09 September 2013

Italian PM Letta: Sketching the contours of the new world economy

Over the past years, Europe has made extraordinary progress in responding to the crisis. The new arrangements have marked a break with the past but we do not see yet a fully-fledged architecture emerging. At the same time political tensions are emerging, disenchantment with or even rejection of the European integration process is growing. As we move forward from crisis management to more structural issues, things become more difficult.

I want the Italian Presidency in 2014 to be a connecting point, a time during which we conclude the adoption of important measures we launched in 2013, from Banking Union to economic and fiscal union and we reflect on broader steps needed to have a stable functioning of the EMU and a stronger European Union.

Thus, I want to focus on three issues that in my view illustrate why more of the same will not work and why we need a greater integration:

1. How to deepen economic integration to support structural reforms at national level;
2. How to further greater integration in the single market;
3. How to introduce some forms of risk sharing in order to make the EMU as a whole and the Member States more resilient to shocks.

Let’s start with economic union. The main tool we have devised to promote structural reforms at national level is the coordination of budgetary and economic policies. Indeed the new coordination framework anchored in the European semester is one of the main advances made in response to the crisis. In short, interdependence requires responsibility and based on this concept of responsibility, Europe has been shaping up a system of coordination based on an intergovernmental logic. But whilst the economic rationale is there, we should also be aware that we might end up with an imperfect or even counterproductive instrument if we do not take a broader view of supranational coordination and of its implications for legitimacy and accountability.

Let's now turn to the Single Market. The Single Market is Europe’s best asset to restore growth. Market integration can also play a role in reabsorbing internal imbalances in the euro area. Yet despite the political investment made by President Barroso and Commissioner Barnier, with the Single Market Acts I and II, despite various European Council conclusions, progress is very slow. Everywhere we see signs of resurgent economic nationalism.

The only way to reverse this trend is to build consensus for a new political approach. If we want to unleash the full potential of the Single Market, we must have the courage to look at it as a European Market, and adopt coherent policies. This applies to the financial and banking sector, where we need to complement the single supervisor with a single resolution mechanism that ensures effective resolutions of the crises, but it also applies to the telecommunication and the digital sector, which will be on the agenda of the next European Council.

My third issue is the role of risk sharing and financial solidarity within the Economic and monetary union. I believe that a genuine EMU will require some degree of risk sharing. The crisis has shown that we cannot rely only on national budgets to absorb shocks and support the necessary adjustment. National tools can be inadequate and, without a form of support from the central level, the economic and social price to pay for a Member State can be dramatically high. The question is: what type of solidarity is acceptable and justified within the context of the EMU? In truth, during the crisis we have made important steps towards mutual insurance. The European Financial Stability Fund, the European Stability Mechanism, the ECB Outright Monetary Transaction arrangement are forms of collective insurance.

At the same time, any move towards forms of financial solidarity between Member States, has met with resistance and has fuelled a growing divide between debtor and creditor countries, the North and the South of Europe. One of the most worrying aspects of the euro crisis is that the embryonic sense of community that was emerging in Europe, cemented by the Erasmus generation and the use of the euro, has been shattered.  Can we overcome this divide and agree on a common notion of solidarity? I believe that a notion of solidarity cannot be construed as a moral obligation of some to help others as this type of absolute solidarity presupposes a sense of community, which is not there. But solidarity can also be just enlightened self-interest, a form of reciprocity, from which everyone benefits in turn and that does not lead to permanent transfers. That notion is in my view compatible with the logic of the EMU.  

Full speech

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