EUROPEAN COMMISSION E U R O P E Background Information for the Informal European Council, 11 February 2010

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1 EUROPEAN COMMISSION E U R O P E 2 2

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3 Contents * 1. Recovering from the crisis 2. Confronting global challenges 3. Our aim: sustainable growth and jobs 4. Growth based on knowledge and innovation 5. An inclusive high-employment society 6. Green growth: a sustainable and competitive economy * Sources and notes at the end

4 1. Recovering from the crisis 1 Europe s growth was severely hit Unemployment has spread Young people are particularly at risk Industrial production declined sharply Our financial system still needs fixing Private investment is heavily constrained Public finances are very severely affected Fiscal consolidation will be demanding The situations of Member States differ Financial imbalances have a cost for all Successful exit is an immediate priority

5 Europe s growth hit by the crisis 2 Annual GDP growth (%) 15 EU-27 US Start of the crisis 15 Japan China We went through the worst contraction since the 193s. In the EU, GDP has fallen by 4% in 29, with +.7% forecast in 21.

6 Unemployment has spread (1) 3 Unemployment rates in Europe (Dec. 29) % of labour force There are 23 million people unemployed today in the EU, an increase by 7 million in about 2 months (March 28 December 29).

7 Unemployment has spread (2) Unemployment rates in the EU, December 29 (and increase since March 28) December 29 March LV ES EE** LT** SK IE HU PT FR EL** EU27 PL SE FI IT BE CZ BG UK* DE DK MT RO** SI LU CY AT NL Unemployment rates are on the rise, with some countries particularly hit. The EU average is expected to reach 1.3% in 21 (back to 199s levels).

8 Young people are particularly at risk 5 Youth unemployment rate (%) 24 Total Men Women Jan 25 May 25 Sep 26 Jan 26 May 26 Sep 27 Jan 27 May 27 Sep 28 Jan 28 May 28 Sep 29 Jan 29 May 29 Sep 29 Dec % of labour force Youth unemployment reached 21.4% in December 29, an increase by 7 percentage points since March 28.

9 Industrial production declined sharply 6 Manufacturing and construction outputs 12, 11, 1, 9, 8, 7, 1993M1 1993M7 1994M1 1994M7 1995M1 1995M7 1996M1 1996M7 1997M1 1997M7 1998M1 1998M7 1999M1 1999M7 2M1 2M7 21M1 21M7 22M1 22M7 23M1 23M7 24M1 24M7 25M1 25M7 26M1 26M7 27M1 27M7 28M1 28M7 29M1 29M7 index (25=1) year Manufacturing output Construction output Industrial production fell by 2% compared to its peak in 28 to reach a level not seen since the 199s. It has now stabilised and is beginning to increase, although the recovery is still fragile.

10 Our financial system still needs fixing 7 Realised and expected write downs or loss provisions for banks by region Realised writedowns or loss provisions (27:Q2-29:Q2) Expected additional writedowns by end-21 Implied cummulative loss rate (%, rs) US UK Euro area Asia There is still a significant adjustment in the financial sector to come, and possible damaging effects on our recovery.

11 Private investment is heavily constrained Bank lending capacity (growth in %) 8 15 Euro area UK US average actual lending 28 actual lending 29 projected lending capacity 21 projected lending capacity Because of pressure on their balance sheets, banks have diminished capacity to increase their lending. Confidence is weakened and credit is scarce. Firms and households face difficulties to borrow and invest.

12 Public finances are very severely affected Budget deficit in the EU, Japan and the EU (% GDP) US JP EU-27 Public deficit is over 7% GDP. Debt is forecast over 8% GDP in 211 (28: 61.5%). 2 years of crisis erased 2 years of fiscal consolidation.

13 Fiscal consolidation will be demanding Public debt level: medium-term projections 1 % of GDP 12 1 Scenario 1 (No consolidation) Scenario 2 (Consolidation.5% of GDP per year) 8 6 Scenario 3 (Consolidation 1% of GDP per year) Even a consolidation of 1% of GDP per year over 2 years may not fully bring back debt to the 6% GDP reference.

