The Institute of International and European Affairs
INACTION IS NOT AN OPTION ? FIXING THE EURO
Check Against Delivery
Ladies and Gentlemen,
It is a great pleasure to be in Ireland and have the honour to speak at the Institute of International and European Affairs. As a Finn I feel very much at home in Ireland, among friends. And as an EU nerd I feel very much at home in this great institute.
I am a former student and later colleague of Professor Brigid Laffan, who is no stranger to this institute, or indeed the EU debate in Ireland. I had the privilege of taking Brigid?s class at the College of Europe in Bruges, and later teaching together with her.
Ireland and Finland share many things. Both are smaller economies, dependent on trade and openness to the outside world. We are both vulnerable to external events. In recent history a great number of Finns emigrated to Sweden when rural Finland had no work to offer. For Ireland and Finland to prosper, we need Europe to prosper.
EU membership and a similar approach to European integration is one prominent feature in our like-mindedness. Integration brings us together and helps individual nations to thrive in a world where challenges are global.
This is especially pertinent for smaller nations like ours, where the factual limits of our independent reach are perhaps easier to understand than for bigger countries with ancient ambitions. The truth is that no single European country has significant leverage in the world on its own ? be it climate change or security ? but together as a union we have a fair chance to make a difference.
European integration has been a natural and beneficial choice for both Ireland and Finland.
The financial crisis has hit Ireland hard. We understand your difficulties, sympathize with your hardship and recognize the great efforts Ireland has made to turn your economy round. Big sacrifices have been made, but also good progress has been achieved. Reforms bring results. It?s not that you fall, but how you pick yourself up. Irish permanent return to markets would be an encouraging step for Europe.
Before making my case for fixing the euro, there is one thing that I want to make perfectly clear – Finland is deeply committed to the euro. There are no hesitations, no second thoughts, no plan B. I know that some headlines may have suggested otherwise, but we are in the euro to stay. Our stake in the euro is both economic and political.
With our commitment to the euro comes a conviction that we should also improve the euro, make it stronger. Real commitment to the euro means that you have to be ready to strengthen it. Fixit is no exit.
I am not underestimating the difficulties the euro area has. We have a crisis on three fronts ? a financial crisis, a debt crisis, a growth crisis. The recovery of the euro demands action in all three dimensions. We have to fix banks, markets and institutions. Inaction is not an option.
I begin to see the light at the end of the tunnel. The crisis is not over, but if we take the right decisions in the next few weeks, we might have turned the half-way point of one of the most turbulent period in the history of European integration.
Ladies and Gentlemen,
When speaking of Europe, a quote from Jean Monnet is usually a safe place to start: ?People only accept change in necessity and see necessity only in crisis.? (Les hommes n?acceptent le changement que dans la nécessité et ils ne voient la nécessité que dans la crise). An old quote from his memoirs, that rings true in the Europe of today. The original context was actually a comment on the United States and its slowness to reform its banking sector in the 1920s.
So let me make some remarks. First on banks – how to make banking union a success. Second, on markets – how to make our economy work better both at national and EU level. And third – on institutions, what needs to be done in terms of euro area governance.
There are no easy solutions. No miracle cures. No silver bullets. Action needs to be taken on many fronts. But I believe that the right elements may be starting to be in place ? banks will be fixed, the ECB is working in strength to calm the markets and economic reform and consolidation will start delivering results.
The present crisis started with banks. We made the mistake that we did not engage in the reform of the European banking system in the early stages of the crisis. I remember that Finland spoke quite early about the urgent need to fix banks ? stress tests, recapitalisation and resolution when needed. We had learned an expensive lesson from our own deep recession and banking crisis in the 1990s. But Monnet would have perhaps said that in the first years of the euro area crisis, the crisis wasn?t deep enough for necessity to kick in.
Now we have a bold proposal from the Commission on banking union. A welcome plan. Something to break the harmful link between sovereigns and banks. We are in fact taking a step in the American direction, with a successful federal framework for financial markets. Failing banks should not be allowed to destabilise the economy.
