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SPEECH/07/74
Joaquín Almunia
European Commissioner for Economic and Monetary Affairs
The EU Economy and the Lisbon
Strategy for Growth and Jobs
Business Community in Land Nord-Rhein Westfalen
Mullheim, 9 February 2007
Ladies and Gentlemen,
First let me thank the organisers of this event for their invitation to speak to you
today. As the most important industrial centre in Germany, I very much welcome the
opportunity to meet the business community of this region. The small to medium
sized enterprises that many among you represent form the backbone of the
European economy and are therefore vital to our quest for sustained growth and
higher employment.
It is for this reason that I will to focus my presentation today on the European
Union's Strategy for Growth and Jobs. As a fundamental strategy to secure a stable
and prosperous future for Europe, one of its most important building blocks is
improving the competitiveness of SMEs and enhancing the EU's business
environment. Before I discuss this issue in some detail, let me first give a brief
overview of the macro-economic situation in the EU.
Overview of the EU economy and benefits brought by the euro
The EU economy is currently enjoying a robust recovery. Growth is buoyant, with
GDP growth accelerating to 2.8% in the EU and 2.6% in the euro area last year.
This represents the strongest growth performance since 2000 and is driven largely
by domestic demand.
This strong growth rate is coupled with macroeconomic stability and low inflation.
Inflation stands at just above 2%, the lowest average since the 1970s and a
considerable achievement when compared to the inflation rates regularly
experienced during the 1980s and 1990s. As a result of low inflation, both short
term, and more importantly for businesses, long term interest rates are at
historically low levels, even by Germany's standards.
These benefits are in large part due to the euro and the stability oriented policies of
EMU. This week marked the 15th anniversary of the signing of the Maastricht
Treaty and the effective launch of the EMU. Today, 316 million people can share
the macro-economic stability brought about by the euro in terms of low inflation,
favourable financing conditions for businesses and reduced vulnerability to external
shocks.
The euro has also brought about significant improvements in the labour market. At
7.5%, unemployment stands at a record low in the euro area and over two million
new jobs were created last year. In fact, employment creation is one of the lesser
known successes of the euro and the accompanying Growth and Jobs Strategy. 12
million jobs have been created in the euro area since the introduction of the euro in
1999. Contrast this with the 3 million jobs created in the 8 years preceding the
single currency and I think you'll agree this is quite an accomplishment.
Overall, it is clear that we are enjoying a period of strong economic recovery and we
have good reason to believe that this upturn will last. The current favourable
economic climate is the result of cyclical factors. Yet the upturn is also to a lesser
extent the result of past structural reforms that are beginning to influence growth.
This is welcome news but does not imply that we can now rest on our laurels. If we
are to sustain growth and job creation we will need to respond to globalisation and
prepare for an ageing society.
Globalisation is an opportunity for Europe. Trade liberalisation and global economic
integration are beneficial for all trading partners, improving the use of resources and
allowing goods and services to be produced more efficiently.
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Moreover, as our trading partners grow wealthier, globalisation brings increased
business opportunities for EU firms in their home markets. Indeed, EU exports are
increasing and the euro area's external trade surplus reached three billion euros in
November last year. Over time, China has become a major trading partner. EU
exports to China have increased by 14% on average over the last five years
whereas US exports to China have decreased in the same period.
Nevertheless, preserving Europe's competitiveness will require further structural
changes that make our labour and product markets more flexible while ensuring
that we remain at the forefront of technology and innovation.
While structural reform is needed to seize the opportunities of global developments,
it is also required to tackle the challenge of population ageing in Europe.
We know that the shrinking of Europe's working age population will have severe
consequences for productivity and economic growth. Indeed, current projections
estimate that unless action is taken, the EU growth rate will more than halve by
2050. At the same time, public spending for pensions and health care is projected
to soar, with government debt in the EU forecast to increase to 200% as opposed to
today's 63%.
While this assessment may sound alarming, Europe's leaders have set out, and
embarked upon, a comprehensive strategy that aims to reap the rewards of
globalisation while addressing the challenge of demographic change as well as the
issue of energy and climate change.
