European Commission
[Check Against Delivery]
László Andor
European Commissioner for Employment, Social Affairs and Inclusion
Social dimension of the Economic and Monetary Union: what lessons to draw from the European elections?
Lecture at Hertie School of Governance
Berlin, 13 June 2014
Professor Offe,
Ladies and Gentlemen,
It is an honour and a pleasure to be here. I would like to thank Mr Weise for his kind invitation and the opportunity to discuss with you the on-going reform of Europe’s Economic and Monetary Union at a time when a new European Parliament and Commission are being formed and key priorities for the next five years are being discussed.
Just over a month ago, President Barroso delivered a remarkable lecture on Europe here in Berlin, entitled “Considerations on the present and the future of the European Union”. On his list of necessary improvements and reforms over the coming years, the deepening of Economic and Monetary Union is the first item.
Today I will build on the President’s reflections in some ways, focusing on the reform of the EMU and on the social dimension of the European integration project.
My main argument today, and one of my main messages to those negotiating the mandate of the next European Commission, is that Europe’s Economic and Monetary Union needs to be strengthened with a well-designed mechanism of fiscal transfers between Member States using the euro.
I will outline how such a transfer mechanism should look like, namely a scheme where EMU Member States share part of the costs of short-term unemployment insurance.
Through such a scheme, it would be possible to create a European safety net for the welfare safety nets of individual Member States.
The earlier such a mechanism is agreed and launched, the better for everybody, including those countries which today enjoy higher levels of employment and may consider themselves to be safe from the impact of financial crises.
A basic European unemployment insurance scheme would have a strong economic rationale, since it would provide a limited and predictable short-term stimulus to economies undergoing a downturn in the economic cycle – something that every country is going to experience sooner or later.
Such a scheme could therefore boost market confidence in the EMU, and thus help to avoid a vicious circle of downgrades and austerity in the euro zone. This would help to uphold domestic demand and therefore economic growth in Europe as a whole.
I will make my case in five steps:
First, I will draw some main lessons from the financial and economic crisis in Europe since 2007.
Second, I will highlight the social consequences of Europe’s double-dip recession and remind you of the huge divergence in employment and social outcomes which now characterises the EMU and so threatens the future of the EU as such.
Third, I will show that Europe’s weakness in confronting the crisis is a systemic problem, rooted in the incomplete character of the EMU as designed 25 years ago – the EMU 1.0 as it is sometimes called.
Fourth, I will explain why the EMU 1.0 needs to be upgraded to EMU 2.0, with fiscal transfers between Member States.
Finally, I will detail my proposal for a basic European unemployment insurance scheme, and, I will explain why the advantages far outweigh its costs.
All in all, I hope to convince you that a basic European unemployment insurance scheme would be a predictable, reliable, fair and at the same time effective instrument for improving the functioning of the EMU – something that could and should be put in place in the next few years.
I am aware that explicitly calling for transfers of taxpayers’ money between euro zone Member States may be seen by some as a provocation in Germany, where the word “Transferunion” has a rather pejorative meaning.
Some might also say such an effort is just a waste of time after the European Parliament elections that have sent to Brussels and Strasbourg an increased number of populists and Eurosceptic nationalists.
Personally I think that the best way to take account of the EP election result is precisely to explore such innovative proposals.
There are two possible reactions to the EP election results. One is a panic reaction, which assumes that the populist agenda should be partly absorbed by mainstream parties in order to restore their credibility. This approach points toward deconstruction of the EU, even if deconstruction is often euphemistically referred to as 'reform' in political debates and the media.
On the other hand, one can choose a strategic response, aiming at reconstruction of the EU, by sorting out the fundamental problems that have caused frustration in society in recent years. If you choose this alternative, you have to go to the root causes of our economic, social, and now also political troubles.
What you will hear now is a plea for monetary reform because I believe this is the factor behind our complex problems and it also holds the key to a progressive reconstruction of Europe.
1. Lessons from the financial and economic crisis in Europe
Ladies and Gentlemen,
I believe it is my responsibility to share key conclusions from my four and a half years’ experience as Member of the European Commission – lessons from years of financial and economic crisis that was unprecedented in EU history and that should never be repeated.
In fact, Europe has been going through two crises and not one. The first we shared with the rest of the world, while the second one specifically originated from the inherent weaknesses of the current EMU architecture and brought us on a different path than the rest of the industrialised world.
The financial and economic crisis, which started in August 2007 in the subprime mortgage sector of the US financial system, reached Europe within a matter of weeks.
When it escalated in Autumn 2008, following the fall of Lehman Brothers, European governments agreed a coordinated stimulus known as the European Economic Recovery Plan, amounting to €200 billion or 1.5% of GDP, including through temporarily increased deficits of national budgets.
Governments paid unemployment benefits to people who lost jobs, tried to maintain investments and refrained from raising taxes. This stimulus helped Europe to overcome the first deep recession, but unfortunately could not be followed up in many countries when the sovereign debt crisis hit in 2010-11.
Speculation about the solvency of the Greek state was followed by many months of hesitation at the European level ahead of the Nordrhein-Westphalian elections on 9 May 2010. Only then was an emergency loan to Greece agreed and announced, in a much larger volume than would have been the case if Europe had taken collective action more promptly.
Speculation then continued about sovereign debt restructuring and about possible exit of various countries from the euro zone, meaning that interest rates in the euro zone ‘periphery’ climbed to very high levels and a number of additional countries had to apply for bailouts.
