25 April 2013

VP Rehn: Intervention in ECON Committee on macro-economic imbalances and fiscal policy

In his opening remarks, Rehn focused on the in-depth reviews the Commission presented two weeks ago, and the Communications on the coordination of major economic reforms and their financial support.

On April 10, the Commission presented In-Depth Reviews for 13 Member States. While the challenges that are analysed and discussed in the IDRs tend to differ from country to country, some policy issues are common to several countries. These are:

1. External adjustment, both of the current account and of the trade balance, is proceeding, but external financial liabilities remain a risk for several countries.
2. Both structural and cost competitiveness remain crucial concerns in a number of economies.
3. Deleveraging is moving on in the private sector, but debt levels remain high. This translates into low consumption and investment, which weighs negatively on growth.
4. Housing markets are adjusting, but there is more to go still.

Our conclusion is that there are macro-economic imbalances in all Member States for which IDRs were prepared, but their nature and gravity differ. Each of them requires policy action and monitoring.

• For Spain and Slovenia, we consider that the imbalances are excessive.
• In Slovenia, which is in a still manageable economic situation, excessive macro-economic imbalances have been building up. In a context of negative economic trends, the risks for financial stability that stem from corporate indebtedness and deleveraging are substantial. These risks are compounded by limited adjustment capacity in labour and capital markets and in an economic structure dominated by state-ownership.
• In Spain, despite significant progress in 2012, there are still excessive macro-economic imbalances. Very high domestic and external debt continues to pose risks for growth and financial stability. While there have been improvements in competitiveness and visible adjustments of flows, notably the current account deficit, challenges remain.

Very high unemployment and excessively tight financing conditions have exposed the vulnerabilities represented by those imbalances. The Commission works in partnership with the Slovenian and Spanish governments, as well as with other governments. We want to support these countries in their reform efforts. In the case of Slovenia, in order to reverse the negative trend, it should complete the reforms it has started and include comprehensive and concrete policy measures in its forthcoming National Reform Programme and Stability Programme. In the same vein, Spain should maintain the reform momentum by including comprehensive and concrete policy measures in its programmes.

Against this background, the Commission will now closely examine the forthcoming National Reform Programmes and Stability Programmes of all countries. Following that, our policy advice will be integrated in the package of country-specific recommendations in the end of May. This package will also cover the Excessive Deficit Procedure...

The pace of fiscal consolidation is now slowing down in Europe. This year, the structural fiscal effort will be ¾ of a percentage point of GDP in the euro area – half of last year’s figure of 1.5 percentage points. The decisions leading to this reduction were made in 2012, in line with the Commission’s recommendations of last spring. By comparison, the United States is reducing its deficit by 1.75 percentage points this year, proportionally twice as much as in Europe.

What has enabled this slower adjustment? This slowing down of the pace of fiscal consolidation has been made possible by three factors:

• first, by the increased credibility of fiscal policy which the euro area Member States have achieved since 2011;
• second, by the decisive action the ECB has taken to stabilise the markets; and
• third, by the reform of EU economic governance, which provides an effective framework for a differentiated fiscal adjustment and the advancement of structural reforms.

Thanks to these factors, we have the room to make fiscal policy with a more medium-term view. This was not possible in 2010-2011, when several euro area countries were in danger of becoming insolvent or of falling into to the whirlpool of prohibitively high interest rates. At that time, many Member States had to restore their policy credibility by difficult decisions to bring their public finances onto a sustainable path.

Against the backdrop of the current economic outlook and the results of the IDRs, the case for a timely pursuit of necessary structural reforms and for rebuilding and deepening the EMU is evident. To this end, the Commission presented in March two communications: one on the ex- ante coordination of major economic policy reforms, and the other on a Convergence and Competitiveness Instrument.

Full speech

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