Speech by Minister of State Michael Georg Link at the Friedrich Naumann Foundation in Washington D.C., July 31, 2012
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Ladies and gentlemen,
The crisis has shown that we may not only have a problem with economic integration but might also have to address more fundamental questions concerning political integration. Some of the wider ranging issues are: How can we solve the crisis of confidence in Europe caused by the debt crisis? Which role do we Europeans want to assume in tomorrow's world? What do we want the EU to look like in ten or fifteen years?
Europe is still in the middle of the crisis. It has been clear to Germany from the beginning that in order to lead Europe back to the path of prosperity, we have to tackle the root causes of the current situation, not just deal with its symptoms.
The origins of the crisis
Several of those root causes are structural in nature, requiring perseverance to change them. According to our analysis, three factors triggered the crisis. They are closely interlinked:
Firstly, excessive public and private debt levels in many member states. The accumulated debt of the euro countries in 2011 amounted to more than eight trillion euros, which is equivalent to 88 per cent of the eurozone's Gross domestic product.
Secondly, growing macroeconomic imbalances as a result of lack of competitiveness in some EU member states.
Thirdly, fundamental flaws in the current structure of the Economic and Monetary Union which I will come back to later.
Let us look again at how the crisis started:
In the aftermath of the 2008 financial crisis, the state had to rescue an over-leveraged and ill-invested banking sector. At the same time, it had to provide huge fiscal stimulus to the economy. The German fiscal stimulus, by the way, was comparable in relative size to US efforts at that time. Rescuing banks “too big to fail” and economic stimulus packages brought public debt to even higher levels.
As a result, financial markets started questioning the ability of some eurozone members to repay their debt or to grow their way out of the debt burden – first in Greece, then in Ireland, then in Portugal, this month in Spain. Germany has supported all measures taken to support these member states and we will continue to do so.
Nevertheless, Germany has been criticized for its positioning in the crisis. We've been told that we haven’t shown sufficient solidarity. That we are focusing only on long-term remedies for what is in reality a short-term problem. That we only talk of austerity without thinking about growth and competitiveness.
I do not agree with any of these statements.
Germany's double track strategy: Stability and growth
In fact, we have focused on a double-track strategy from the very beginning by linking solidarity on the one hand with a policy of fostering fiscal stability and growth on the other. For us, stability and growth are two sides of the same coin.
Let me be specific:
Solidarity with countries facing liquidity or structural problems has been a major pillar of our efforts. Germany is granting 285 billion euros in guarantees for both the temporary European Financial Stability Facility as well as the permanent European Stability Mechanism – that is more than two thirds of the German annual budget! Translated into the size of the US economy, this would be the equivalent of well over one trillion US dollars in guarantees by the US Treasury. Can you imagine members of Congress approving such a sum to help out non-Americans? The assertion that Germany is not demonstrating solidarity with fellow eurozone partners which are in trouble is an urban legend and simply not accurate.
As you are aware, the future permanent European Stability Mechanism (ESM) is currently being examined by our Constitutional Court. The fundamental question is: Are the new obligations set out in the ESM treaty in line with the German Constitution? Following the hearing on 10 July, the Court announced that it will deliver its decision on 12 September. We are confident that the Court will rule that the ESM treaty is in line with the provisions of our Constitution. Once a positive decision has been made, we would be ready to finish the ratification process rapidly, allowing the ESM to start its work. Germany’s share of the financial guarantees involved amounts to more than a quarter of the total.
Politically, all of this is not an easy task because these measures need parliamentary approval as well as popular support. However, all of them were ultimately adopted by large majorities in Parliament, including large parts of the opposition.
To solve the crisis we also need fiscal stability and responsibility.
The Fiscal Compact we signed in March is intended to halt and reverse the problematic developments and inherent flaws of the Monetary Union. This treaty firmly establishes the principles of fiscal responsibility and budgetary sustainability in Europe. It contains, amongst other things, an obligation for all signatory states to introduce a debt brake in their constitutions or national legislation.
Of course growth is crucial. To overcome the crisis, we need solidarity, stability and new growth in Europe.
Apart from unsustainable debt levels, the widening gap in competitiveness among eurozone members is a key cause of the crisis. Thus, cutting national budgets alone will not do the trick. We need fundamental structural reforms which can create sustainable new growth.
We know from our own experience that this can be a painful process which takes time and which may even lead to electoral change. But it can be done if we have the right objective, the right definition of the growth we need.
We don't need simple short term economic stimulus. We need a concept for a sustainable path for growth. An economy must have the strength to constantly grow from within. Therefore its leitmotif must be the enhancement of competitiveness through better conditions for innovation and private investment. Some of the key catchwords are: better educational systems, more efficient public administration, reform of labour markets. I call this concept “smart growth” – and a good number of EU partner countries are following this approach.
Ultimately, it is up to individual EU member states to adopt structural policies that facilitate new and lasting growth. But the EU can provide important support for them to do so.
What the EU can and is in the process of doing
There are many things the EU can and is in the process of doing:
For example, the “Compact for Jobs and Growth” which was adopted by the European Council last month. 120 billion euros will be mobilized in order to increase the European Investment Bank's paid-up capital by ten billion euros, to launch the pilot phase for Project Bonds in transport, energy and broadband infrastructure, to reallocate structural funds in support of small and medium-sized enterprises and youth employment and to devote a further 55 billion euros to growth-enhancing measures.