Indeed, energy is becoming an increasingly important issue in a context
characterised by lasting high oil prices and concerns about long term security of
supply. The question of climate change is closely linked: half of the emissions of
green house gases come from the energy sector. The Commission has therefore
recently proposed a comprehensive package aiming at:
- improving the security of supply, through a triple diversification of our sources of
energy, our suppliers and our infrastructures and a renewed effort to increase
our energy efficiency;
- fighting climate change by setting new targets for the post Kyoto period,
promoting decarbonised energies and trying to convince other parts of the world
to join the effort;
- and improving the functioning of the internal market of gas and electricity,
through for instance increased interconnections of the national networks and an
improved regulatory framework.
The re-launched Growth and Jobs Strategy puts boosting productivity and raising
employment rates into sharp focus while simultaneously fostering innovation and
addressing the issue of energy. Meeting the goals of this strategy would enable us
to turn global developments to our advantage and preserve the living standards and
social welfare of European citizens.
Progress under the Strategy for Growth and Jobs
The Lisbon Strategy was originally conceived one year after the launch of the single
currency and it was designed to complement EMU's framework for stability and
growth. In 2005, Lisbon was renewed, drawing on the lessons of the first five years
in practice and focusing on increasing partnership between the EU and Member
States.
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Since the launch of Lisbon, the strategy has been instrumental in focusing minds of
governments and stakeholders on the need for reform. Let me elaborate in detail
just some of the key reforms already implemented by Member States:
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Firstly, across the EU governments have introduced tax cuts and changes to the
benefit system in order to 'make work pay.' For example, countries such as
Belgium and Finland have introduced tax measures that target low wage
earners while France, Germany, Belgium and others have established systems
for the early activation of the unemployed.
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Member States have also introduced reforms to their healthcare and public
pension systems. Indeed, pension reforms coupled with changes to early
retirement rules have already increased the employment rate of older workers
and have raised the retirement age by one year.
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In addition, a host of initiatives are underway to foster research and the diffusion
of new technologies. These include the use of targeted investment, support for
start-up companies and a higher availability of risk capital. Current targets aim
to increase R&D expenditure from 1.9% to 2.8% of GDP by 2010.
I am pleased to report that past reforms are already beginning to produce results.
While it is true that the current economic upturn is to a large extent due to cyclical
developments, evidence is accumulating of important benefits stemming from
structural changes. For example, resilient employment growth, especially among
women and older workers, coupled with the rapid decline in unemployment suggest
that structural improvements have taken place in the labour market. It is a little
known fact that despite the sluggish growth during the first half of this decade,
Europe has been creating more jobs than the US.
Indeed, it is estimated that reforms in areas such as unemployment benefits, taxes
and the ease of entry for new firms have reduced the structural unemployment rate
by almost 1.1% and have boosted GDP in the euro area by 1.7% since 1995. On
top of this, labour productivity is increasing in the first three quarters by an
annualised 2.5% compared to an average growth of 0.8% a year between 1995 and
2006. Research indicates that part of this pick up is structural and reflects reforms
made in recent years.
The progress made thus far may be modest in some respects but it illustrates the
real benefits that can be achieved if the EU presses ahead with its structural reform
agenda. While past measures are commendable, they do not go far enough. Above
all, now is the time to accelerate reforms when economic conditions provide us with
a 'window of opportunity'. To relax efforts now could prove a historic mistake.
Macro-economic stability and microeconomic reform in Germany
I have outlined a positive picture overall for the EU economy. Within this wider
framework of strong growth and macro-economic stability, Germany's case is
particularly striking.
Since the early 90s, Germany suffered from sluggish growth, high unemployment
and low competitiveness. Now, all the signs indicate that the German economy's
period of stagnation has been firmly consigned to the past. Germany has overcome
the impact of re-unification, and is recovering its economic dynamism.
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Growth has accelerated, reaching 2.4% of GDP in 2006, a considerable
improvement compared with 2005 when growth was less than 1%. Despite the VAT
increase at the beginning of January, all indications point to Germany remaining on
a solid growth path.
Competitiveness has been restored, with German exports increasing by 10.1% in
2006. Moreover, indicators suggest that the business climate has also improved in
the fields of construction, retailing and wholesale.
