Europe’s attractiveness is no longer taken for granted. I am not only talking about the attractiveness of the ‘European way of life’ for citizens. It is beyond doubt. Well, no wonder, you might say jokingly, that ordinary people appreciate welfare states with long holidays and early retirement...!
But I am also talking about what is of interest to you: Europe’s attractiveness to investors and entrepreneurs.
In fact, it is this double attractiveness that makes our continent unique. Europe’s message to the world is that one can have both. Economic growth and social justice. Efficient political decisions and democratic accountability. Adaptation to the times and a preservation of one’s heritage. A good place to invest and to live.
I will put it in a provocative way: I am convinced that the world will move in the direction of the European model, sooner or later. (Knowing that without a robust economic infrastructure, this model is unsustainable.)
Look at it: the European Union today, with its 27 countries, represents an area of stability, prosperity and strong public institutions. We are 500 million well-educated and talented people. With only 7% of world population, we still generate almost 22% of the world’s wealth. These surely are remarkable assets.
The results of the Ernst & Young study published recently came as no surprise to me: Western Europe is perceived as the second most popular destination for Foreign Direct Investment (FDI), right after China. And Eastern Europe is perceived as more attractive than both India and the US.

The message is clear: attractiveness is not just about low labour costs and taxation, no, it is also about stability, about a reliable legal framework, about a schooled population. It is about access to a large and sophisticated market. All these elements play in favour of the EU as a whole.
The latest economic and financial turmoil did not change these strong fundamentals. Nor did they undermine the strong will of European political leaders to work together. On the contrary.
This is not always understood. Some recent press comments predicted the end of the euro. These comments made me think of the famous quote by Mark Twain: ‘The report of my death is greatly exaggerated.’
We are obviously at a critical moment. One month ago, the euro was in the eye of the storm. So was the European Union. Both destinies are linked.
Because of the financing needs of one small European country, the global finance community held its breath – from Tokyo to Washington, from Beijing to Abu Dhabi. Through the financial sector, we are all linked. The euro itself also became a world currency, with, for instance, Russia and China holding a large stock of euros.
I suppose many of you kept a close eye on these developments. Therefore, today – now that we are in somewhat calmer waters – I propose to go into two issues:
Firstly, I should like to share some of my reflections on how the European Union dealt with the euro crisis.
Secondly, I would like to comment on how we are working politically, in member states and in the European institutions, to enhance long-term European growth.

Firstly, our exit from the turmoil:
To start with, I think it is important to put things into perspective. Listening to some commentators, one gets the impression that we are living the biggest crisis since World War II, or even World War I. Recently, one observer urged European leaders to use the Churchillian language of ‘blood, toil, tears and sweat’ in order to convey a sense of urgency. Well, it is not exactly the outbreak of World War II… We are not in the monetary Armageddon. Verbal inflation will not bring back confidence. It is a political duty to keep a sense of proportion. We are certainly in a critical moment; one can call it ‘unprecedented’ and ‘historical’. But crises are always unprecedented, by definition. Therefore I am glad that the EU has been able to deal with this one.
It took time, the coordination was difficult, but it is the result that counts. In my judgment the EU did reasonably well. We stumbled, but we did not fall.

The Union works under a lot of political constraints. These are often underestimated by outside observers. In our political system, there is a difference between (on the one hand) coming up with a plan, and (on the other hand) getting it adopted by a parliament and accepted by the public. Just think of the American health care plan! In the European Union, the difficulty is even bigger. We are not a single state. In the case of the eurozone, we are dealing with 16 governments and 16 parliaments, each with very different public opinions. Economists or investors may not always like it, but it is a political fact. It is what makes Europe a Union of democracies.
Decision-making was complicated, but not obstructed. There were three main difficulties.
First difficulty: the treaties did not provide us with the instruments to deal with such a situation; they expressly forbid a bailout. The creators of the Economic and Monetary Union thought that preventive action would be sufficient and that financial support would work as a moral hazard. We had to invent a financial mechanism on the spot.
Second difficulty: Greece only asked for help on 23 April, for domestic political reasons.
Third difficulty: because of the German Constitutional Court’s very strict interpretation of the treaty interdiction of a bail-out, Germany can only intervene ‘ultima ratio’, as a last resort.
Notwithstanding these difficulties, our capacity to act was clear, once Greece introduced its demand for support. Within 10 days we provided (together with the IMF) €110bn under strong conditionality.
Early May, when a risk of contagion to other countries developed, we acted again. We were faced with a very serious threat to the stability of the euro and the financial system. That’s why we decided, in a special meeting of the heads of state and government from the eurozone on 7 May, to use ‘the full range of means available’ to protect the Euro. These were not empty words. During the following 48 hours, all institutions and member states assumed their responsibility:
» The Commission rapidly made a proposal;
» The finance ministers agreed on the most impressive safety mechanism for the eurozone ever seen – the €750bn package;
» The Central Bank changed its policy with regard to sovereign bonds;
» Two member states immediately announced extra cuts to reduce their deficits. Others have done so since then.

