Speech by Minister Stubb: "Some truths about Europe"

“SOME TRUTHS ABOUT EUROPE”

Dear President,
[Excellencies],
Dear friends,

It is a great pleasure to speak at the Robert Schuman foundation in Paris. A founding father of modern Europe. A man of vision, who had the courage to look beyond national borders when nationalism taken to its extremes had done so much harm to our continent. I am also very pleased to have an opportunity to visit France at a time of great changes. A time of very important decisions for Europe.

My aim today is to tell some simple truths about Europe. All rational decision making starts by seeking facts. I will make some observations about the economic crisis and what needs to be done to fix it. Then I will try to present a coherent picture of the Eurozone economy and its rebalancing. And last, I will make some reflections on the institutional consequences of the crisis.

Eminent scholars point out, that even great and successful civilizations can face collapse. One only needs to look at Joseph Tainter’s Collapse of Complex Societies to understand that losing it is relatively easy. The most powerful point to emerge from this academic research is that collapse does not happen because of the challenges themselves, but the inability to react adequately to crises. Rational, fact-based decision-making is at the heart of successful government.

I am certainly not saying that the European Union or Western Civilization face collapse. But what I am saying is that we need the political courage and intellectual clarity to look at our fundamental problems and react with sustainable and logical policies.

***

Today, Europe faces a deep economic crisis of unprecedented proportion. The current crisis is not a simple thing. It is in fact an agglomeration of three overlapping crises.

First, we have a global financial crisis that started with the collapse of Lehman Brothers in 2008; I remember that at first some thought the problem was restricted to the United States. Second, we have a Eurozone debt crisis that started with Greece and has badly escalated. Third, we have a serious crisis of weak European growth. Growth is stagnant and we all need to recognise the fact that without stronger growth we will never be able to solve the debt crisis to our satisfaction. Growth is also our insurance against future crises.

I do hope that we will not have a fourth crisis on our hands – a political crisis meaning that we would be unable to steer Europe out of its current predicament. Elections have taken place, many governments have changed. But we cannot escape the fact that economic realities have not. You cannot just simply vote the crisis away. Anger, frustration and protest are no policies.

Europe has performed well in the crisis – we have agreed to enhanced fiscal discipline, strong new rules. We have built a strong firewall to deal with the financial crisis. The main problems are at national level – how to implement meaningful structural reform.

My own country, Finland, has not been immune to public dissatisfaction with European politics. Populism is a perhaps understandable, but short-sighted reaction to social change and economic uncertainty. To my mind the political landscape is no longer divided into left and right, but something I would describe as localists and globalists. The former seeking protection and the latter understanding that you cannot turn the clock back. The far-right and the far-left have actually much in common, both seeking nationalist solutions, when they no longer work. Like trying to deal with climate change within the confines of the nation-state.

Dear friends,

A European debate about growth has emerged. We need this debate, but at the same time we must be very clear about what we mean. How growth can really be promoted and which policies do not work.

One thing is clear – we cannot promote growth by more government spending. We simply do not have that room of manoeuvre with Eurozone average public debt at nearly 88% of GDP. I know my Keynes, but we lost that option by overspending during good times. Countercyclical policies actually mean that we have to save during good times, not just spend during the bad. Otherwise you create a system of forever rising public debt, which is precisely what seems to have happened in many countries.

Another thing should also be clear - there is no choice between growth and austerity. It would be false to claim that a solution to our crisis would be to forget fiscal consolidation and just spend more public money. It could provide some short-term comfort, but it would also make things worse by making our debt burden heavier, like getting out of a hole by digging deeper. You do not help yourself by losing your credit rating.

The policy we believe in is growthsterity – perhaps something impossible to translate into anything comprehensible in French, but the idea is quite simple: growth will only emerge through policies that will restore credibility to our economies by stabilising public finances and at the same time making structural reforms that will strengthen the economy. I believe this to be the only real option we have left. Finland had a deep recession in the early 1990s – this is what we did when borrowing more was not an option.

A debate about smarter use of European funds is needed – how to use the EU budget to strengthen growth. One key lesson is that no EU money should be spent unless it is underpinned by a healthy macro-economic environment.

There are also useful ideas about how to increase EIB lending or use European project bonds to finance infrastructure. Growth can be promoted with smart European spending, but we need to remember the true scale of these European operations. The European Union budget accounts for one percent of GDP – it is in no case a weather changing instrument. Growth that will make a real impact on the European economy needs to come from other sources, from the private sector. Key items are investments, private spending, increasing economic activity, more trade. The key for restoring the confidence that will get private investments and spending moving is structural reform and the further development of the internal market.

