László Andor Commissioner for Employment, Social Affairs and Inclusion Automatic fiscal stabilisers for the EMU: The long term needs to be prepared today" Conference Let s think outside the box. Automatic stabilizers for the Eurozone: Pros and cons of a European Unemployment Benefit Scheme, Brussels 11 October 2013 Good morning, Ladies and Gentlemen, It is a great pleasure for me to join Aart de Geus in welcoming you to this conference. 1
I cannot begin otherwise than by warmly thanking Bertelsmann Stiftung for organising this event. Aart de Geus and his team have mobilised a number of distinguished experts, even if not all of them can be here today. This effort will most definitely benefit the European Commission s on-going exploratory work on the possibilities of developing automatic fiscal stabilisers at the level of the Economic and Monetary Union. Today s conference is timely in several respects. Just last week the Commission put forward a Communication on strengthening the social dimension of the EMU. This policy paper looks into ways how to better ensure that adjustment to economic shocks within our monetary union involves as little employment and social damage as possible. Much less than recently experienced. More than that, it explains that the EMU as a whole needs to systematically detect key employment and social problems and ensure that these are addressed in a timely and effective way - otherwise the proper functioning of the single currency is at risk. 2
We discussed the social dimension of the EMU in detail yesterday at a conference entitled Restoring socio-economic convergence in Europe. Convergence in socio-economic outcomes is both a Treaty objective for the EU and a necessity if all Member States are to benefit from using a common currency with a single monetary policy. Yesterday s event was jointly opened by Presidents Barroso and Van Rompuy, which confirms the seriousness of the challenge Europe is facing in terms of a still fragile recovery and still growing disparities between the 'core' and the 'periphery'. But the issue is not just how to restore social equity in the way our monetary union functions. The debate on EMU reform is much more comprehensive and touches upon the very sustainability of the monetary union and its resilience against shocks. Today s conference takes place ahead of the meeting of the Council of Employment and Social Affairs Ministers in Luxembourg on 15 th October, and just two weeks before the European Council meeting which is expected to further discuss EMU reform. 3
The Heads of State and Government are hoping to potentially take decisions in December on the main features of stronger policy coordination and on associated solidarity mechanisms between Member States. The issue of transnational fiscal transfers is on the agenda, and the right modalities need to be developed. * * * Ladies and gentlemen, The Commission has been a strong and consistent advocate of addressing the social aspects of the on-going economic crisis and has promoted the idea of socio-economic convergence throughout these years. In 2010, we put forward the Europe 2020 Strategy which treats inclusive growth, increase in employment and reduction in poverty as essential elements of a smart and sustainable economic model. When it comes to the Multiannual Financial Framework for 2014-20, the Commission s proposals closely reflected the Europe 2020 Strategy and we have been fighting for a strong social dimension of the EU budget. 4
This includes a strong and modernised European Social Fund, but also a continuation of the European Globalisation Adjustment Fund and a new Fund for European Aid to the Most Deprived, which aims specifically at protecting social cohesion by providing emergency assistance to those in greatest need. All these instruments represent collective action at the EU level and they are based on transnational fiscal transfers that are in the enlightened self-interest of all the Member States of the Single Market. In the European Semester process, employment and social policy-makers have been involved alongside those responsible for budgets and for the balance of payments. In last week s communication on the EMU s social dimension, the Commission proposed to analyse and address key employment and social challenges in the EMU even more systematically, and to involve social partners more closely in economic policy-making. In short, the Commission has been seeking to maintain unity and cohesion in Europe and to ensure that all Member States can return to growth. This philosophy also framed the Commission s 2012 Blueprint for a deep and genuine EMU. 5
This is also why the Blueprint clearly envisaged that an EMU fiscal capacity with a shock absorption function needs to be considered as part of the long-term design of the monetary union. This was also confirmed in last week s communication on the social dimension of the EMU. I quote: In the long term, based on progressive pooling of sovereignty and thus responsibility and solidarity competencies at European level, it should become possible to establish an autonomous euro area budget providing the euro area with a fiscal capacity to support Member States absorb shocks. The central budget would provide for an EMU-level stabilisation tool to support adjustment to asymmetric shocks, increase economic integration and convergence and avoid setting-up longterm transfer flows. Overall, a shared instrument could deliver net gains in stabilising power, compared with current arrangements. A common instrument for macroeconomic stabilisation could provide an insurance system to pool the risks of economic shocks across Member States, thereby reducing the fluctuations in national incomes. I think we do not even need to consider the idea of transnational automatic stabilisers within the EMU as something controversial. 6