Debts from financial markets were replaced by debts from official sources, which turned the euro zone into a club of debtors and creditors, set against each other.
The elected governments of Greece and Italy were replaced with technocratic administrations as the democratically elected ones were unable or unwilling to implement front-loaded fiscal consolidation.
The fiscal impact of bank bailouts added to the financial problems of sovereign borrowers, and so contributed to the destabilising trend in the euro zone.
From a fragile recovery we entered a double-dip recession in 2011. At the same time, the lack of confidence in the sustainability of the euro zone resulted in capital flight from less stable countries towards more stable ones, causing further financial and economic polarisation.
During these years, we learned expressions like financial fragmentation, and observed a deepening core-periphery divide within the euro area. This became an existential crisis of the monetary union, and of the EU as a whole.
While Europe went into a second recession in 2011, the US economy was already steadily growing because the US had relevant instruments in place and the US Government and central bank did not hesitate to use them to generate growth and jobs.
The EU only started to emerge from the financial whirlpool when the ECB announced that it would be actually ready to act as a central bank in a crisis, and the Presidents of the European Council, the Commission, the ECB and the Eurogroup came forward with a long-term plan about the reconstruction of the EMU.
In short, the sovereign debt crisis of the past four years has shown us that without a lender of last resort, a central budget or a coordination framework geared towards stimulating aggregate demand, the EMU 1.0 has been – at best – a structure for fair weather, but not for a financial and economic crisis.
At the beginning, the euro provided some shelter for its Member States. Austria, for example, was challenged by capital markets but its membership in the euro zone helped to calm them down. For countries losing access to financial markets altogether, emergency lending was always agreed.
But the euro has also been a trap, because Member States can no longer adjust to economic shocks through tailor-made monetary policies and devaluation in their exchange rate, while at the same time being subject to strict rules on fiscal policy.
For more than five years now, many European countries have been struggling to strengthen their growth potential inside the monetary union mainly through a muddling through strategy. The contractionary effects of these strategies have put the EU at a competitive disadvantage in global terms.
Furthermore, the long crisis has led to social consequences that cannot be acceptable in the European Union.
2. The social consequences of the double recession
Ladies and Gentlemen,
The Treaty on European Union establishes the objectives of balanced economic growth in a highly competitive social market economy, aiming at full employment and social progress.
Back in 2010, when the Barroso II Commission was just starting its term, we built on the Treaty obligations by proposing the Europe 2020 Strategy for smart, sustainable and inclusive growth.
This Strategy was agreed by the European Council and established a model of social and economic development based on five headline targets to be reached by 2020. These targets include 75% employment rate among 20-64 year-olds and at least 20 million fewer people in or at risk of poverty or social exclusion.
However, Europe’s performance has unfortunately worsened since then due to the long economic crisis. While the employment rate was 68.5% in 2010, it fell to 68.3% in 2013. The number of people in or at risk of poverty or social exclusion was 118 million in 2010, but 124 million in 2012. Crucially, these aggregate figures hide enormous disparities between Member States.
It is obvious today that while some countries like Germany are enjoying economic growth and record-high employment, many other countries are struggling with economic stagnation or continued contraction, with unemployment rates near or over 20% and with declining household incomes and rising levels of poverty.
This graph shows the divergence in unemployment rates, to give just the most obvious example.
But in adjusting countries, where economic growth is negative and unemployment is on the rise, poverty has also risen significantly.
Demand for the services of food banks has grown and many young people lacking opportunities choose to emigrate, often to other continents, which of obviously results in a loss of human capital for Europe as a whole.
Why did Europe become so divided in terms of economic and social outcomes?
A key factor has been the design of our Economic and Monetary Union, with monetary policy being centralised at the European Central Bank, but fiscal and structural policies being predominantly under the responsibility of national governments, without there being any euro zone budget in place.
This means that instruments that were historically used to limit the social impact of crises were not available any more, while there has been nothing newly introduced to replace them.
For us this also means that the Europe 2020 targets cannot be expected to be achieved, not even with big delay, when so many governments in Europe lack the ability to conduct economic policies that could generate sufficiently strong economic recovery.
What I would like to highlight, also in relation to the 2014 European elections, is that the sovereign debt crisis since 2010 and the fiscal consolidation strategies implemented in response to it have substantially weakened the power of the welfare state.
In particular, they have weakened the effectiveness of so-called automatic fiscal stabilisers at the national level, which basically means the ability of a state to immediately act in a countercyclical way as tax revenues drop and social expenditure increases.
Until 2010, national budgets were able to counter the economic downturn. Since 2010, many national governments have lost this ability and austerity policies in many cases actually aggravated the economic crisis.
The point is that macroeconomic instability in Europe stemmed predominantly from the incomplete design of the Economic and Monetary Union: troubled countries could not unilaterally devalue, could not call upon a lender of last resort and could not count on any fiscal support from other Member States that would enable them not just to survive but to stimulate economic recovery.
The only mechanism through which troubled countries inside the EMU have been able to restore economic growth is so-called internal devaluation, i.e. cost-cutting in both the private and public sectors by shedding labour and reducing wages. Internal devaluation has resulted in high unemployment, falling household incomes and rising poverty – literally misery for tens of millions of people.
Moreover, it is a recipe that cannot be applied in many countries at the same time because it undermines overall demand. If many countries cut their wages and lay off workers, nobody wins in terms of relative competitiveness but everybody loses.