14 The situations of Member States differ Evolution of (price) competitiveness relative to the euro area average (1998 = 1, NB: increases represent losses in competitiveness) ES IE 11 NL PT IT EL Relative loss in competitiveness 1 AT BLEU FR 9 FI Relative gains in competitiveness DE Member States have experienced different developments of their real effective exchange rates (a measure of competitiveness reflecting price trends) since the start of monetary union in 1999.

15 Financial imbalances have a cost for all Estimated impact of additional spending on debt servicing if borrowing costs rise by 5 basis points (.5% point): 38 bn per year 12 Equivalent to 28% of public spending on tertiary education Equivalent to 46% of public spending on R&D 13 bn 81 bn Not managing debt and imbalances in the euro area may raise borrowing costs for all.

16 Successful exit is a priority 13 Different scenarios for GDPs Potential output level Slope = long-term potential growth No loss in potential output level after some time Case No 1: «Strong recovery» a full return to earlier path Potential output level Permanent loss in potential output level Same long-term potential growth after the crisis (same slope) Years Case No 2: «Sluggish recovery» a permanent loss in level terms only or a permanent loss on growth rates Potential output level Potential growth before crisis (e.g. 2%) Potential output loss increasing overtime Lower long-term output growth after the crisis (e.g. 1.5%)(lower post-crisis slope) Years Case No 3: «Lost decade» a permanent loss on growth rates

17 2. Global challenges intensify 14 Global competition is fierce Intra-EU trade is a catalyst for growth Asia will remain the fastest growing market Our futures are interlinked Our demographic path is known Ageing accelerates Old-age dependency will rise fast Ageing impacts our capacity to grow and limits our room for manoeuvre Cimate/energy goals require drastic action Acting together at EU level pays off

18 Global competition is fierce 15 Export share (% world exports) , 2, 15, 1, 5, - EU US Japan China India The EU benefits from being one of the most open economies in the world, but its external position is eroding.

19 Intra-EU trade is a catalyst for growth 16 Intra-EU and extra-eu exports of goods Intra-EU exports of goods in bn euro Extra-EU exports of goods in bn euro Intra-EU trade has been high and growing over the last decade. For every 1 of wealth created in a Member State, it is estimated that about 2 end up benefiting other EU Member States through trade.

20 Asia will remain the fastest growing market GDP in Asia in 25 and 25, in trillion euros % p.a. tr.14.4 China 34% GDP growth (% p.a.) tr. 8.6 China 22% Japan 49% India 7% Rest of Asia 22% Japan 37% India 8 % Rest of Asia 22 % World 2.8% Asia 3.5% China 5.% Japan 3.3% India 1.5% Rest of Asia 3.5% Rest of Asia India Japan China Asia and especially China is expected to continue expanding at a growth rate largely superior to the rest of the world.

21 Our futures are interlinked Relation between EU imports and exports of goods 2% 23% 18 Growth in extra EU-27 exports of capital and consumption goods 7% 8% Growth in EU-27 imports of intermediate goods from China, excluding fuels % 15% Share of China in EU-27 imports of intermediate goods (end of period) Two thirds of our imports are key intermediates for production and exports, and they come increasingly from BRIC countries. China doubled its share in EU imports of intermediate goods since These imports have contributed to the strong growth of EU exports of final goods.

22 Our demographic path is known Population by sex and age on 1. January of each year 19 Men (28) Women (28) Age First baby-boom cohort: age 64 in 21 1,,75,5,25,,25,5,75 1, Per cent Baby-boomers start retiring. This marks the end of the demographic dividend, i.e. the fact that the working age cohorts were particularly large compared to the rest of the population.

23 Ageing accelerates Population change over previous year The number of people over 6 is growing almost twice as fast as it did up to 27 (about 2 more million annually compared to 1 million previously). With smaller younger cohorts, the working age population will start shrinking from 213/214, and be reduced by about 2 million in 22.

24 Old-age dependency will rise fast,9,8,7,6,5,4,3,2,1 Old-age dependency ratios under four retirement age assumptions (59, 63, 66 and 69 year-old) work to 59 work to 63 work to 66 work to The old-age dependency ratio the ratio of people above retirement age for each person in active age is rising fast and would almost double by 26 if current demographic and retirement patterns persist.

25 Ageing impacts our capacity to grow EU growth potential (pre-crisis) GDP growth Employment growth The reduction of the size of our workforce will have a lasting impact on our capacity to grow.

