Ekumeenista sillanrakennusta Roomassa

January 23rd, 2014

OR and Herman LiikanenKahden tiiviin päivän jälkeen Pekingissä, jossa yhdessä euroryhmän puheenjohtajan Jeroen Disselbloemin kanssa meillä oli monia hedelmällisiä keskusteluja kiinalaisten viranomaisten kanssa, aloitin 16. tammikuuta lyhyen vierailuni Roomaan.  On selvää, että maailman suurimman nousevan talouden ja “Ikuisen kaupungin” ajattoman majesteettisuuden välillä on iso ero. Pekingissä ja koko Kiinassa muutos on ollut jatkuvaa viimeisen kolmen vuosikymmenen aikana.

Matkani Italiaan oli luonteeltaan ekumeeninen sekä hengellisesti että poliittisesti. Hengellisesti matkan kohokohta oli varmasti lauantai-illan ekumeeninen vesperi eli iltahartaus Pyhän Marian kirkossa ja Pyhän Birgitan luostarissa Trasteveressa.  Suomen evankelis-luterilaisen kirkon ja ortodoksisen kirkon arkkipiispat Kari Mäkinen ja Leo sekä Helsingin katolinen piispa Teemu Sippo pitivät hartauden arvokkaasti ja tyylikkään yksinkertaisesti. Tapahtuma järjestettiin Pyhän Henrikin muistopäivänä, joka juontaa Suomen kristinuskoon kääntymisestä 850 vuotta sitten. Vesperin jälkeen sisar Marja-Liisa ja hänen kanssasisarensa tarjosivat ystävällisesti iltapalan osanottajille. Lopuksi pyysimme Salon kanttorien kirkkokuoroa esittämään Sibeliuksen Finlandia-hymnin, eikä hartausväen joukossa ollut kuivaa silmää.

skannaaminen0001Toinen osa eurooppalaista sillanrakennusta — tällä kertaa Pohjois-etelä -akselilla — pidettiin iltapäiväseminaarina Villa Lantessa, Suomen Rooman kulttuuri-instituutissa. Tohtori Alpo Rusi, Suomen suurlähettiläs Paavinistuimessa sekä Sveitsissä, piti mielenkiintoisen puheen Suomen diplomaattisista suhteista Vatikaaniin ja Suomen rauhanponnisteluista vuosina 1943–1944. Olimme aiemmin tavanneet Vatikaanin valtiosihteeri Camillerin keskustellaksemme ulkopoliittisista asioista.

Muutamien itäsuomalaisten osanottajien kanssa jatkoimme iltaa juhlallisella pyhiinvaelluksella läheiselle “Un Garibaldino finlandese” -patsaalle, joka kuvaa erästä toista itäsuomalaista, Herman Liikasta, joka oli alun perin Ristiinasta ja eli myöhemmin Hirvensalmella. Hän on Suomen ensimmäisen EU-komissaarin, pääjohtaja Erkki Liikasen isoisosetä. Suomalais-italialaisen yhteyden juuret kulkevatkin kauas jopa Kimi Räikköstä ja Ferraria edeltävään aikaan!

Luonnollisesti tapasin Roomassa talousministeri Fabrizio Saccomannin vaihtaaksemme kuulumisia tämänhetkisesti tilanteesta. Teimme tämän työlounaan merkeissä, jota ystävällisesti isännöi Suomen suurlähettiläs Petri Tuomi-Nikula. Ruokapöydän ympärillä italialaiset hämmentyivät, kun heille tarjottiin ruoan päätteeksi suomalaista limoncelloa, joka oli tehty suurlähettilään puutarhan sitruunoista, mutta vaikuttivat myönteisesti yllättyneiltä maistettuaan sitä.

Kuten Roomaa, Italiaa yleensäkin ihannoidaan sen taiteen, arkkitehtuurin ja ruoan sekä italialaisten eloisan, luovan ja kekseliään luonteen vuoksi. Italian talouden menestystekijät on rakennettu näiden pitkäaikaisten vahvuuksien päälle. Italian iso haaste on, kuinka poistaa näiden mahdollisuuksien hyödyntämistä haittaavat tekijät maan merkittävien vahvuuksien ja mittavan kasvupotentiaalin tieltä.

