Successfully facing the sustainable growth challenge is critical if we are to raise living standards and service the debts that we hand down to future generations. With the future in mind, growth must indeed be sustainable, not only in economic terms but also in terms of its impact on the environment and climate. Green growth has great potential both in environmental and economic terms and needs to remain a top priority.

The second challenge, fiscal sustainability, requires staying the course of reform and consistent 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 per cent 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.

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. Last November the Commission put forward a Blueprint which presents the economic rationale to bring about the completion of EMU and outlines a roadmap with short-, medium- and long term actions to that end. It balances increased responsibility and increased solidarity. It also indicates the possible need for Treaty changes as far as deeper integration is concerned.

Throughout the measures proposed, ensuring democratic legitimacy is at centre stage. As representatives of national parliaments, you all know very well that parliaments are where legitimacy and accountability of policy decisions vis-à-vis the citizen are realised. It is to you that citizens turn for answers. This great responsibility requires finding the best way forward through an open debate and discussion.

The blueprint builds on the Community method. By allowing non euro area participation in the new arrangements whenever possible ensures convergence between current and future euro area Member States.

For the short term (six to 18 months), we envisage 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 also develop a European Resolution Mechanism. A resolution fund should build on contributions from the financial industry.

Also, we will come with proposals for increased prior coordination of major economic reforms. Due to our close economic integration, reforms in one country will often have spill-overs on other Member States. We will also need to strengthen economic policy coordination and secure stronger ownership of reforms through contractual arrangements aiming to facilitate the implementation of structural reforms. They will define the more detailed measures to which the Member States commit themselves and which can be coupled with financial support.

In the medium-term (18 months to five years), we 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.

The challenges ahead of us will not be resolved without hard work and serious efforts. There is no time for complacency. In the end, what we want to achieve with all of this is a competitive and inclusive economy that enables us to achieve sustainable growth and job creation, while maintaining our social model and ensuring a sustained rise in welfare. This requires an institutional set-up that supports these objectives. That's why rebuilding of the EMU is essential for our long-term welfare and for the sake of sustainable growth and job creation.

But we cannot get lost in institutional arm-wrenching, neither at national or European level. In looking to the future the overarching objectives need to be at centre stage. 

Full speech

Address by Irish Minister for Finance, Michael Noonan

© European Commission