It is clearly envisaged, at least by the Commission, for the long term. The question is therefore not if, but rather when and how exactly. * * * Ladies and Gentlemen, The asymmetry in economic development is perhaps an even greater problem in the EMU today than it was at the Blueprint's adoption one year ago. The biggest challenge Europe faces today is to tackle the growing divergence in the economic, employment and social situations and recovery prospects across Member States, especially in the euro zone. Europe still needs a game changer that would make the recovery balanced and sustainable. In certain countries of the Eurozone periphery, this also requires a major reconstruction programme that would help to bring down risk premia, invite fresh investment and enable new economic activities to develop. 7
But bringing down risk premia requires not just short-term fixes. It is first and foremost about putting in place a credible macroeconomic framework that would finally give economic players confidence that all EMU countries will actually return to growth and that they all have an acceptable future inside the monetary union. Without such a long-term prospect, household demand will keep falling and companies will continue to be afraid or unable to invest in the periphery. Automatic fiscal stabilisers are a tool of economic policy to counter a cyclical downturn and maintain aggregate demand in the short term. To the extent that the divergence between the core and periphery of the euro zone has become structural over the past five years, we need structural solutions to overcome it, such as a banking union, re-industrialisation and resolution of unsustainable debts. Purely counter-cyclical fiscal policy would only alleviate part of the problem, and even if we introduced automatic fiscal stabilisers at the EMU level tomorrow, they would not entirely solve the present crisis. 8
But automatic stabilisers at the transnational level could be an instrument that could help our monetary union deal with future economic crises in a way that minimises output loss and social hardship. They could play an important role in preventing a short-term asymmetric shock from unleashing longer-term divergence within the monetary union something which we have not achieved in the past five years. To put it simply, automatic fiscal stabilisers at the EMU level could make it a lot cheaper to deal with future economic crises because action would be taken quickly, based on pre-agreed parameters. This would make the monetary union more resilient to future shocks. Agreement on transnational fiscal stabilisers could therefore contribute already today towards greater confidence in the EMU s future. It has been known for a long time and directly tested in Europe already in the 1970s and early 1990s that sustainable and wellperforming monetary cooperation requires solidarity between the participating countries and that this means fiscal transfers in one form or another. 9
Asymmetric shocks are a reality of life and we need to look into ways of dealing with them most efficiently and effectively. Countries cannot be expected to apply unlimited internal devaluation or accept a 10 or 20% loss of GDP every time a sector collapses or markets panic. Such downward adjustments in the absence of countercyclical policies would also be highly damaging for the economic performance of the EMU as a whole, both because of the drop in internal demand and because of hysteresis effects. Unfortunately, evidence shows that the EMU can no longer rely on national automatic stabilisers since the sovereign debt crisis erupted. They worked reasonably well across Europe until 2010, but have become much weaker since 2011. In some countries of the periphery, tax increases and cuts in social protection spending have actually aggravated the impact of GDP downturn on household incomes. * * * Ladies and Gentlemen, To conclude, the Commission does not consider the idea of automatic fiscal stabilisers or any other fiscal transfers to be a silver bullet or panacea for solving the euro crisis. 10
However, there is a real problem in the current functioning of the EMU which calls for serious assessment and solution. We do not shy away from the issue of transnational fiscal transfers because it is clear that this is a necessary element for a deep, genuine, sustainable and legitimate EMU in a long-term horizon. For all the reasons I mentioned, an EMU-level unemployment benefit scheme could well turn out to be the next big project in the process of EMU reform, after the banking union is implemented. But all this has to be seen in the context of a broader effort aiming at repairing the European business model through, among other things, stronger financial sector regulation, upgraded industrial policy and better use of existing EU funds in support of regional development and social investment. It is also fair to say that the Commission is currently not at the stage of preparing specific proposals or planning to launch a consultation on specific options for EMU-level automatic stabilisers. We are certainly deepening and expanding our technical work on this subject, because solutions for the long-term need to be developed today. 11
As in any other field, it is important to first clarify the nature of the existing problem and clarify what is at stake, before developing the technical options in depth and making policy proposals. This is why I would like to thank Bertelsmann Stiftung once again for organising this expert conference. I am confident that today s discussions and the work that you will all be undertaking in the follow-up to this event will move us forward, towards robust and well-defined options. I wish us all a productive conference. 12