26 and limits our room for manoeuvre 23 Increase in age-related public spending (% GDP) Pensions Health care Long-term care Education Unemployment benefits Total In 26, there will be only 2 persons of working age for every person aged 65+, compared to 4 for one today. Our capacity to fund our welfare model is at stake.

27 Climate/energy goals require action CO2 intensity and GDP per capita 24 CO2 per unit of GDP (kg per $28, PPP),9,8,7,6,5,4,3,2,1 India China World European Union Japan United States, GDP per capita ($28, PPP) Europe is already the major low-carbon economy but its climate goals and energy vulnerability call for drastic action.

28 Acting together at EU level pays off 25 Medium-term impact (22) on EU GDP of specific EU level reform measures model simulations euro bn Venture capital (removal of crossborder regulatory and tax barriers) 25% reduction in administrative (EU contribution corresponding to 35% of the overall burden) Services Directive (conservative estimate) Unbundling electricity markets Taken together, the four policies mentioned in this graph could boost EU potential growth by 1% to 2%.

29 3. Our aim: sustainable growth and jobs 26 Our GDP potential must be restored Employment must be boosted We must act on our productivity levers

30 Restoring our GDP growth potential 27 Average annual potential growth in the EU 2 1,5 Total Factor Productivity Capital Accumulation Labour (employment and hours) 1, ,5 The crisis will halve our potential output growth in the period compared to the start of the century.

31 Raising our employment rates 28 Employment rates (28) 8 EU US Japan 7 % of respective age population Overall Women (15-64 years old) Older workers (55-64 years Women Older workers old) (15-64 years old) (55-64 years old) Overall The employment rate went up from 62% in 2 to 66% prior to the crisis, but it remains too low, especially for female (59% as opposed to 73% for men) and older workers (46%).

32 Acting on our productivity levers Sources of real income differences compared to the US (27) Employment and hours worked Labour productivity (per hour worked) EU JPN Notwithstanding a slight catching up in employment and hours worked, the EU still has a substantial income gap with the US. Two thirds of the gap is explained by lagging productivity.

33 4. Growth based on knowledge and innovation 3 Nurturing high-tech, high-growth sectors Spreading innovation across firms Raising our levels of R&D investment Matching the pace of competition Coordination of R&D efforts boosts results Investing in our students and universities Broadening access to tertiary education Taking up the global fight for knowledge Catching up with high-capacity broadband

34 Nurturing high-tech, high-growth sectors 31 High-tech sectors' share in manufacturing value added Share of high-tech exports (% of total exports) EU-25 US 1 5 EU27 US Japan The EU is lagging behind major partners as regards the smartness of its economy and high competitive pressure arises from developed and emerging economies.

35 Spreading innovation across firms R&D spending ( bn) and industrial structure (28) 32 High-tech Medium-high tech US Medium-low tech EU Low-tech R&D investment in the US is driven by high-tech sectors. The number of firms in high-tech sectors in the EU is much lower: differences in sectoral composition explains ½ of the total gap in R&D intensity with the US.

36 Raising our levels of R&D Expenditure on R&D (% GDP) 33 4 Private sector Higher education sector Government sector 3,5 3 2,5 2 1,5 1, EU Japan US In spite of our 3% target, there has been little progress on R&D spending since 2. The EU is particularly lagging in terms of private R&D spending.

37 Matching the pace of competition 34 Investment in ICT R&D in 29 (billions ) 2,5 2 1,5 EU FP7 Google 1,5 The EU Framework Programme for Research (FP7) invests about 1.3 billion in ICT R&D every year. In 29, Google invested billion USD - the equivalent of 2 bn - in R&D.

38 Coordination of R&D efforts boosts results Estimated benefits of coordinated R&D policies 35 3,5% 3,% 2,5% Extra benefit through coordinated R&D policies GDP 2,% 1,5% 1,%,5% Domestic benefit if a country boosts R&D on its own,% Model simulations show that coordinated R&D policies could double the potential benefits of R&D investment.

39 Investing in our students and universities Expenditure on tertiary education (% GDP) 36 3,5 3 2,5 Private Public (direct) % GDP 2 1,5 1,5 EU Japan US Total spending on tertiary education in the EU (as a % of GDP) is less than half the US level, mainly as a result of lower private spending in Europe.