Euroopan talouden kääntyminen kasvuun luo myös Italian elpymiselle suotuisan ilmaston. Tavallisten italialaisten takia toivon vilpittömästi, että maa käyttää nyt hyväkseen tilaisuuden tarttua uudistuksiin ja vapauttaa ne mittavat taloudelliset mahdollisuudet, joita sillä on. Italia on euroalueen kolmanneksi suurin talous, ja nämä olisivat kovin tervetulleita uutisia niin italialaisille itselleenkin kuin myös muille eurooppalaisille. Eikä vähiten minun kaltaisilleni ihmisille, jotka ihailevat Italiaa ja haluavat nähdä sekä tämän maan että sen kansan menestyvän.

Ecumenical bridge-building in Rome

January 23rd, 2014

OR and Herman LiikanenAfter two frenetic days in Beijing, where together with the Eurogroup President Jeroen Dijsselbloem I had a number of fruitful discussions with the Chinese authorities, on 16 January I began a short visit to Rome. Needless to say, there is a striking contrast between the capital of the world’s largest emerging economy, a place of constant transformation for the past three decades, and the timeless majesty of the ‘Eternal City’.

My mission to Italy was an ecumenical one, both spiritually and politically. Spiritually, the highlight of the mission was certainly Saturday evening’s Ecumenical Vespers at the St. Maria Church and St. Birgitta Convent in Trastevere. The Archbishops of the Evangelical-Lutheran and Greek-Orthodox Churches of Finland, Kari Mäkinen and Leo, and the Catholic Bishop of Helsinki, Teemu Sippo, performed the ceremony with sanctity and elegant simplicity. The event took place on St. Henry’s day, which symbolises the Christianisation of Finland some 850 years ago. It was followed by a supper kindly hosted by Sister Marja Liisa and her colleagues. In the end, we asked the Salo Church Choir to perform Finlandia, and there was no dry eye in the house.

Another event of European bridge-building – this time North-South – took place in Villa Lante, the Finnish Cultural Institute in Rome. Dr. Alpo Rusi, Finnish Ambassador to the Holy See and Switzerland, gave an interesting talk on Finland’s diplomatic relations with Vatican and the pursuit of peace in 1943-44. We had earlier met with Monseigneur Camilleri of the Holy See to discuss topical foreign policy matters.

skannaaminen0001With some fellow Eastern Finns, we ended the event by doing a solemn pilgrimage to the nearby statue of another Eastern Finn, Herman Liikanen, “Un Garibaldino finlandese”, originally from Ristiina, late in life in Hirvensalmi. He is a great-great-uncle of Governor Erkki Liikanen, my predecessor as the Finnish Commissioner. The Finnish-Italian connection goes thus much further than to Kimi Räikkönen at Ferrari!

I naturally met in Rome with Finance Minister Fabrizio Saccomanni for an exchange of views on current issues. We did this over a working lunch kindly hosted by the Ambassador of Finland, Petri Tuomi-Nikula. The Italians around the table were perplexed to be offered a glass of ‘Finnish limoncello’ at the end of the meal (made from lemons grown in the garden of the Ambassador’s residence in Rome), but they seemed pleasantly surprised upon tasting it.

Like Rome, Italy as a whole is admired around the world for the wealth of its art, architecture and food, and for the vibrancy, creativity and resourcefulness of its people. The underlying strength of the Italian economy is built on these longstanding assets. The challenge Italy faces is how to change those factors that are currently preventing the country from taking full advantage of its great strengths and substantial growth potential.

The broader upswing in Europe is creating a more benign climate for a recovery in Italy too. For the sake of the Italian people, I sincerely hope that Italy will seize this occasion to step up the momentum of reform, address with determination the well-known challenges the economy faces, and release once again its great potential. As the eurozone’s third largest economy, that would be welcome news not only for Italian citizens, but for all Europeans. And for all those who, like me, admire Italy and want to see the country and its people succeed.

