Saving Europe’sEconomic Recovery

Dr. Olli Rehn, Vice-President of theEuropean Parliament

Capital Markets Top Seminar, 25 Sept 2014

Aalto University, Helsinki

European economy in recovery mode

• Damaged by the financial and debt crisis since 2008, theEuropean economy was stabilized in 2010-2012.

• The stabilization was achieved through inevitableconsolidation of public finances and decisive action incontaining financial market turbulence.

• Europe’s economy returned to growth in Spring 2013.

• Recovery is still fragile and in danger and weakened bygeopolitical tensions and deflation dangers.

• Saving the recovery calls for bold and well-coordinatedpolicy mix by EU institutions and member states.

90

95

100

-3

-2

-1

0

1

2

3

4

5

07 08 09 10 11 12 13 14 15

GDP growth rate (lhs)

GDP (quarterly), index (rhs)

GDP (annual), index (rhs)

forecast

q-o-q% index, 2007=100

3.2 0.4

-4.5

1.6 -0.4

Figures above horizontal bars are annual growth rates.

2.00.1

1.6

2.0

Source: Commission services

Economic activity in Europe 2007-15

European growth map 2012

Source: Commission services

Source: Commission services

European growth map 2014

Ghost of geopolitics &danger of deflation

• Europe’s nascent recovery is now haunted by there-born ghost of old-school geopolitics, and bythe scary spectre of deflation.

• The conflicts in the Middle East and the falloutfrom the war in Ukraine – and from Russia’seconomic stagnation – are weakening investorconfidence and dampening economic activity,and thus exacerbating deflationary pressures.

• The danger of deflation is there, and we alreadysuffer from a too long period of low inflation.

7

Inflation

Source: European Commission

-1

0

1

2

3

4

5

07 08 09 10 11 12 13 14 15

%

Energy and unprocessed food [pps.]

Other components (core inflation) [pps.]

HICP, all items

forecast

Better EU policy mix• To save Europe’s recovery, the EU’s policy mix should be geared to boost

sustainable growth and job creation. Need better coordination than today.

• Monetary policy will continue to need to be accommodative – andperhaps, if need be, become still more expansionary.

• In fiscal policy, consistent consolidation to continue, focus on thesustainability of public finances over the medium term.

• Structural reforms should be intensified in the Member States to makeEurope more competitive, innovative and flexible.

• In EU policy-making, the focus should now move from “macro to micro” =from “sheer” economic stabilization to boosting sustainable growth,competitiveness and employment:

• Complete the Single Market (including in energy, services & digital services)

• Seek growth beyond our borders and pursue new free-trade deals (TTIP)

• Improve access to finances, especially of growth-oriented SMEs

• Capitalise on the potential of the green economy

A new pact on reform and credit

• Need a new pact on reform and credit, to be madeup of three policies and three+ players. Its threeelements would reinforce each other and growth.

• The key actors - Italy and France, the EuropeanCentral Bank and Germany - need to work out thedetails of such a pact this autumn and then agree onit at the European Council in December.

• This project should be initiated and facilitated bythe incoming European Commission.

The Pact, part 1

• Need to intensify serious economic reforms in thecountries that have for years delayed them.

• Economic reforms in France and Italy could boostgrowth and reassure the ECB that its monetarystimulus would have the desired positive effect.

• The same goes for Finland, which have delayed thenecessary reforms and is in dire straits today.

The Pact, part 2

• Once France and Italy have become serious abouteconomic reform, then the European Central Bankshould without any unnecessary delay go all the wayit needs to combat the deflationary spiral.

• The ECB’s willingness to go all the way in monetarypolicy – up to a QE2 if needed – would help kill thespectre of deflation and justify both to the politicalleaders of France and Italy and their voters that theeconomic reform is worth the political cost.

The Pact, part 3

• The surplus economies of the eurozone, particularlyGermany, should further boost domestic demand andinvestment, both public and private, to supporteconomic activity throughout the eurozone, ashas formany years been advocated by the EC.

• A concrete signal by the German government that itwill use its substantial fiscal space as Europe’s majorsurplus economy would have a significant impact onthe European economy and an equal psychologicalimpact on the European public.

• It would also help to convince France and Italy of thecase for tough economic reform.

Investing in growth and jobs• In the long run Europe can compete with the

emerging powers only by investing in education,research, innovation, and green economy.

• Private investment: the Banking Union, including theAQRs and STs, is a must to finally restore the healthand resilience of the European banking sector, tolend to the real economy.

• Public investment: a 300 be investment programmeproposed by the Commission President Jean-ClaudeJuncker, worked out with the EIB, must be concreteand well targeted for the growth and jobs.

No single-issue movement,no silver bullet will succeed.

Instead, we need to work on all frontsto save Europe’s recovery and

reinforce growth and job creation.A new pact on reform and creditwould do the job. Can we do it?

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