40 Broadening access to tertiary education Share of population aged with tertiary education EU USA Japan Today in the EU, less than one person in three aged has completed a university degree, compared to more than 5% in Japan and 4% in the US.

41 Taking up the global fight for knowledge Share in the top institutions of the 29 Shangai list EU Japan USA Top 5 Top 1 Top 2 While the EU has 4% of the universities in the top 5 of the Shanghai ranking, the top end is clearly dominated by the US (17 of the top 2 institutions are located in the US).

42 Catching up with high-capacity broadband Fixed broadband subscribers per population (December 28) 39 35% 3% 25% 2% 15% 1% 1 Mbps 3-1 Mbps Below 3 Mbps 5% % Europe Japan USA (e) Korea More than 5% of all broadband lines in Japan and 4% in Korea are fibre, delivering high-capacity connections. Only 1% in Europe.

43 5. An inclusive high-employment society 4 Combating risks of poverty Tackling early school-leaving Meeting future skills needs The PISA survey rang the alarm bell Promoting active ageing and lifelong learning Investing in human capital pays off Societal change creates new opportunities Building job-friendly tax systems

44 Combating risks of poverty At-risk-of-poverty rates by groups in the EU, Unemployed: 44% Children: 2% Elderly: 19% Total: 17% Employed: 8% Almost 8 million Europeans (17%) were at risk of poverty before the crisis. 19 million of these are children. 8% of people in work don t earn enough to escape from it. Women, the young, the elderly, people on precarious contracts and migrants are especially exposed.

45 Tackling early school-leaving Share of population aged with at most lower secondary education and not in further education or training Benchmark (1%) Worst performer in EU EU average Best performer in EU Today, one in seven young people (18-24) leave school early (6 million dropouts in EU 27). The rates are declining too slowly, and several Member States are lagging behind.

46 Meeting future skills needs 43 Skills needs in 22 Million jobs Low qualifications Medium qualifications High qualifications By 22, 16 million more jobs will need high qualifications and 4 million more jobs will need medium qualifications, while 12 million jobs less will require low qualifications.

47 The PISA survey rang the alarm bell 44 Share of pupils with poor reading competences Benchmark 21 EU 21,3 24,1 Japan 1,1 18,4 USA 17,9 19,4 Korea 5,8 5,7 17 Canada 9,6 11 Australia 12,4 13, One in four 15 year-old has poor reading competences. The EU average is declining. Migrant populations succeed better in Canada and Australia.

48 Promoting active ageing and lifelong learning Share of adult population (25-64) participating in lifelong learning 45 % / EU's best performer EU average EU's worst performer About 8 million people only have low or basic skills in the EU. Adult participation in lifelong learning is stagnating, and participation is highest for the youngest, the most educated and the employed, and lowest for those who need it most.

49 Investing in human capital pays off 46 If, over the next 2 years, student performance in each country would improve to reach the level achieved by Finland today the effect on GDP by 29 (the lifetime of the generation born in 21) will be: + 66% for the OECD, and between + 177% (NL) and + 173% (EL) for EU countries Source: OECD 21 The High Costs of Low Educational Performance: The long-run economic impact of improving PISA outcomes.

50 Societal change creates new opportunities 7,5% Employment in the health and social sector (share of population 15-64) 47 7,% 6,5% EU-27 EU-15 6,% 5,5% 5,% White jobs have been one of the engines of employment growth in recent years (+ 3.3 million since 2) and now represent more than 1% of all jobs in DK, FI, NL and SE. Ageing will reinforce this trend.

51 Building job-friendly tax systems Labour tax rate on low-wage earners EU US Japan Earlier reforms shifting the tax burden away from labour have paid off and need to be pursued.

52 6. Green growth: a competitive and sustainable economy 49 Decarbonising our electricity supply Decarbonising our transports Resource-efficiency matters Europe s lead in green sectors Green growth creates new jobs Tackling our missing energy links The internal market helps us grow Still a large potential in services Using e-commerce Helping our SMEs to grow in new markets The case of automotive production

53 Decarbonising our electricity supply 51 Sources of electricity production in the EU today and tomorrow 27 Vision for 25 Gas 23% 28% Nuclear Fossil with CCS Oil 3% Renewables and nuclear Coal 3% 16% Renewables Our ambitious climate policy will transform our energy mix and can reduce our import bill for oil and gas by EUR 6 billion by 22 and EUR 15 billion by 23.