Fair play on the football pitch and beyond

November 25th, 2013

Last week in the European Parliament I had the opportunity to participate in a very important debate, which combined two issues close to my heart: human rights and football.

Human rights are at the core of the European Union; our cooperation is firmly based on shared values and respect for fundamental rights. And football is an essential element of the contemporary European culture and way of life.

No doubt, I declare personal interest. I am not a football fan; it is just a way of life for me. I got my first ball before I learnt to walk, and still must get to play at least once a week, if only for the sake of my mental health. But I do not consider football only as a sporting activity. Football can play an important role in economic and social progress, not least by offering young boys and girls a valuable social activity and helping them appreciate fair play and the combination of individual excellence and effective teamwork. In other words, it should help them appreciate that there is indeed such a thing as “society”.

The European Parliament debate to which I am referring concerned the situation of migrant workers in Qatar. Recently, there have been alarming reports on the treatment of migrant workers in Qatar. These workers, amongst others, are building the infrastructure that is needed for the FIFA World Cup in 2022.

As a footballer and former football official, I see this as a litmus test for FIFA and European officials in FIFA.
This is a stark reminder of the need to pay more attention to the situation of millions of men and women migrating in search of a better life. The situation of migrant workers in Qatar requires significant improvement in accordance with ILO conventions.

The initiative of the Qatari authorities to conduct a thorough investigation into these allegations is a welcome step. So is the Qatar Supreme Committee’s announcement on 18 November to force companies building projects for the 2022 World Cup to guarantee welfare standards for workers.

These positive developments should not be limited to the football field. They must be extended to all foreign workers in Qatar. Successfully addressing shortcomings will require constructive cooperation between local authorities, governments of the workers’ countries of origin, recruitment agencies and the private sector.

The FIFA leadership, for its part, should make sure that the 2022 World Cup will act as a catalyst for positive social change, including an improvement of the labour rights and living conditions of migrant workers.

Many professional footballers today are living proof that football can open up a way out of poverty. Even after the numerous injuries I have suffered, I am still convinced that football is good for you. We need to ensure that football is also good for the people who are working on making it happen.

It is essential that FIFA aims at fair play, not only on the football field but also on the construction sites and in the working conditions of migrant workers.

Turning Germany’s surplus into a win-win for the eurozone

November 11th, 2013

Germany’s current account surplus has been a subject of heated debate for some time. On the one side, there are regular calls for the country to reduce its surplus through fiscal stimulus, to lift southern Europe from its doldrums. On the other side, in Germany these calls are often regarded as jealous attacks against the country’s extraordinary economic performance.

Both extremes bluntly simplify a complex reality in a way that kills any serious policy debate. Especially in the current context of coalition talks in Germany about a new government programme, it is important to look at the matter in an analytical manner to provide substantive elements for a well-informed debate.

Let’s look at the facts and consider what can be done in their light. For several years, Germany has run a sizeable current account surplus. Recent data indicate that the surplus has surpassed 6% of GDP in every year since 2007. 

What is behind the large surplus? A key factor has been the deepening of European integration in the past ten years, since this has helped strengthen Germany’s industrial competitiveness in many ways. First, the creation of the euro prevented the German exchange rate from appreciating to reflect the large surplus. Second, the integration of the production chains with central and eastern Europe allowed Germany to diversify and profit from a large pool of well-educated and cheaper labour.  And third, financial market integration and interest rate convergence drove international capital flows which mirrored these current account developments.

Equally important, adjustment channels are influenced significantly by global economic interdependence. Essentially, the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world. Germany is specialised in products that are in demand in the rest of the world and is highly competitive on both quality and price. High savings and low investment in many sectors have contributed to the large and persistent current account surplus.

The prospect of Germany’s ageing population translates today into lower consumption and higher savings for retirement. Investment should go up now because an ageing population should see the economy becoming more capital-intensive. When ageing kicks in, savings should start going down and consumption up.