The logic is sound ? we have an integrated European financial market, so we should also have integrated European financial supervision. I think that the Commission is right in its ambition ? supervision should be in place as soon as possible. It should cover all banks ? we know that non-systemic banks can become major problems. Building European banking supervision under the auspices of the European Central Bank makes good sense.
We know that supervision without the ability to close nonviable banks is toothless. Bank resolution needs to be a part of the plan. However, the financing for both bank resolution and deposit guarantees should be collected from banks themselves, not from the taxpayer. This is an important element in avoiding moral hazard. The ECB has taken the right steps to stabilise the financial markets. Banking union has to start from a clean slate ? it is not about taking joint liability for past mistakes.
Growth in the euro area is weak. Growth is perhaps the main element in turning things round ? the only way to increase employment and stabilise public finances in a sustainable manner.
I have said on many occasions that growth can no longer be fuelled by more debt. That room of manoeuvre has been spent – actually, spent many times. Growth can only come from improving competitiveness, making our economies work better. This means action at two levels ?the national and the European. These reforms will bring the necessary confidence for investments and economic activity. It?s all about the credibility of your efforts.
The European dimension in reform is self-evident. If we had to put it on a bumper-sticker it would read ?It?s the internal market, stupid.? We need to face the fact that the internal market is not what it should be. Too many obstacles remain, too much regulation. The internal market is far from complete with services, by far the biggest sector of our economies. There is no single market in the area with the most promising growth aspects ? the digital market place where Europe is divided into 27 different systems and legislations.
I am a great friend of the Commission and it was good to hear that the Commission will present a new Single Market Act, but as with banking union ? why now, and not years earlier. The Commission should not be shy in taking the initiative and proposing bold new steps.
Europe should also be more active in pursuing free trade. The multilateral trade negotiations are moving nowhere. We have to build strong free trade relationships with our important partners. We need to deepen our trade with Japan, Russia, Canada, China. The ultimate prize would be a free trade agreement with the United States, strengthening the most important economic link in the world.
Reforms are the most crucial at the national level. There is scope for reform in all Member States, including my own. We should take the Commission?s recommendations on structural reform to heart and be more open to criticism. A poor track record on reform automatically translates into poor competitiveness. The list of European failings is long ? rigid labour regulation, protected professions, unnecessary red tape, inefficient administration, dysfunctional taxation, poor competition.
When we speak of economic reform, a nasty attitude has been creeping in. There is much talk that this is all about a north-and-south divide in Europe. Beer drinking reformers and wine sipping regulators. I believe that this is a false assumption and implies a profoundly misguided conception that southern Member States would not be able to reform, condemned to being uncompetitive and forever dependent on European handouts. I feel that we should have a beer for starters and wine with the main course.
But seriously, look at Portugal ? good solid reforms. Spain has taken right steps. Italy has huge potential in reforming its economy ? already a vibrant entrepreneurial powerhouse, but imagine what it could achieve with the right reforms. The latest figures show that while the euro area economy is slowing, exports from Portugal and Spain are increasing.
We should not be erecting a new Berlin Wall between south and north.
We sometimes forget that reform was introduced to the north by necessity as well – banking crises, uncompetitive economies, choking regulation. Reform came to Finland because of an unprecedented depression. Germany had problems with declining competitiveness only ten years ago. Perhaps historians will later show how expanding credit ? irresponsible lending – in the first decade of this century stopped reform at the Franco-German border. Necessity was drowned by an avalanche of money. Now reform has to move forward.
The wisdom of Monnet applies to us all ? change comes from necessity.
And reform is also about taking leadership where it belongs ? with the political, elected leaders of Europe ? with governments and parliaments. If we want to take the initiative from the unelected technocrats and faceless markets, then economic reform is the only road available.
The governance of the euro area has improved by great steps already. Economic policy coordination has been firmly embedded by the six-pack legislation and further measures. A system where budgets are sent to Brussels for review and the Commission can impose sanctions on transgressors would have been seen as science fiction only five years ago.
