Good morning. I am delighted to be here for this important and timely discussion on the future of the euro zone. I would like to thank Mr. Giuliani for inviting me, and for his kind introduction.
It is a pleasure to be alongside my colleague and friend, Wolfgang Schäuble—and to see many familiar faces in the auditorium.
It is highly appropriate that today’s dialogue is inextricably linked to Robert Schuman. The “Father of Europe” promoted a stable and peaceful future for this continent.
In his famous Declaration of 1950, he envisaged the European Community of Steel and Coal as “the leaven from which may grow a wider and deeper community between countries.”
He has been proven right for the most part, but today—as in 1950—Europe continues to face important challenges concerning its long-term future.
In our dialogue, I would like to touch on the large scale, underlying global trends that are shaping Europe’s future, and on the more immediate policy challenges Europeans are facing today, so that they can follow the path toward a more dynamic and integrated Europe that can provide the “leaven” to support strong and durable growth in the coming decades.
Long term trends
Turning to my first question, what are the large scale developments causing dramatic change? Let me briefly mention three.
First, globalization and interconnectedness. Between 1950 and 2007, global trade expanded on average by 6.2% per annum, helping to support real GDP growth of 3.8% a year.
The opening up of trade and financial flows has helped raise global growth and welfare, but without eliminating poverty in all economies—it also poses major challenges like rising inequality, which is increasingly noticeable around the world.
In the coming decades, powerful forces of globalization—communication technology, financial flows, migration—will continue to influence the world we live in.
Second is demographic change. Life expectancy in the EU has increased by about 15 years since the 1950s. And the dependency ratio—that is the proportion of those not participating in the work force compared to those that are—is set to rise from around 30% today to about 60% in 2060.
Other societies, especially in Asia, will also go through a dramatic aging of the population in the future. All this will have enormous ramifications—socially, politically, and economically.
Third is technological innovation. The smart phone in your pocket has 1000 times the processing power and 16 times the memory of the computers that took the Apollo spacecrafts to the moon—but your phone is also 25 times smaller and, of course, significantly cheaper.
Technological progress is having a revolutionary impact in many ways—it raises people’s expectations in this hyperconnected world, but will also make a lot of traditional jobs obsolete.
These underlying drivers create both opportunities and challenges.
This brings me to my second question—while bearing in mind this changing global context, what key challenges do policymakers face today?
The good news is that the European economy is recovering from the crisis. Confidence is improving and financial markets are upbeat. Perhaps too upbeat.
How do we sustain and strengthen the recovery, while making sure that growth is strong, lasting, and more inclusive? Without this, it will be difficult to tackle the legacies of the crisis: high unemployment and high debt. So high in fact, that they seriously impact our future.
Indeed, there is the danger of a vicious cycle: persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth.
What is Europe to do? First, it needs to tackle structural road blocks that hurt innovation, job creation, and productivity.
As Mario Draghi said last week in his memorial lecture to honor Tommaso Padoa-Schioppa “Markets can be opened through EU legislation. But it is only through structural reforms that firms and individuals can be enabled to take full advantage of that openness.”
I agree. There has been progress, but there is more to do.
If all euro area economies would close 10 to 20% of the gap in product and labor markets relative to best practices in the OECD, our estimate is that euro area GDP could be 3½% higher in 2019 than we currently forecast today.
These structural reforms would need to be accompanied by other measures that we have discussed in our most recent Article IV consultation with the euro area (which was published on Monday):
- Monetary policy should remain supportive until private demand has fully recovered, and the ECB has achieved its price stability objective. Stubbornly low inflation can undermine the recovery.
- The fiscal policy stance for the euro area as a whole is broadly neutral and that is appropriate. In the event of a negative growth shock, automatic stabilizers should be allowed to work.
- Some economies that have the fiscal latitude to do it should pursue a more resolute public investment policy.
- Balance sheets need to be repaired to help improve confidence and revive credit and investment.
- Banks should be encouraged to take advantage of benign market conditions to raise capital. Stronger national insolvency regimes will help repair corporate balance sheets.
- Complete the work on a banking union. There has been substantial progress, but a common fiscal backstop is still needed to break the link between banks and sovereigns.
Toward a more integrated and dynamic Europe
This brings me to my third and final point: the need for deeper economic integration. I do not want to discuss the political side of things here, but there are three economic themes that are relevant in my view.
First, it is imperative to maintain a highly educated labor force that is mobile across borders. The global competition for skilled labor is steep, and the euro area cannot afford to let its talent go to waste.
From this perspective, the fact that youth unemployment is so high—an average of 24% across the region—is nothing short of a catastrophe. If you are unemployed at this age, acquired skills tend to languish, and it is difficult to acquire new ones. As importantly, the capacity to learn and future employability also decline rapidly.
Moreover, as a rapidly ageing society, Europe is becoming ever more reliant on its younger workers to support the economy and sustain its social safety net.
Let me just say this very clearly: Europe depends on this generation of workers, both to hold its own in an ever more competitive world economy, and to carry the burden of the retiring baby boomers.
Its own survival requires that Europe gets the young back to work. It might be useful to look here to the Erasmus programs, or to the extensive use of the European Massive Open Online Courses (MOOCs) with good collaboration between the university and the business worlds, but the needs are here and solutions remain to be found.
Second, more developed and diversified regional capital markets can support innovation, investment, and long-term growth. In particular, the securitization of lending to SMEs could reduce reliance on bank funding, and alleviate credit constraints for firms. It would help cross-border investment and boost the growth of other types of funding.
At the same time, it is important to reverse financial fragmentation, allowing liquidity to flow across borders. The Single Supervisory Mechanism (SSM), to be introduced later this year, should help in this respect.
And, more generally, banking union really means that it does not matter where banks are located in Europe—they should be able to lend anywhere at competitive terms, subject to the same prudential norms as other banks operating in the same market.
Third, new markets, open markets, and more efficient markets are good for productivity and competitiveness. Free trade agreements with large trading partners will open new doors for the euro area’s products.
Deeper integration with world markets would improve productivity and plug countries into global supply chains. Implementing the Services Directive would open up protected professions and increase competition.
In closing, let me quote again from the Declaration of 1950:
“Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.”
I think I have pointed out enough areas where concrete achievements are needed and certainly possible. I have perhaps raised more questions than provided answers, but I know that to find the solutions to these critical challenges, a dialogue such as we have today is a key step on the right path.
With this, I look forward to our discussion. Thank you.
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