Moreover, around a third of the German current account surplus can be explained by returns on assets accumulated abroad in the years before the crisis, when excess savings in Germany and other core countries were redistributed throughout the eurozone and further afield. Instead of boosting productivity-enhancing investment, which would have enhanced sustainable growth, they largely ended up fuelling the credit booms and subsequent asset and housing bubbles in recipient countries. That mispricing of risk was detrimental to both sides: the catastrophic busts that hit the peripheral economies led to losses for the German banks themselves, adding to those incurred from their investments in toxic US assets. Meanwhile, investment in Germany has fallen from 21.5% of GDP in 2000 to 17.6%, a significantly lower proportion than in other eurozone countries.

In the economic analysis that the European Commission provides for the reinforced policy coordination, we have looked at the best ways of creating a win-win outcome for both Germany and the eurozone as a whole.

Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus. True, the increase in domestic demand has doubled in the past two years when compared to the eurozone as a whole, but it is still modest. Meanwhile, private investment is set to fall again this year.

The EU Council’s recommendations to Germany, adopted in July, urge the country to open up the bottlenecks to the growth of domestic demand. In particular, Germany should create the conditions for sustained wage growth, for instance by reducing high taxes and social security contributions, especially for low-wage earners. The country should further stimulate competition in services – construction in particular, but also in certain crafts, as well as professional services – in order to boost domestic sources of growth.

There are other pressing challenges too. The energy transition requires an improved regulatory framework to unlock private investment in energy networks. Boosting investment in infrastructure will help sustain domestic demand not only in the short term, but also in the longer term via its positive impact on productivity.

All this would enhance Germany’s economic performance and welfare and could help reduce the inequalities that have accumulated in recent years. But it would also have a significant positive impact on the eurozone economy. For while a rise in demand in Germany might not lead directly or immediately to a large rise in exports from southern Europe, the reforms the EU is advocating for Germany would facilitate a genuine and mutually beneficial rebalancing in the eurozone economy. Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery. To profit fully from this opportunity, there should be no easing of the drive to boost competitiveness through structural reforms.

Because these important issues deserve further analysis, the European Commission will this week need to consider whether to launch an in-depth review of the German economy in the framework of the EU’s Macroeconomic Imbalances Procedure. Such a review would provide both European and German policymakers with a detailed picture of the economic challenges and opportunities facing the eurozone’s largest economy.

Of course, Germany is not the only country whose policies have spillover effects on the rest of the eurozone. As the two largest eurozone economies, Germany and France together hold the key to a return to growth and employment in Europe. If Germany can take steps to lift domestic demand and investment, while France embraces reforms to its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone – providing stronger growth, creating more jobs and reducing social tensions.

A version of this article appeared in German on 11 November 2013 in the Frankfurter Allgemeine Zeitung.

The Golden State sees opportunities in Europe

November 4th, 2013

 

The Golden State sees opportunities in Europe

Last week I spent a couple of days in San Francisco, visiting also the Universities of Berkeley and Stanford. The purpose of the mission was to explain to the influential academic and business circles of the Bay Area what was going on in Europe, and to sound out how all of that looks from the perspective of the American west coast. It was impressive to note how well informed and how interested both the academic and business communities there are of European developments.

At Berkeley the seminars with my long-time colleague and friend Professor John Zysman and his students were particularly enlightening: quite critical but always substantive, as the discourse should be in a research community. I’ve known John since he wrote “Manufacturing Matters” in 1987, although he got to know me much later. I still believe that manufacturing matters, and so do services, for we are not living in a post-industrial society. With Dan Brenitz, John has just edited a book called “The Third Globalization”, which ponders whether wealthy nations can stay rich in the 21st century and what kind of industrial strategies are needed for that.

Another memorable thing to do was my second interview in Professor Harry Kreisler’s series “Conversations with History” (we did the first one ten years ago, focusing on the rule of law and principles in politics). This time we went in-depth into the reconstruction of EMU. The interview will be available online in a few weeks, so you can judge yourself then.

In my talks, I explained that Europe is pursuing a comprehensive reform of the Economic and Monetary Union as a whole, but perhaps even more importantly, going through fundamental reforms of the economies of its Member States.