Serious structural problems exist in Europe. Our labour markets are rigid, pensions systems need reform and our economies choke with too much regulation. This has to change for Europe to succeed. Structural reform may sound dull and they do not provide immediate results. But remember the Hartz reforms in Germany ten years ago – reforms were made in the labour market and now Germany has been reaping rewards.

The same applies to openness. Erecting barriers would be the wrong reaction to the crisis. We need more free trade, not less. If we are to build sustainable jobs in Europe, they have to be in companies that thrive in the global market place. I will not accept the logic of protectionism – it amounts to admitting that Europe cannot succeed. We need a strong Europe, not a Fortress Europe. But it takes courage to embrace openness. In the long-run Europe can only succeed and prosper with free trade and we should push for ambitious trade liberalisation.

The European Central Bank has acted decisively with its liquidity program, and bought Europe valuable time. But even the ECB cannot keep on pushing more money forever. ECB operations have succeeded, but at the same time it has produced even stronger links between sovereign borrowers and banks in weaker European countries as the liquidity has been used to buy sovereign debt. The ECB action has provided relief, but it is no substitute to reform.

Dear friends,

As the crisis consists of three interconnected dimensions, let me dissect responses one-by-one. Public deficits need to be checked. We must make Europe grow again. The financial system needs to be strengthened.

We cannot avoid the fact that most Eurozone economies took too much debt. Debts need to be repaid. This is why the fiscal discipline we have established needs to be respected. Improved economic governance – the so called six-pack – is a major European achievement. Strong rules, strong discipline. We must remember that we lost our credibility some ten years ago when we disregarded the Growth and Stability Pact. The same mistake cannot be repeated by fudging our new rules.

The same applies to the fiscal compact – stronger rules on deficits. The compact should not and cannot be opened. We have to stop with the illusion that there could be easy fixes to the poor state of European public finances. Consolidation will take time and effort.

European growth is far too weak. It shows everywhere – weak growth, high unemployment, punishing youth unemployment. The essential measures for making Europe grow again are founded on structural reform, developing the internal market and keeping Europe open. The Single Market remains a major European achievement and is the foundation for Europe as a major global economy.

Just to use one very practical example. We have an internal market, but it needs updating. Growth is strongest in the digital market place where only American companies rule because they have a big truly single home market, when we have a fragmented European market. If you want to sell digital services – music, content, information - in Europe you have to deal with 27 different national legislations. The operational environment of the internal market has already changed and digitalisation is a never ending trend. At the moment the market is running ahead and legislation is lagging behind. We are back to basics – make the internal market work. This is basic EU work – much needed harmonisation.

France and Finland have cooperated closely on the promotion of the Digital Single Market. We have a mutual understanding on the importance of this issue for European growth.

What Europe essentially needs is Nordic capitalism. I think that we have managed to build a decent system combining both markets and welfare. Nordic economies are so small that erecting barriers was never a real option. You had to compete globally. At the same time we wanted to maintain an inclusive society, welfare for all. The labour market combines flexibility with security. We could afford this welfare only by having competitive industries based on knowledge and innovation. An inclusive society can be built on fiscal responsibility. I think our model carries a good lesson for Europe – you can build an inclusive society but you need to work with the markets, not against them. There is no social Europe without a competitive Europe as its foundation.

The financial system is the essential transmission system of modern economies. If the economy were a physical body, then finance would be its blood-flow. Without credit, there is no business. Banks are easy to hate, but essential to the economy.

Both the global financial crisis and the Eurozone debt crisis have underlined how the financial system is a truly borderless world where problems in one country can have far-reaching effects in others through the banking system. One important rationale in crisis management has been a worry over unpredictable effects on the financial system. An uncontrollable crisis in Greece in 2010 would have provoked a serious banking crisis sending the continent into a deep recession.

The reform of the financial system is inherently a global issue that cannot be tackled by Europe acting alone. The eurozone, however, has specific problems of its own.

I am not blind to the fact that macro-economic balancing is required in the Eurozone. One way to look at the problem is that Germany became too strong, too competitive in relation to weaker economies in the Eurozone. From an economist’s point of view a tension was built between the strong German core and a weaker Eurozone periphery, a tension that started tearing the Euro area apart as the financial crisis forced investors to look at their lending policies with more prudent eyes.

