Boosting Europe’s Global Competitiveness

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By Olli Rehn, European Commissioner for Economic and Monetary Affairs

American Chamber of Commerce to EU, Launch of Dan Hamilton Study

Ladies and Gentlemen,

Let me begin by saying that I broadly share the view presented in Dan Hamilton’s report about the formidable challenges Europe is facing.

As the rest of the developed world, Europe is struggling to recover from the worst economic slump since the 1930s. The legacy of high public (and in many cases also private) debt, high unemployment and low investments act as a drag on growth for years to come. Moreover, over the past year or so, tensions in the European sovereign debt market have fuelled exceptional uncertainty and led to high interest rates for some Member States.

At the same time, unprecedented measures have been taken by Europe to contain financial market turbulence. While they have been effective in the sense of preventing financial chaos – there has been no Lehman type of catastrophe – more needs to be done.

In addition to making sure that financial backstops are strong enough for all eventualities, the policy response has to tackle the root causes of the current crisis. Crisis management cannot be separated from addressing the key structural weaknesses of the European economy, the scale of which has been starkly revealed by the financial shock originating – not in Europe – but in the US.

The problems are well-known: lack of fiscal prudence in good times in many Member States; labour market practices and tax and benefit systems that are un-conducive to high rates of employment and swift reallocation of labour in the face of shocks; slow-moving and uncompetitive innovation system; and a still fragmented internal market.

To understand the European challenges, it is important to note that the issue is not just – and sometimes not at all – the average performance, but the great diversity. For example, as a whole, EU public finances are in a better shape than those of the US. This holds whether one uses general government deficit or debt as a measure. The specific EU problem is that in some countries public finances are in a really bad shape and this spills over to other countries in different ways.

To improve European competitiveness, by which I mean the capacity to create jobs and increase productivity, not simply low unit labour costs, one needs to do different things in different Member States. However, at the same time we must coordinate the actions to obtain the full benefits of synergies. Therefore, policy coordination is always a key element of European competitiveness policy, unlike for example in the US.

Ladies and Gentlemen,

I would claim that the crisis has brought about a sea change in the European economic policy. First, there is a much broader understanding and acceptance that major reforms – many of which are painful in the short term – must be taken. Secondly, the willingness to coordinate economic policies is much higher than ever before.

The drastic fiscal and structural policy measures which have been taken by Greece, Ireland and Spain witness of the former. Many countries are encouraged by the success of the German reforms over past decade, the fruits of which are now clearly visible.

The legislative package for reinforced economic governance proposed by the Commission, which is currently under discussion in the European Parliament and the Council, is concrete evidence of changed attitudes towards coordination. In fact, we have already introduced the new architecture in the form of the European Semester, which was launched by the Commission’s Annual Growth Survey on 12 January.

The proposals in the Annual Growth Survey form the basis for the European Council recommendations to Member States in March. Last Friday’s European Council gave clear and strong support to complete the legislative package by summer, to conduct ambitious stress tests, and to strengthen the existing financial backstop, the EFSF.

The Treaty and the new economic governance provide the right framework for a truly European response, and can enable members of the euro area to go further on some issues to improve competitiveness if they wish. The policy objectives discussed in this context are in line with the Annual Growth Survey, which constitutes the blueprint for fiscal consolidation, structural reform and growth-enhancement, while the European Semester provides the framework for the work.

All this shows that a momentum is indeed building up for a step change in European policy making towards stronger promotion of sustainable growth and job creation. But to ensure that concrete actions follow on a broad basis, we must find an inclusive way of taking the process forward.

The Annual Growth Survey provides the Commission’s assessment of the economic challenges, takes stock of the progress made in implementing the Europe 2020 growth strategy and spells out the Commission’s priorities for urgent policy action. It is written in a blunt language, not always characteristic to our documents, and brings together 10 priority actions encompassing three main areas:

  • rigorous fiscal consolidation to enhance macroeconomic stability;
  • labour market reforms for higher employment;
  • structural reforms to enhance sustainable growth.

As Professor Hamilton says, the best way to empower people is to help them remain active. Two Europe 2020 Union level key policy initiatives or “flagships” – “Youth on the move” and “Agenda for new skills and jobs” – pursue precisely that goal. They are complemented by the “Digital agenda for Europe” flagship to help develop Europe’s knowledge society. A skilled workforce is essential to an innovative economy.

The EU has agreed on an employment rate target of 75% by 2020. To reach that target, actions to upgrade the skills of the workforce and eliminate the skill mismatches between supply and demand will be intensified. Cooperation between higher education and businesses is a necessity.

But we also need significant structural reforms that make work more attractive. The Annual Growth Survey identifies several areas for urgent action: more employment friendly tax and benefit systems; pension reforms conducive to later effective retirement; better designed unemployment benefit and training schemes; and more balanced employment protection legislations.

On innovation, it is essential to emphasise its importance for Europe to establish a durable economic recovery and develop long-term competitiveness. To that end, the “Innovation Union” – another Europe 2020 flagship – focuses on:

  • Increasing our investment to levels achieved by other leading economies.
  • Giving entrepreneurs better incentives to bring “ideas to market”; this includes better access to finance, affordable intellectual property rights and less burdensome regulation.
  • Eliminating the fragmentation and duplication of national research systems.

We live in a world of ever scarcer natural resources, with peak oil and probably peak water – so I completely agree that the EU should lead the global transition to a resource-efficient economy. We have a Europe 2020 flagship initiative (“Resource efficient Europe”) aiming to do just that. The EU has set itself ambitious targets for greenhouse gas reductions by 2020 and will follow a near-ready roadmap to a low-carbon economy by 2050. In this context, I would like to note that Europe relies very much on price mechanism to deliver efficient outcomes: emission trading and high taxes on fossil fuels are central elements of the European approach.

As regards structural reforms, tapping the full potential of the Single Market is one of Europe 2020’s priorities. Deepening the Single Market will have strong evidence-based economic underpinnings and focus on a limited number of actions, including:

  • full implementation of the Services Directive,
  • completing a European framework for intellectual property
  • rapid and interoperable standard-setting including in ICT
  • removing tax disincentives for trade or investment.

As for the global perspective, the EU is the champion of inclusive multilateralism and thus one of the driving forces of G20 cooperation.

We actively support the G20’s cooperative approach and agree that the Action Plan agreed at the Seoul G20 Summit last year must be fully implemented. Reform momentum coordinated at the global level is paramount. We need to exit from fiscal stimulus and financial support measures in a coordinated fashion and accelerate structural reforms.

At the Seoul summit, G20 Leaders committed to reducing current account imbalances to sustainable levels. They mandated Ministers to develop a mechanism of timely identification of large imbalances with preventive and corrective actions. This mechanism has significant similarities with the alert mechanism we will implement in the EU.

Ladies and Gentlemen,

Let me conclude by reminding that the European Union is probably the most advanced example of successful consensus building in history and its experience can be very useful in the G20 framework. Shared determination is what we all need, to pave the way for a more prosperous future for all of us.

For Europe, 2010 was the year of crisis and survival. I’m confident that 2011 can be made the year of reform and revival.

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