High public deficits are being brought under control, from close to 7% of GDP in 2010 to close to 3% of GDP this year. Structural reforms in the labour, product and services markets are starting to deliver the first results in terms of improved competitiveness and export performance. The European Central Bank has taken decisive action to stabilise the markets.

Work on establishing the building blocks of the Banking Union is moving forward well. The Single Supervisory Mechanism will become operational in a year, after the completion of a thorough balance sheet assessment of the banks that it will directly supervise. And a Single Resolution Mechanism will follow in due time, to complete the structure.

The investors who finance our member states’ deficits and debt have responded to these efforts with growing confidence and lower interest rates.

As a result, the European economy is experiencing a turnaround, which could transform into a solid and sustainable recovery next year, provided that reform efforts continue and nobody rests on their laurels. I did not yet have the new autumn forecast with me, but I felt sufficiently confident to claim that “Europe will be back”, to paraphrase a famous Californian politician of European origin.

We had good exchanges with academics and commentators whose task it is to observe critically economic policies in Europe and the US, and who found interesting comparisons and lessons to be learnt on both sides of the Atlantic.

Yet I was most encouraged by the business community and investors, who found that Europe offered increasingly attractive opportunities, and who were clearly turning their sights back across the Atlantic – especially since some of the emerging market economies were slowing down and therefore losing their attractiveness compared to the re-emerging Europe.

One of the most interesting discussions I had was with an investor with a strong track record in investing into start-ups in the high-tech sector. He considered Greece to be one of the most dynamic environments for his business at the moment, with many young, well-educated and innovative people wanting to take the initiative in their own hands and establish new businesses. In his view, young Greeks increasingly want to become entrepreneurs instead of public servants, which is one necessary feature of the turnaround which the economists like to call a “structural change from the non-tradeables to tradeables sector”.

If there were one message to bring home from California it would be that the academic and business communities there recognise Europe’s efforts in stabilising the economy and returning to recovery, even if we still have major challenges, notably the high unemployment in many parts of the EU. I left them with a commitment that we would not stop our efforts, but instead continue with the reconstruction of the EMU, by soon looking into what more we should do to make it function better.

Sometimes things seem clearer from a distance. It was definitely worth the time and paying the cost of the still prevailing jetlag to make this short visit to the eastern coast of the Pacific.

Better to be safe than sorry when exiting monetary stimulus

October 15th, 2013

The yearly jamboree that is the IMF and World Bank’s annual meetings is over for 2013. It is a particularly intensive but still mostly useful gathering of thousands of economic policymakers and other folks in finance and public policy, with hundreds of parallel meetings.

The IMF jamboree reminds me of the party conferences of the Centre Party of Finland, which is the party I used to know best – with the exception that the latter usually gathers the 4,000 representatives of the rank-and-file branches to debate and vote in an ice hockey rink, rather than in the urban conference halls inside the Washington Beltway. From my standpoint, canvassing and speaking in the ice rink context has been pretty useful training for the numerous larger and smaller gatherings and talk shows in the IMF “party conference”. 

This time, Europe was not at the epicentre of the meetings, unlike in the last four years. Obviously, the immediate focus was on the US fiscal gridlock. While Capitol Hill delved deep into its bipartisan political fight, in the Netherlands, the government and parts of the opposition were able to strike a decisive budget deal last Friday. I hope that US policymakers will take heed and “go Dutch” themselves.

But once the US fiscal stalemate is resolved – and I trust that reason will still prevail, and quickly – there is another major policy issue around the corner: how to exit smoothly from unconventional monetary policy in a world of deep economic interdependence.

On that issue, the US and the emerging market economies were centre-stage. But Europe is not just a semi-innocent bystander here: we have a big stake in this context, for as a re-emerging economy, Europe faces the prospect of rising interest rates potentially hampering her still nascent recovery.

We have taken a look at the effect that a normalisation of interest rates may have on the European economy. Preliminary analysis using our econometric model shows that a rise in US interest rates could have a significant impact on the EU. However, the nature and the size of this impact depend essentially on the underlying causes of the increase. 