54 Decarbonising our transports Moving towards an efficient and integrated transport network 52 The transport sector represents 7% of EU GDP and emits one quarter of total CO2 emissions. 97% of the sector depends on oil and is vulnerable to price shocks. Congestion costs more than 1 billion per year. The move towards decarbonisation opens up opportunities for new vehicles, standards and infrastructures, in the EU and abroad.

55 Resource-efficiency matters Material efficiency 53 material productivity, 198=1 2,5 2, 1,5 EU15 Japan USA 1,,5 Materials are a cost to industry. Europe is improving but Japan - for example - is already more efficient and improving even faster. If Europe could improve its resource efficiency by 2%, this could boost growth by around 1 per cent.

56 Europe s lead in green sectors Europe s share of the world market in green sectors 54,5,45,4,35,3,25,2,15,1,5 Power generation Energy efficiency Material Efficiency Water Management Sustainable mobility Waste management Europe is a world leader in many environmental technologies, and this has boosted our export performance. This market is forecast to triple by 23 and Europe must strengthen its competitive edge.

57 Green growth creates new jobs Employment in EU eco-industry (thousands) Jobs in the eco-industry have increased by 7% every year on average since 2 to reach 3.4 million. Achieving the 22 renewable target could deliver 2.8 million jobs in the renewable energy sector in total.

58 Tackling our missing energy links Connecting our energy internal market 56 Southern gas corridor LNG terminals Baltic Interconnection Plan Mediterranean energy ring North south electricity & gas interconnections in central-south Europe North sea offshore grid Completing the internal energy market will reduce prices for firms and consumers and may add.6%-.8% to GDP. It will also help reduce energy dependency and diversify imports for all Member States.

59 The internal market helps us grow 57 EU-27 exports of goods (%GDP) EU Foreign Direct Investments (%GDP) 25 intra-eu extra-eu % GDP % GDP Intra EU-25 FDI Extra EU-25 FDI The single market has borne fruit in terms of higher economic integration: intra-eu exports (67% of total exports) and intra-eu FDI (62% of total FDI) have increased markedly. This resulted in significant economic gains: 2.1 % of EU GDP over the period ( 5 per head) and 2.75 million jobs.

60 Still a large potential in services 58 EU-27 exports of services (%GDP) Effects of Services Directive Intra EU27 Extra EU % increase (Other Commercial Services) Trade FDI The EU is a significant market for cross-border trade in services - but the intra-eu dimension for services (58% of total) is weaker than for goods (67% of total). The full implementation of the Services Directive could increase trade in commercial services by 45% and Foreign Direct Investment (FDI) by 25%. It can bring.5 to 1.5% increase in GDP.

61 Using e-commerce Share of consumers using e-commerce, Online Purchasing 37% Cross-border Online Purchasing 8% % 1% 2% 3% 4% % of all EU Individuals aged The total estimated value of online transactions is around 15 billion in 29. About 4% consumers have used internet to purchase goods and services, but only 8% have done so from abroad. Too many users have doubts about safety and financial transaction on the net.

62 Helping our SMEs to grow in new markets 6 5 Conditions for start-ups Time to set up a business (days) Japan US BE HU DK PT SI EE FR CY IT EU-27 LU LT AT PL ES It takes 15 days to set up a business in Europe. Despite progress made, unfavourable conditions remain for new or small entrepreneurs.

63 The case of automotive production 61 Global vehicle park number of vehicules Millions Today Given GDP and population growth across the world, the global vehicle park will increase from the current 8 million vehicles to about 2 billion by How many of these will be «green» and produced by European firms?

