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First, resolving the crisis requires structural solutions. Tackling the capacity for real economic adjustment, the structural problems and the erosion of economic competitiveness is at the core of the policy recommendations the Commission gave to Members States on 29 May, and which EU leaders endorsed last Friday.
The breathing space provided by the slower pace of fiscal consolidation, which we recommend to several countries, should be used effectively for economic reforms e.g. in product and labour markets that can unleash Europe's growth potential and capacity to create jobs. This is crucial for France, Italy, Spain, Belgium and many other Member States.
Accordingly, the two largest eurozone economies, Germany and France, hold the keys in their hands towards a smoother and more effective rebalancing of the European economy. In a nutshell, this calls for competitiveness-supporting economic reforms in the labour market, entrepreneurial conditions and pension system in France, and meanwhile structural measures to further reinforce domestic demand in Germany. This is in fact what the Commission has just recommended to these countries. If Germany and France together can together achieve this, they do a great service for the entire eurozone by providing stronger growth, creating more jobs and reducing social tensions.
I am of course fully aware that the necessary reforms often require persuasion and perseverance from the policy makers. The courage and foresight that helped Ludwig Erhard to produce the German economic miracle based on the free market will be needed in today's Europe...
My second point is that the necessary structural change has to be financed. Economic rebalancing is still being held back by vulnerabilities in the banking sector and by deep distortions in the credit channel. While the sovereign risk has to a large extent receded, the monetary transmission mechanism remains impaired in Europe and the credit conditions suffer from financial fragmentation.
We are building the regulatory architecture for Europe's integrated financial market. Let's not forget the progress we have already made. The single supervisory mechanism was agreed less than a year after the idea was put on the table. The Commission will shortly make a legislative proposal for a single resolution mechanism as its natural complement. This will consist of a single resolution authority and common resolution fund, which will be financed through levies of the sector itself.
Another important feature of the banking union is the possibility to directly recapitalise banks through the European Stability Mechanism. Two weeks ago, the Eurogroup agreed on the principles and rules for a direct recap instrument, and the ECOFIN Council reached broad agreement on the tools for the resolution of failing banks.
The banking union is essential to reverse the process of financial fragmentation in Europe, thereby preserving the integrity of the single market, and ensuring proper financing of structural change. Clearly, the banking union will not be completed overnight. That's why we are taking action to bridge current weaknesses of the banking sector, so as to ensure that the financial sector will be able to resume its proper function and thus channel savings to the most productive uses to support adjustment and recovery in the real economy.
Compared to Europe – and to Japan – the United States managed to undertake a relatively immediate and massive repair of its banking sector and financial system, which most economists assume played a more important role than fiscal policy in containing the crisis and restoring confidence. In Europe we have done a lot, but we still have much work ahead of us to complete the financial repair. That's why, on 29 May, we recommended to the euro area to ensure that the single supervisory mechanism and the European Banking Authority carry out rigorous asset-quality reviews and stress tests in the next 6-12 months. It is crucial to complete the repair of the credit channel – as the European economy is bank-based – but it is equally essential that the lending is channelled to the most productive uses...
This brings me to my third point, public finances. The public and private excesses of the last decade mean that public debt in the euro area has reached a level above 90 per cent of GDP. But a fact that is easily forgotten is that the fiscal deficit in the euro area has been reduced from over 6 per cent of GDP in 2010 to below 3 per cent this year. Fiscal policy now has a credible framework and consistent consolidation needs to continue, with the focus on structural sustainability of public finances over the medium-term.
The reinforced economic governance is now being implemented. With these important reforms, the options for further fiscal integration have been exhausted under the current Treaty on European Union...
All in all, the economic and financial crisis has clearly taught us that the stability culture has to go beyond monetary policy and beyond fiscal policy. I am particularly referring to a sound micro- and macro-prudential policy for the financial sector, as well as to the prevention of harmful macro-economic imbalances and to the pursuit of structural reforms as enabling policies for a stable monetary union. In the end of the day, having a set of stability rules is not the same and does not yet amount to as having a stability culture. This is more than simply a semantic remark...
This brings us to the origins of the European economic model and the need for a renewed social market economy. The EU’s common economic strategy is all about reforming the European economic and social model. Not somehow nostalgically clinging to the status quo, since that would only lead to a permanent economic decline of Europe. Not dismantling the European model, because we believe in the combination of stability culture, entrepreneurial drive and social justice. But, instead, genuinely reforming and modernising the social market economy, for the sake of sustainable growth and job creation.