In general, we need to spend EU funds better. The next EU budget for 2014-2020 – the Multiannual Financial Framework – will be the place to lay the basis for that: At a time of tight fiscal budgets there is a need for structural reforms and a better allocation of the available funds in order to foster growth and employment.
Beyond that, we must reduce red tape, help small and medium-sized enterprises and reform our labour markets. All these reforms are politically difficult but very beneficial in the long term. We should also stimulate the external dimension of growth by improving business opportunities for EU companies in third countries and increasing international trade through more free trade agreements. We should continue to work towards the goal of launching negotiations on a comprehensive transatlantic trade and investment agreement next year.
And of course we also have to finally deal with the fundamental flaw of the Economic and Monetary Union: in the eurozone we have a monetary union, but no economic or political union. The euro was the right thing to do. But when setting it up shortly after the fall of the Berlin Wall we weren’t able to go all the way and create a political union side by side with the Economic and Monetary Union. We have allowed the hallmark of our monetary union, the Stability and Growth Pact, to be hollowed out and violated numerous times without real consequences.
At last, there is agreement within the EU that this needs to be addressed. The European Council has given a mandate to its President, Herman Van Rompuy, to develop, “a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union” by the end of 2012. President Van Rompuy has made it clear that he wants to develop his ideas in close cooperation with the governments of the member states. This fall, we will talk about four building blocks for the future of the Economic and Monetary Union: an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and strengthened democratic legitimacy and accountability.
Visions for the future of the EU and the eurozone
What are our visions for these discussions? First of all, I could well imagine the discussion about strengthening the EMU developing into a debate about the future of the EU as a whole.
On the initiative of German Foreign Minister Westerwelle early this year, ten EU foreign ministers have decided to meet in an informal setting to discuss questions relating to Europe's future beyond the resolution of the debt crisis. We must have the courage to think ahead. This encompasses fundamental, cross-cutting issues which we feel need to be addressed. Our aim is to kick off a strategic debate: Where do we need “more Europe”? So far, the informal group of ministers has met four times and issued an interim report last month, with the aim of introducing a discussion paper concerning the talks on the future of the EU in September.
It is clear, however, that in parallel to the further conceptual development of the Economic and Monetary Union, we have to address the urgent challenges which the eurozone is currently facing by taking short- and medium term action on the basis of the existing treaties:
A central element here is the establishment of joint European banking supervision. Although decisive steps have already been taken to stabilize and restore the heavily damaged financial sectors in many European member states, great danger still emanates from the largely uncontrolled transnational nature of the banking industry. We are therefore promoting swift and decisive steps towards the creation of a European financial regulatory regime involving the European Central Bank. Moreover, we have to foster the national deposit guarantee schemes and national bank resolution funds to restructure or wind down failing credit institutions.
Parallel to establishing stricter rules for the banking sector, it is also important and necessary that the financial industry contributes on a larger scale to the costs of the euro crisis. Since the introduction at EU 27 level was not achievable, we will now go forward with a group of like-minded member states to implement a financial transaction tax in Europe. We will exercise great care in constructing the tax regime to avoid a reduction of investments in the real economy as well as a negative impact for savers and pension schemes.
In addition, Germany and its European partners are currently taking the finalizing steps to implement the so-called “Two-Pack” legislation for the better coordination of fiscal policies and the strategic alignment of national budgets.
The economic and financial crisis turned into a crisis of confidence
What started as an economic and financial crisis in the eurozone has changed into something else: into a crisis of confidence in the EU as a whole – and not only among our citizens.
In Europe, the severity of the crisis has prompted some scepticism towards the EU, even towards the idea of integration. This scepticism is taking different forms. In some countries there is a risk of rising nationalism and populism.
This is something we must take extremely seriously. We will therefore continue to do all that we can to overcome the financial crisis.
For a strong and united Europe to assert our shared values and interests at the global level, we need both to handle and to overcome our present crisis – and to set the course for future decision-making.
This will only succeed if we do not limit our vision of Europe to the debt crisis and all the toil it entails. We must not reduce Europe to the price at which it comes. We must bear in mind the big picture of why we need Europe in this changing world.
The European Union is the instrument we have at hand in order to do just that – shape the future. Looking at the long term, the answer to the crisis must be “more Europe”, not “less Europe”. This is also the broad consensus among German political parties, even though they may disagree on the details of crisis management. For Germany, there is no good future without a good future for a united Europe. Germany is and remains deeply and firmly committed to a united Europe.
Transatlantic cooperation remains crucial
To conclude, let me address the question as to the role of the partnership between the United States and Europe is in all this:
The effects of globalization confront us with new challenges: from climate change to water and food shortages, from cyber security to the protection of the global commons. New powers are rising faster than we could foresee only a few years ago. Their growing economic weight is increasingly translating into political weight.
Every government on our two continents is shifting resources towards fast-growing new centres of power in Asia and elsewhere.
I remain firmly convinced that transatlantic cooperation remains crucial. As Vice President Biden said at the Munich Security Conference in 2009 – and I quote: “In sharing ideals and searching for partners in a more complex world, Americans and Europeans still look to one another before they look to anyone else.” End of quote.
I would be very much interested in hearing your opinions on this and on any of the other points I have raised today. I am very much looking forward to our discussion. Thank you.