The situation of the German labour market is also looking considerably brighter and
unemployment has decreased substantially.
Against the background of this recovery, Germany is successfully managing to
achieve sound public finances, a central tenet of macro-economic stability. The
German government has placed fiscal consolidation at the heart of its policy
approach. Indeed, as a result of measures taken to correct the government deficit,
the excessive deficit procedure against Germany is expected to be abrogated in
June.
Nevertheless, the Commission's recent assessment of Germany's Stability
programme for 2007 shows that improvement is still needed, especially given that
next year will see risks stemming from social expenditure and the planned company
tax reform. The German government should hasten the pace towards the medium
term objective in 2008 by maintaining tight control over expenditures and by
ensuring that the announced reform of the corporate tax system does not
jeopardise fiscal consolidation.
While this country has accomplished an impressive recovery, keeping to the path of
economic growth will also depend on the structural reforms Germany makes to
ensure its position as a strong and competitive EU leader.
Thus far, Germany has shown a strong commitment to structural reforms and last
year took important initiatives to improve its structural strength. Several measures in
particular deserve a mention:
The government has brought the decline in working hours to a halt and has
introduced reforms to the pension system aimed at reversing the trend to early
retirement. Indeed, the government has decided to raise the retirement age to 67
while establishing a framework for privately funded pension schemes.
At the same time, labour market reforms have provided for more flexibility. Germany
has liberalised employment protection legislation for temporary contracts while
making the organisation of work more accommodating for employees through
flexible working hours and part time jobs. Moreover, there has been a considerable
degree of wage moderation in Germany. Without a doubt the progressive decline in
unit labour costs has helped restore the competitive edge that Germany lost during
the unification boom.
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Although public attention usually focuses on reforms linked to labour markets and
welfare systems, today I would also like to mention reforms in the microeconomic
sphere, which are of particular relevance for SMEs:
- Firstly, Germany has introduced a systematic and ongoing simplification
programme to reduce the administrative burden. Plans are underway to reduce
the reporting requirements on companies.
- Important progress has been made towards reducing the costs of starting a new
business and Germany has taken measures to increase the share of risk
financing. Steps are being taken that target the internationalisation of SMEs.
- Germany has recognised the need for a highly educated workforce and has
taken various measures to upgrade the quality of general education as well as
promoting excellence through initiatives targeting top universities. These include
measures that aim to improve the output of academic research.
- Finally, Germany has also set an ambitious target to increase expenditures in
R&D from 2.5% in 2004 to 3% by 2010. As a prime location for high technology
and research, no doubt this region will be at the cutting edge of new R&D
schemes.
Overall, I am encouraged to see that the strength of the German reform efforts
embodies a determination to raise the country's innovative capacity. Unfortunately,
there exist important weaknesses in the German Reform Programme which need to
be tackled.
- Firstly, more ambitious reforms are needed to strengthen competition in product
and service markets. Germany should continue to relax restrictive rules
governing many liberal professions. There is also a need to remove barriers to
competition in the gas and electricity networks where unbundling has so far
been ineffective.
- Second, implementing the health care reform and strengthening efficiency in the
health sector will help ensure the long term sustainability of public finances.
- Thirdly, Germany needs to do more to tackle unemployment. Efforts should
focus on integrating the low skilled into the labour market through better access
to qualifications and by providing more effective employment services for the
long term unemployed and young people out of work.
Therefore despite progress, important obstacles remain, and it is clear that this
country needs more structural change, not less.
Conclusion
Ladies and Gentlemen,
Let me conclude by emphasising once again the strong position in which both the
EU and Germany now find themselves. Thanks to our stable and growing
economies, we are in an ideal position to prepare Europe for future challenges and
opportunities. This year Germany took over the European Presidency. It is
significant that a key theme of the Presidency's work programme is the continuation
of EU reform and the implementation of the Lisbon Strategy for Growth and Jobs.
We know that reforms deliver results, and we have identified the work that remains
to be done. Now is the time to pick up the pace and press ahead with the reform
effort to secure Europe's future for its citizens.
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