Economists would also point out that restoring this balance, without breaking the Euro requires for money to flow – one way or another - from the strong core to the weaker periphery. There are ways to do this – and this is already happening to a degree with investors losing the money they have lent to Greece. But in a broader perspective we need a bigger transfer and you can do it either by a transfer union or increasing demand.

If the Union operated as a true federation, we would have a transfer union, but this idea is alien to many, not least to Berlin and Helsinki. So money has to flow to the south by increasing demand – as I said earlier, the financially weak cannot increase spending, so the financially strong must do it. And I think that this is gradually taking place with Germany accepting a new position by boosting demand with generous pay settlements. This is very good news for the Euro as Germany is typically the biggest market for most Eurozone members.

***

What does the current crisis mean for European integration? I am a federalist at heart and more Europe would be my natural reaction to any challenge.

Much of what I outlined before actually entails more European action, working together. However, we must also be clear that the present crisis will not be remedied by institutional action. No treaty change can alter the economic facts.

Treaty change is not an option at present. We spent a European decade with treaty change. Good steps ahead, but I am asking myself did we lose sight of the main issue – European competitiveness deteriorated at the same time and unsustainable developments in the Eurozone were allowed to happen. If European Councils spend now all their time debating the finer points of the economic crisis, earlier they spent their time immersed in institutional detail.

Treaty change is not an option and I suspect that even if we were to embark on treaty change any result would be thrown off-balance by a referendum here of there. So one simple truth is treaty change at 27 is over for the time being. We have to play with the cards we have.

The only way we can develop integration is in smaller circles, core Europe.

Cores exist already, cores are a fact. Euro and Schenghen are major cores. But it would be wrong to assume that these cores would always consist of older, more established member states. Looking at economic realities I would predict that countries like Poland or Estonia, both building robust economies, will seek seats in inner circles. This is a meritocracy.

I visited the City last autumn and the advice from the banking community was that the euro needs to develop into a political union. Enhanced economic governance is one answer.

I hold Jean-Claude Piris in high esteem and I think that he is right in his view that progress will depend on an avant-garde moving ahead. The Eurozone €17 is a natural, and treaty sanctioned avant-garde, but where I would disagree with my distinguished friend is his insistence on building separate institutions for this inner-core. The way to ensure that core Europe does not clash with the Union at large is to keep its institutions in common. The European Commission has to be in the driving seat both with policies at EU27 or €17 and decision-making needs to be embedded in the Council. Separate institutions bring the risk of disintegration.

I made a speech in Bruges last November where I made a remark about how an EU core is being made by the markets and not by institutions. Stronger Eurozone economies have had to take strong leadership in the crisis and assume major obligations. We should all seek to improve our economies and aim for sustainable public finances. The only way I can see eurobonds ever happening is by an inner core of solid Eurozone members issuing joint debt, not because of economic weakness, but strength.

A paradox has emerged in Europe – its most successful institution at present is the European Central Bank. The ECB seems to be the most decisive institution in dealing with the crisis, but this does not reflect well on the others – the European Council and the European Commission need to take leadership in promoting growth and making structural reform a reality. We talk endlessly about competitiveness, but as Nike says – Just Do It.

What we need is the restoration of the community method – requiring strong leadership from the Commmission.

Dear friends,

I promised some truths about Europe, simple truths. Let me see where we are in terms of delivery, making good on this promise. Do I have a top ten of plain European truths?

One: We need strong growth, but sustainable growth will only come by structural reform and developing the internal market into the digital age.

Two: Promoting growth by taking more debt is not an option for Europe.

Three: Smart European spending can help, but it is no substitute for structural reform.

Four: Europe needs openness to succeed – more free trade, not less. Protectionism is no answer.

Five: Many member states took too much debt and let their public finances out of control. This can never be allowed to happen again.

Six: Banks are important for business, and we should manage the financial system better.

Seven: Treaty change is not an option at the present and it cannot alter the economic facts.

Eight: Cores exist, but the old establishment has no automatic claim in belonging to them. Meritocracy matters.

Nine: The Community method has to be restored.

Ten: If the Union did not exist today, we would need to create it.

Dear friends, to conclude,

We have a serious crisis, but on balance Europe has been a success story. With the correct policies we can overcome the present crisis and make Europe more competitive, a home for new industries. Europe need not to be shadowed by America and Asia, but for Europe to prosper in the future we need the right policies, rational action.

I started my speech by making some reflections on the need for rational politics, enlightened decision-making. What better place to have a debate about rational action. After all rationalism is a great French contribution to civilization.