There are basically two scenarios. On the one hand, if the rise in interest rates is driven by a negative shock and a worsening of investor sentiment, the impact will be negative. On the other hand, a normalisation of monetary policy driven by a strengthening of economic activity in the US would likely have a positive impact on the EU and euro area. Of course, because of the current financial market fragmentation in the euro area, some vulnerable countries could be negatively affected by the rise of long-term interest rates, even in the second scenario.

It is evident that stronger and sustained growth will go hand-in-hand with a carefully calibrated transition towards the normalisation of monetary policies, including an appropriate communication strategy.

The importance of a smooth normalisation of monetary policy was underlined in the conclusions of the International Monetary and Financial Committee. They point out that the phasing out of unconventional monetary policy by major economic powers has global ramifications. All agreed to take into account the impact of their action on their international partners in light of possible feedback effects.

This leads me to two main policy conclusions.

First, it is better to be safe than sorry when exiting the monetary stimulus. In other words, while the phasing out of monetary easing will need to gradually happen, an excessively speedy or rushed exit from monetary easing would have clearly negative ramifications for the still weak and fragile economic recovery. A carefully calibrated phasing out of monetary stimulus will be more appropriate and eventually indeed necessary for the sake of sustained recovery and growth.

Second, it is essential that we in Europe – both the individual Member States and the Union as a whole – stay on the reform course. Especially, it is crucial to maintain the momentum in rebuilding the economic and monetary union, most concretely through the construction of a banking union. But the same call for structural reforms to strengthen economic fundamentals is likewise fully valid for the (other) emerging economies.

 

Banking on a sustainable recovery in Europe

October 3rd, 2013

Yesterday I participated in the Governing Council meeting of the European Central Bank in Paris, in my normal non-voting capacity. I also had a productive meeting with Prime Minister Jean-Marc Ayrault and Finance Minister Pierre Moscovici on the French reform process, which is moving forward, supported by social dialogue.

One key issue for the ECB and its Governors is the forthcoming balance sheet assessment of euro area banks, which is essential to reinforce confidence in the European banking sector and thus to improve the credit flows to households and businesses, particularly SMEs. That economic growth requires credit growth is a fact of economic history.

President Mario Draghi accurately explained to the press the Commission’s approach to the treatment of capital injections under the EU fiscal rules. In short, there is a clear marching order to be followed in cases where recapitalisation is necessary. If the balance sheet assessments reveal capital shortfalls, these would be covered first via private solutions and internal resources – shareholders and junior creditors – before resorting to public backstops. Where state support is necessary, the new state aid rules in force since 1 August apply.

As regards the treatment of capital injections under EU fiscal rules, these are normally considered as “relevant factors for financial stability” and/or as one-off measures, and thus not included in the structural balance and not counting against the Member State in the context of the Excessive Deficit Procedure. As such, there is no disincentive to effective public backstops caused by these fiscal rules.

Cleaning up balance sheets is a pre-condition for growth but also for resuming the path towards more genuine financial integration in Europe, namely through the creation of the banking union. To strengthen the gradual recovery that is now at its early stages, we need to make decisive progress on both of these fronts in the coming months.

The G20 helped Europe confront this crisis – now it must help the world avert another

September 8th, 2013

News headlines from the G20 Summit in St Petersburg were understandably dominated by Syria. Yet the two days of discussions between leaders, finance ministers, business representatives and trade unions in the imposing Konstantinovsky Palace and the opulent Peterhof were mostly about other issues than Syria. 

The G20 has over the past five years developed as the main forum for sharing information and analysis, assessments and views, experience and advice when it comes to economic and fiscal policies or to improving the functioning of the financial markets.

As such, it has been a most valuable platform for the EU and the euro area during the crisis. It has allowed us to keep global partners well informed about developments in Europe. It has permitted us to spar with them over our strategy for recovery. And it has been a place where our global partners have sharpened our focus and encouraged us to action through peer pressure.

This has been tremendously helpful for our efforts to overcome the crisis and to strengthen our Economic and Monetary Union. Indeed, in the midst of the deepest moments of the crisis, when we were struggling to form and present a clear united European line, the G20 called on the EU in the clearest of terms to start acting like the Union that we had for years already claimed to be. That was a necessary and effective wake-up call. Sometimes problems as well as solutions can be seen more clearly from the outside.