One should consider these actions as one common European effort. Taken as a whole, they clearly show the Union is able to act decisively. They also showed the strong political will to defend our currency and to guarantee economic stability.
What lessons is the European Union drawing from this crisis, in terms of economic policy? Clearly, the key priorities are fiscal sustainability and being able to deal more effectively with financial trouble.
I am currently chairing a Task Force on these issues. It consists of ministers of finance from almost all the 27 member states, and representatives of the EU institutions, amongst whom Central Bank President Trichet.
Let me briefly mention the three priorities we are working on. It will give you a state of play on the issue.
Firstly, we all want to reach greater budgetary discipline. All agreed on the need to strengthen our fiscal rulebook: the Stability and Growth Pact. Proposals include stronger warning procedures and new types of sanctions. We have to admit the pact was not applied to the full. Big member states even softened it in 2005: a major mistake.
The second objective is a reduction of the divergences in competitiveness between the member states. This is a new priority. It is vital. Sound budgetary policies are necessary but not sufficient to ensure competitiveness. We could have known it since long ago, but it took the crisis to hammer down the point. A quick look at the current account of the balance of payments of a country suffices to have an idea of its competitiveness position.
These imbalances in competitiveness are a particular problem for members of the euro area. Countries can no longer devalue, but they enjoyed (at least until recently) low interest rates. In this respect, membership of the eurozone acted as a ‘sleeping pill’ for some economies. Nobody wants a ‘rude awakening’ by the market forces. One idea therefore is to develop indicators of competitiveness, so that we can measure and control. They should function as an early warning, a wake-up call. In fact, we need a monitoring system (including sanctions) just as tough for a lack of competitiveness as for the high budget deficits.
The third objective of the Task Force is better crisis management. This is about an effective financial crisis mechanism to deal with problems such as those of today in the eurozone. It is also about the need for stronger political cooperation and coordination. We must be able to act quicker and more efficiently when problems arise. In the Greek crisis, we built ‘a lifeboat at sea’, but we can clearly not go on improvising like this.
These are our three main priorities in order to prevent public debt from spinning out of control in the future.
More generally, beyond this particular crisis, everybody is now aware that we need a stronger economic governance within the Union and within the eurozone in particular. I can assure you we are working on that as well.
The euro is a fundamentally sound currency: eleven years of low inflation (less than 2%); close to equilibrium on the balance of payments and an average budget deficit half as important as other main players. Now we need convergence in economic development and policies to underpin the credibility of our common currency.

Let me conclude this subject with a remark on the relationship between public debt and growth. Some people fear that the required fiscal tightening will jeopardise the recovery (and also make reducing the deficits more difficult).
I think that fear is exaggerated. I am even convinced that lower deficits will, on balance, enhance consumer and investor confidence and stimulate economic growth. Moreover, European governments can follow a differentiated exit strategy. Those who do not have the fiscal space (like Spain or Portugal) are already starting to reduce their deficits. Those who have some more space (like Germany or Austria), may take more time. But in the end, all will have to exit from the crisis mode.
I will not insist too much on the higher growth perspectives with a slightly less high value of the euro…

This brings me to my second subject: how to create more jobs and more structural growth? How to enhance Europe’s attractiveness?
I do not have to point out the daunting list of challenges Europe is facing.
Other major economies in the world are racing ahead. We Europeans used to think this was because they have lower labour costs. Well, if that was their only advantage, we could deal with it easily… No, the challenge we face is in European competitiveness, in innovation, in labour participation. It touches every part of our economies and societies.
People are realising what’s happening, slowly but certainly. That’s why now is the time to act.
Since I entered office, I have put growth and jobs high up the Union’s agenda.
Enhancing structural economic growth is key. In a ‘business as usual’ scenario we have to live with an annual 1% GDP increase. This is certainly unsustainable with a rapidly ageing population. Of course it is easier to get higher growth in an emerging economy than in a mature economy. All economies will hopefully become more mature. It is more difficult in a society with a highly developed social system than in a capitalist world. All countries tend to become social market economies.
All European leaders basically know which structural reforms we need. The discussion is less on what we do, more on how we get there.
We have to go from targets on a piece of paper to real-life political commitments.
What I want to do, in the European Council, is to make ‘peer pressure’ genuinely pressure. For instance, by focusing on fewer economic targets. In two weeks’ time, the heads of state and government will adopt a new European strategy for growth and jobs. We will stick to five main targets, all quantifiable. R&D and innovation, education, employment, climate and social inclusion.
Let me just make a few comments:
» We have to preserve that type of expenditure (for instance on education) and tax deduction in a period of budgetary cuts. This is not a soft option.
» Climate change is about new technologies, huge investment in nuclear energy and renewable energy, in energy security: this is not a soft option.
» Together with the earlier mentioned competitiveness requirements, this will imply reforms in the labour market, retirement age and social security: this is not a soft option.
The European Commission, supported by the European Council, also wants to push for a deeper internal market. There is an excellent report by former Commissioner Mario Monti, which is a good basis. Many European markets – both in goods and in services – can be further developed. The common market has always been Europe’s strength. It is the biggest one in the world, 500 million people with a high purchasing power. We now need again to build on this time-proven asset, in co-operation with businesses. It is the condition for growth.

Finally, thanks to our new treaty, the European Union can develop into a more effective international player. We speak as a Union about our values and interests to our global partners… But there is still work to be done. Hopefully the EU has learnt the lesson of the climate conference in Copenhagen: the Union is not just the institutions in Brussels, but all the member states together. No EU member state is a global player anymore. There is no future for vanity of a country alone.
All European heads of state and government have to be aware of the challenges ahead. Some were already there; some were aggravated by the economic crisis and its aftermath.
All 27 governments and parliaments will be confronted with a reform programme in the budgetary field and in the socio-economic domains. All this will not be easy to achieve, but it is vital. And it is doable.
European leaders all know we need to act fast and to work together to safeguard the extraordinary attractiveness of the European Union.