FRANKFURT (MNI) ? The following is the verbatim text of a speech
Monday by European Commissioner for Economic and Monetary Affairs Olli
Rehn to the extraordinary ECON meeting at the European Parliament.
?In the first half of 2011, the EU economy continued its gradual
recovery, although recently with a slower pace. After the strong GDP
growth in the first quarter (0.8% q/q), the second quarter recorded
slower growth (to 0.2% q/q). Short-term indicators for the euro area
point to a further moderation of growth.
However, one has to take into account that temporary slowdowns (or
?soft patches?) are not unusual in multi-year-long recoveries. In
particular, this subdued recovery is not surprising in the aftermath of
a financial crisis, given the continuing need for financial deleveraging
in the private and public sector.
Stress in financial markets increased over the summer, leading to
substantial volatility and occasional turbulence. This was mainly due to
the US political discord on its debt ceiling and the EU sovereign debt
problems, as well as more general concerns about an economic slowdown.
At the same time, funding pressures in the EU banking sector have risen.
Indeed, what we seem to be currently going through is a more
parallel performance of financial markets and the real economy. My
reading of the evolution in this regard is that the financial markets
and the real economy move now more in synchrony, which makes me
seriously concerned about continued financial turbulence spilling over
to and potentially harming the recovery of the real economy. This
underlines the importance of containing the market turbulence to secure
the economic recovery.
The deterioration of the growth outlook is a consequence of a
combination of various factors, such as higher oil prices in the first
half of the year, and more recently, a less supportive external
environment and ? yes ? the impact of the financial market turmoil.
All in all, the short-term growth prospects have somewhat worsened
compared to our spring forecast. We are now working on our interim
forecast and will release it on 15 September.
Given the economic and fiscal situation and the need to boost
growth and jobs, what are the EU?s policy options for enhancing these
goals? As the scope for macroeconomic stimulus is very limited ?
nonexistent in many MS ? growth-enhancing structural reforms have become
even more central in the current context.
The key elements of structural reform have been identified in the
Annual Growth Survey and the country-specific recommendations of the
European Semester. We must make the most out of the single market,
especially in services, energy and intellectual property; make the tax
and benefit systems more conducive for employment growth; reform the
labour markets and pension systems; invest in knowledge and innovation;
and simplify the regulatory environment for enterprises to encourage
them to grow.
Structural reforms must be an integral part of our comprehensive
crisis response. Several member states have taken significant decisions,
especially as to fiscal reforms, but more effective structural measures
with substantial impact on enhancing sustainable growth are urgently
needed. Given the need to continue fiscal consolidation, reforms with no
or little negative implications for the budget should be prioritised.
To safeguard the conditions of sustained recovery, it is essential
to complete the ongoing financial repair. EU banks are significantly
better capitalised now than they were one year ago. This has been
confirmed by the stress tests in July. In the run-up of the tests,
European banks increased their capital by some E50 billion.
Those banks whose capital positions were found to be too weak by
the stress tests were required to take appropriate action within 6 to 9
months. Private sector solutions ? rights issues, sale of assets,
mergers etc. ? are preferred. However, public-sector intervention is
required, if such private sector solutions were unavailable. This
process is now moving forward.
Despite these measures to reinforce capital, EU banks have
experienced difficulties in their access to funding in recent weeks. As
the necessary recapitalisation of EU banks proceeds, we expect their
funding conditions to improve. And of course, the banks have access to
the provision of liquidity by the central banks, as noted over the
weekend.
On July 21st the Heads of State or Government of the euro area took
a number of important decisions that will help safeguard financial
stability and resolve the debt crisis.
They agreed on a new EU/IMF programme for Greece, which ensures the
financing of the Greek state in the medium-to-long-term. Unlike earlier,
private sector creditors contribute to the solution through voluntary
debt roll-overs and buy-backs.
The euro-area leaders also agreed on a set of new stabilisation
tools by increasing the flexibility and effectiveness of the EFSF and of
the ESM. These enhancements to the EFSF and ESM constitute a clear
change of approach and will allow acting earlier and more efficiently to
ensure financial stability. We have called on the euro-area member
states to accelerate the approval procedures for the implementation of
these decisions, so as to make the EFSF enhancements operational very
soon.
In the continuing search for new ideas on economic governance, we
should not forget what we have already achieved, notably the European
Semester and the Euro Plus Pact, the reforms of financial regulation and
new architecture of financial supervision, as well as the new financial
backstops (EFSM, EFSF, ESM).
But most importantly, the adoption of the legislative package on EU
governance will be a crucial step forward in strengthening fiscal
surveillance and formalising the surveillance of macro-economic
imbalances. An urgent approval of the package is key in allowing us to
make significant progress in economic governance.
However, there is no reason for complacency, as recent market
developments have demonstrated. The July summit invited the President of
the European Council, in close consultation with the Presidents of the
Commission and of the Eurogroup, to make concrete proposals by October
on how to improve working methods and enhance crisis management in the
euro area.
We should, in particular, find ways to provide more institutional
clarity in the euro-area. Especially, we need to reflect on how to
improve the division of labour and respective responsibilities of the
euro-area meetings in the composition of Heads of State or Government
and of Finance Ministers, and how to improve the working methods of the
Eurogroup, including also its support structures and communication
practices.
Moreover, there are currently rather high expectations on how
eurobonds could help solve the debt crisis by pooling the debt issuance
of euro-area member states. However, it is clear that eurobonds, in
whatever form they were to be introduced, would have to be accompanied
by a substantially reinforced fiscal surveillance and policy
coordination as an essential counterpart, so as to avoid moral hazard
and ensure sustainable public finances. This would have unavoidable
implications for fiscal sovereignty, which calls for a substantive
debate in euro area member states to see if they would be ready to
accept it.
As I said before the summer in this House in the context of the
?six-pack? on governance, the Commission is committed to present in the
near future a report on the alternatives and technical issues for the
design of Eurobonds. On this basis, before we take any further steps,
broad consultation will be required to identify possible common ground
and a sensible way forward.
In his forthcoming State-of-the-Union speech, President Barroso
will outline the Commission?s proposals on how economic governance of
the euro area can be further developed.
To sum up, we need to continue to monitor the current economic and
financial market situation, in order to constantly assess the adequacy
of the policy stance in the EU and the euro area.
The best way to foster growth at the current juncture is to
vigorously implement structural reforms, including the Single Market,
which will enhance the medium to long-run growth potential, but will
also have positive short-run confidence effects.
And to address remaining risks to financial stability, it will be
essential to swiftly implement the 21 July euro area summit decisions
and adopt the pending governance package. The ?six-pack? is not only
important in its own right, but it is a necessary foundation for any
more ambitious pooling of fiscal sovereignty.?
? Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com
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