This autumn is all about deepening economic and monetary union. The president of the European Council, Herman Van Rompuy is preparing proposals with his colleagues of the European Commission, the ECB and the Eurogroup. I think that we are all in the early stages of discussing national positions and Finland is no exception ? we still need time and debate. Therefore what I am about to say about deepening the Economic and Monetary Union is on a personal note, not necessarily reflecting any final outcomes from the Finnish debate or firm governmental views.
The dimensions of this process seem fourfold ? banking union, economic governance, fiscal union and the democratic dimension. Big words, big headlines. However, in practice content is king. I believe that with the Commission?s proposal the outlines of banking union are already more or less known.
On economic governance I see no reason to refuse further discipline, but at the same time we have to recognise that already much has been achieved in terms of economic governance and it may be more important to mind firm implementation of agreed rules than devising new ones. Subjecting national budgets to EU-control should pose no difficulty as we are earnestly seeking a more firm system for economic governance. This needs to apply to all ? big and small, the meek and the all-powerful. Rules are not rules if they do not apply to all.
All-in-all we may already have the great outlines of what we need to achieve – deepening the EMU with robust financial supervision and firm economic governance.
Little concrete has been said about ideas for improving the democratic dimension of Economic and Monetary Union. I do not really believe in a revolution on this front. The European Parliament has a strong and important role in ensuring that Europe gets the legislation it needs.
But let?s not kid ourselves ? the best way to involve democratic accountability in the EMU is through national parliaments controlling national governments. National parliaments need to be involved when you use national money. There is no democratic deficit where I come from – the Finnish parliament is closely involved in EU policy.
And improving democratic controls should not lead to ECB independence being questioned.
But the lack of a European political space is a real problem and it can hardly be fixed by inventing new meetings for EP and national parliaments to attend. The European Parliament elections of 2014 need to be made a water-shed in increasing the democratic legitimacy of European governance. The President of the European Commission, José Manuel Barroso, made an excellent suggestion of European political parties submitting their candidates for the next Commission president at the EP elections. I personally think that the same logic could apply to members of the Commission with individual Commissioners being appointed from the ranks of the European Parliament.
The issue of treaty change is in the air. And I suppose it takes a bold man to utter the word in Dublin. I have great understanding for the attitude that we need to do whatever necessary to strengthen the euro. If treaty change is needed, then it must be done. However, I am slightly sceptical as to the real need for treaty change and also cautious about its feasibility. Treaty change usually takes a long time and ratification is uncertain. We do not have the time, nor can we introduce an element of further uncertainty. For practical reasons it makes more sense to concentrate on improvements that are doable without treaty change.
I would disagree with President Barroso when he said that we cannot move forward under the existing treaties.
We know for a fact that any treaty change increasing the union?s competences needs a convention, which would be difficult to limit in scope. And we also know for a fact that significant treaty change would trigger referenda. At this delicate juncture we need to increase certainty, not uncertainty.
President Barroso has also introduced the F-word to the debate. I am not shy of federalism as a concept, but we always have to be mindful that in practice it includes many variations and contents. We are making progress at great speed in constructing Europe, going into new areas of integration, but what we are doing means more or less quantitative change than a great qualitative leap into a full-blown federation.
Fixing the euro is our most pressing issue and it must be fixed with speed and determination. We have the concrete elements like banking union, economic discipline and ECB action. We know what needs to be done. I would take great precaution in introducing elements like treaty change or federalism into the equation perhaps raising the bar of fixing the euro from the concrete and achievable to the theoretical and unachievable.
Dear fellow Europeans,
I believe that the tide may be slowly turning. We have difficult times ahead and cannot be complacent. But this autumn brings new hope for the euro. We have a clear plan ? banking union, economic discipline, reform, ECB action. I think that the markets are finally realising that you do not play chicken with the ECB.
The outlines of the solution are clear, let?s make it happen.
Europe is wrongly depicted as a declining continent. We have great advantages and strengths that need to be put to good use. The crisis has made us turn inwards, it has sapped our confidence. We need to change this. But there is no turning back the clock, no return-ticket to ?good old times? before the crisis. Only by embracing reform can Europe succeed.
Come on Europe! Time to stop sulking. Let?s fix this together.