64 References for slides 2-2 Slide 2 - Europe s growth hit by the crisis Source: European Commission Services (Ameco) Slide 3 - Unemployment has spread (1) Source: European Commission Services Notes: UK: Oct. 29. EE, EL, LT & RO: 3rd quarter 29. Slide 4 - Unemployment has spread (2) Source: European Commission Services Notes: UK: Oct. 29. EE, EL, LT & RO: 3rd quarter 29. Slide 5 - Young people are particularly at risk Source: European Commission Services Slide 6 - Industrial production declined sharply Source: European Commission Services Slide 7 - Our financial system still needs fixing Source: International Monetary Fund (Global Financial Stability Report - October 29) Slide 8 - Private investment is constrained Source: International Monetary Fund (Global Financial Stability Report - October 29) Slide 9 - Public finances are very severely affected Source: European Commission Services (Forecast 1/21) Slide 1 - Fiscal consolidation is demanding Source: European Commission (29 Sustainability Report and 29 Autumn Economic Forecast) Slide 11 - The situations of Member States differ Source: European Commission Services Notes: BLEU: Belgium and Luxembourg Slide 12 - Financial imbalances have a cost for all Source: European Commission Services (Ameco) Slide 13 - Successful exit is a priority Source: European Commission Services Slide 15 - Global competition is fierce Source: European Commission Services (Comtrade) Slide 16 - Intra-EU trade is a catalyst for growth Source: European Commission Services / Model simulations: WorldScan model Slide 17 - Asia will remain the fastest growing market Source: CEPII / European Commission Services Slide 18 - Our futures are interlinked Source: European Commission Services (Comext) Slide 19 - Our demographic path is known Source: European Commission Services (forecast) Slide 2 - Ageing accelerates Source: European Commission Services (forecast)

65 References for slides Slide 21 - Old-age dependency will rise fast Source: European Commission Services (forecast) Slide 22 - Ageing impacts our capacity to grow Source: European Commission Services (forecast) Slide 23 - and limits our room for manoeuvre Source: European Commission (29 Ageing Report) Slide 24 - Climate/energy goals require action Source: International Energy Agency (World Energy Outlook 29) Slide 25 - Acting together at EU level pays off Source: European Commission Services Slide 27- Restoring our GDP growth potential Source: European Commission Services Slide 28 - Raising our employment rates Source: European Commission Services Slide 29 - Acting on productivity levers Source: OECD (Going for Growth 29) / European Commission Services Slide 31 - Nurturing high-tech sectors Source: European Commission Services Slide 32 Spreading innovation across firms Source: European Commission Services Slide 33 Raising our levels of in R&D Source: European Commission Services / OECD Slide 34 - Matching the pace of competition Source: European Commission Services / Google s website Slide 35 - Coordination of R&D efforts boosts results Source: European Commission Services / Model simulations Slide 36 - Investing in our sudents and universities Source: European Commission Services Slide 37 - Broadening access to tertiary eduction Source: OECD / European Commission Services Slide 38 - Taking up the global fight for knowledge Source: Shanghai ARWU ranking Slide 39 - Catching up with high-capacity broadband Source: European Commission Services Notes: (e) estimates for the US based on projections Slide 41 - Combating risks of poverty Source: European Commission Services Slide 42 - Tackling early school-leaving Source: European Commission Services

66 References for slides Slide 43 - Meeting future skills needs Source: CEDEFOP study for the European Commission Slide 44 - The PISA survey rang the alarm bell Source: OECD (26 PISA study) Slide 45 - Promoting active ageing and lifelong learning Source: European Commission Services Slide 46 - Investing in human capital pays off Source: OECD (Report The High Costs of Low Educational Performance 21) Slide 47 - Societal change creates new opportunities Source: European Commission Services Slide 48 - Building job-friendly tax systems Source: OECD (Going for Growth 29) / European Commission Services Slide 48 - Building job-friendly tax systems Source: OECD (Going for Growth 29) / European Commission Services Slide 51 Decarbonising our electriciy supply Source: International Energy Agency (World Energy Outlook 29) / European Commission Services Slide 52 Decarbonising our transports Source: European Commission Services Slide 53 - Resource-efficiency matters Source: Aachen Foundation / European Commission Services Slide 54 - Europe s lead in green sectors Source: Roland Berger / European Commission Services Slide 55 - Green growth creates news jobs Source: European Commission Services Slide 56 - Tackling our missing energy links Source: European Commission Services Slide 57 The internal market helps us grow Source: European Commission Services Slide 58 - Still a large potential in services Source: European Commission Services Slide 59 Using e-commerce Source: European Commission Services Slide 6 - Allowing our SMEs to grow in new markets Source: World Bank Doing Business 21 Slide 61 - The case of automative production Source: Global Insight / European Commission Services

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