In a closely intertwined global economy the actions and choices of one player almost always have an impact on the others. Similarly, one player’s problems tend to become another’s problems too. This is something we have had to learn the hard way also inside the Economic and Monetary Union, where the build-up of large imbalances led the euro area to its deepest ever crisis. The most important lesson we drew for the future was that imbalances would need to be monitored collectively and corrected promptly when identified. This is why we immediately and significantly strengthened our economic policy surveillance and coordination mechanisms, even while we were still struggling to find our way out of the crisis.

This time around in St Petersburg, our G20 partners gave us recognition for our efforts and achievements in beating the crisis and in strengthening the EMU for the future. It is clear to everyone that it will still take years of efforts and hard work to fully recover and to return to strong and sustainable growth. But it also is becoming increasingly clear that the turnaround of the European economy as a whole is at hand, and that our comprehensive strategy of differentiated fiscal consolidation and competitiveness-enhancing structural reforms is working and paving the way for a sustainable recovery of growth and jobs.

As a consequence, the focus of the discussions was much less on Europe than before. Much more, the sights are now turning to the emerging market economies, where there are some signs of a build-up of imbalances similar to those that ultimately led the EU into its current trouble. The G20 again has a chance to prove its value by allowing an early identification of the emerging issues, as well as coordination of early efforts to tackle them before they become problems with global impacts.

After a year of preparations at the level of ministers and central bank governors as well senior officials, the summit was able to adopt a declaration that has earned recognition for both the quality and quantity of its substance. It contains important commitments by the G20 collectively and by its members individually to policies to promote growth, healthy public finances, better functioning and stable financial markets, trade, taxation, and development. 

With all its annexes the declaration may be a demanding read, but I dare to claim that a few years from now you will be able to find in this document the roots and initiatives for many policy actions that will have been taken by then. It will have been for the benefit of strong, sustainable and balanced growth for all.

Recovery is within reach

August 14th, 2013

  « Do nothing in haste, look well to each step, and from the beginning think what may be the end. » (Edward Whymper, 1840-1911, legendary English mountaineer)

Over the summer, a potential turning point in the EU economy has been in the making, though still fragile. Add today’s quarterly GDP figures to other recent positive survey data and you will find reasonable evidence suggesting the European economy is gradually gaining momentum. I am referring to the indicators of economic sentiment and of industrial orders and output, and to some tentative signs that the downward trend in employment is starting to reverse. Stock markets are also performing well, and bond yields of so-called peripheral euro area countries are slowly but consistently coming down, providing for more financial stability in these stressed economies.

All in all, both soft and hard data over recent weeks support the European Commission’s spring forecast and its projections for a subdued, mild recovery in the second half of 2013. For next year, our projections show the recovery should be on a more solid footing, as long as we can continue to avoid new political crises and detrimental market turbulence.

The data also supports, in my view, the fundamentals of our crisis response: a policy mix where building a stability culture and pursuing structural reforms supportive of growth and jobs go hand in hand. To work, this policy mix needs the basis of our economy to be stronger: that is why we are cleaning up the mess in the financial industry and putting in place new rules for a sounder financial sector in the future, as well as reinforcing economic governance at both national and European level. And there is no doubt that the decisive policy action of the European Central Bank has had a decisive impact by supporting the short-term stabilisation of financial and bond markets.

Furthermore, all countries under programmes are putting their houses in order. They are doing so with determination, often with painful efforts from their citizens, and with the unwavering solidarity of their European partners.

Yes, this slightly more positive data is welcome – but there is no room for any complacency whatsoever. I hope there will be no premature, self-congratulatory statements suggesting “the crisis is over”. For we all know that there are still substantial obstacles to overcome: the growth figures remain low and the tentative signs of growth are still fragile; the averages hide important differences between Member States, as a number of Member States including Spain and Greece still have unacceptably high unemployment rates, especially for young people, which has created real risks of a lost generation; the implementation of essential but difficult reforms across the EU, in countries both under programmes and other Member States, is still in its early stages … So there is still a very long way to go before we reach our ultimate goal of a sustainable growth model that delivers more jobs.

I call on European policy-makers, as well as social partners and business leaders, academics and commentators, to seize this opportunity. A sustained recovery is now within reach, but only if we persevere on all fronts of our crisis response: keep up the pace of economic reform, regain control over our mountain of debt, both public and private, and build the pillars of a genuine economic and monetary union with no loopholes where irresponsible bankers or short-sighted policy makers can thrive.

So let’s all keep in mind Whymper’s wise words: we should look  to the next steps in this steep ascent which is still ahead of us, in order to fully exit the crisis, and not lose sight of our goal. It is within reach, if we stay the course.

Spanish Sketches A.D. 2013: Can Spain achieve what Ireland and Latvia did?

August 6th, 2013
Madrid

Madrid, Spain

“Something is happening here. But you don’t know what it is. Do you, Mr. Jones?” That’s Bob Dylan at the cultural and social turning point in the mid-1960s.

Something is happening in today’s European economy as well, but it is too early to draw definitive conclusions.

Most recent data provided by forward-looking economic indicators tend to point to an improved outlook. Of course, there is no reason for claiming victory yet, as in many countries unemployment remains unacceptably high and as the reforms that support growth drivers are still half-way or about to be implemented. But neither can we deny the underlying trend indicating that a rebalancing and reform of the European economy is clearly underway. This concerns by and large the eurozone economies, as well as the United Kingdom.

Spain is a case in point. The Spanish sketches A.D. 2013, according to last week’s important IMF staff report, are telling. The trade balance adjusted from a deficit of 6% of GDP in 2008 to a surplus of 1% in 2012. As Spain needs to run surpluses over the medium-term to cover its large external debt, import volumes have also fallen. The Spanish export sector has been standing well over time, even though wages in Spain have responded only partially and with a lag. Over the past years, the lack of flexibility and the marked duality in the labour market translated into large employment losses in the economy.

As the Spanish economy needs to reallocate its resources from the non-tradable sectors, notably construction, to more productive uses, notably the export sector, we can take a cautiously positive note of recent figures that indicate a better trend in job creation. No doubt this trend may reflect in part a seasonal pattern, related to Spain’s relatively competitive tourism industry, but it could mark the long-awaited turning point. Next month, we will assess in detail Spain’s labour market reforms in 2012.

The momentum to reform, to improve the functioning of the labour market, should be maintained. Social partners traditionally have a central role in Europe. Overcoming the duality between permanent and temporary contracts and giving young people more opportunities are the tasks and responsibility for all the stakeholders involved. IMF staff recently provided a simulation of a broad-based ‘social agreement’ between the employers and trade unions on an internal devaluation: employment increases (and price cuts) in return for unions agreeing to significant further wage moderation. Such a rise in employment and lower inflation would boost consumption growth already in the second year. In that simulation, unemployment would fall by 6 to 7 percentage points over the next three years compared to the current path.

The comments by authorities that are presented in the IMF report are sceptical as regards the chances of success of such a broad-based social agreement. I don’t underestimate the political challenge to bring about a broad political and social consensus on an economically optimal path of adjustment. But wouldn’t it still be worth a serious try, for the sake of those millions young Spaniards who are currently unemployed? Those stakeholders who would outright reject it would take a huge national responsibility of the social and human costs on their shoulders.

A strong sense of political responsibility has been key for the success stories of Ireland and Latvia in terms of economic reform and internal devaluation. The pundits in the euro-sceptical commentariat and media have been telling us that this is simply impossible in the light of economic history, due to the money illusion and sticky wages – “it won’t happen, and even if it were to happen, then it would break the political back of the society, so no one should copy Ireland and certainly not Latvia!”

I’m mentally ready to get a chorus of prophets of the doom voicing their outrage in financial media against this perspective. But if we had trusted them and followed their advice, the euro would have broken up already some years ago.

Let’s imagine: What if Spain yet can achieve what Ireland and Latvia did? Don’t rule it out from your imagination, Mr. Jones.