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State Secretary at the German Ministry
for Economics and Technology,Dr.
Pfaffenbach
Institute for International and European
Affairs
1. Oktober 2010
11:30
Dublin
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Ladies and Gentlemen,
I am very honoured by this opportunity to speak at the Institute of
International and European Affairs and to contribute to the debates that the
Institute has organized over a large number of years.
[Wenn der Vorsitzende (chairman) des Instituts anwesend ist:
I am particularly grateful to Mr. Brendan Halligan for this invitation.]
I will use this opportunity to set out a few thoughts about the challenges that
economic policy is currently confronted with in Europe.
Europe must put its house in order:
My main message is simple and not surprising:
We are in the midst of a major change of economic relations worldwide and
Europe must put its house in order if it wants to play a major role in this
new environment.
Efforts to stabilise budgets and to improve competitiveness must not falter as
the economy recovers.
Recovery worldwide:
Let me take a quick look at the current situation of the world economy:
After the deepest recession since the Great Depression growth has returned
and is continuing, although at a moderate pace overall. The IMF has revised
upward its estimates for this year in its July update to a growth rate of 4,6 %
this year and 4, 3 % in 2011. I do not expect big surprises in its World
Economic Outlook which is to be published on 6 October.
Most forecasters expect some slowing down in the second half of this year and
in 2011.
But the recovery basically remains on track.
A double dip in the world economy is not ruled out completely but it is not
likely according to most observers.
True, the recovery remains uneven as advanced economies grow at a much
more moderate pace than many emerging markets. It is surrounded by
considerable risks.
Financial markets are still vulnerable and sovereign risks could destabilize
them again.
Diverse situation in Europe:
The Euro area GDP grew strongly in the second quarter of 2010 [increasing
on a quarterly basis by 1.0%, compared with 0.3% in the first
quarter].
The Commission now forecasts a growth rate of 1,7 % for this year.
Indicators suggest that GDP growth will moderate in the second half of this
year in Europe as well.
-3underlying momentum of the
Nevertheless there is a positive
recovery.
For 2011 the Commission forecasts a strengthening of private
consumption and of investment activity.
The recovery is starting to stand on its own feet.
Growth is quite uneven, however, ranging from 2,2 % in the second quarter in
Germany, to -1,5 % in Greece.
Ireland has unexpectedly recorded negative growth in the second quarter (
-1,2 %, after +0,3 % in the first quarter).
I can only commend the Irish government for embarking on an ambitious
consolidation path. It has won credibility through its swift and bold response
to the crisis.
[Recently, Irish and Portuguese spreads on sovereign debt
have widened to record highs again. Irish spreads are
being driven by bailout cost concerns.]
I encourage the Irish to sustain these efforts and to act decisively in order to
maintain this hard earned credibility.
Germany
The German economy is recovering much more forcefully than expected
by most observers. GDP rose by 2.2 percent in the second quarter of 2010.
This has been the highest quarter on quarter growth ever since German
reunification.
The European Commission estimates that the German economy will grow by
3,4 % in 2010.
The large scale stimulus package still provides significant support in 2010.
Looking ahead, Germany is benefiting from the strong recovery of world
trade.
Furthermore, the recovery has bolstered confidence of consumers and
investors in Germany.
Internal demand is increasingly contributing to growth.
[Wachstumsbeitrag im 2. Quartal: 1,3%].
These positive developments in Germany are supported by structural reforms
implemented in previous years and a more resilient labour market.
Innovative part time models have brought about new flexibility. Wage costs
have risen moderately.
Business can take off all the more swiftly now.
Recently, firms have been starting to add to their labour force.
[In August 2010 3.188 million people were unemployed (283,000 compared to the previous year), the
unemployment rate amounted 7.6 percent (compared to
8.3 percent in the previous year). Short time work has
been reduced significantly.]
German competitiveness has sometimes been criticised for being at the
-4expense of partner countries,
particularly in Europe.
I don’t believe however, that we have a zero sum game here. In a highly
competitive global environment, it makes no sense to seek some kind of
middle ground of competitiveness in Europe.
Europe as a whole would not benefit from a less competitive German
economy.
Competitiveness must be raised in all Member States if we want to remain a
large and influential economic powerhouse in a more diverse and multipolar
world economy.
We must adapt to an environment, where easy credit will no longer be the
main driver of growth.
In some cases regaining a sustainable growth path may not be possible
without a retrenchment in living standards that have been boosted much in
previous years.
a) Exit and consolidation
Our immediate task is to exit strategy from temporary support measures and
to implement a major consolidation of the budget as the crisis has laid
open a large structural deficit. [Defizit im Gesamtstaat dieses Jahr
unter 4 ½ % des BIP (ca. 100 – 115 Mrd. €), Defizit Bund
voraussichtlich unter 60 Mrd. €]
The Federal government has launched a consolidation programme
amounting to more than 80 billion Euros over the years 2011 to 2014.
The business sector, social expenditures and the government sector itself will
contribute to the savings effort in a balanced manor.
In order not to jeopardise growth potential, we avoid large scale tax raises.
Credible and ambitious consolidation strategies are necessary in all of
Europe. The recent crisis has made very clear.
A number of governments have devised more aggressive consolidation
strategies in the face of financial market concerns.
There has been some success in convincing markets of these efforts but risk
premiums for government debt are rising again in recent weeks.
It is essential not to dilute or soften consolidation strategies.
In view of heightened sensitivity of financial markets to public finance
developments this would only add to uncertainty and thus weaken growth
prospects even more.
These risks are compounded by the upcoming ageing-related fiscal burdens.
Strengthening fiscal surveillance in Europe
Ladies and Gentlemen,
the crisis has shown that the Stability and Growth Pact was to week to
prevent high government deficits and a large build up of debt.
With the full support of the European Council, we have embarked on a major
effort to strengthen fiscal surveillance in the EU.
The Task Force led by the President of the European Council, Herman Van
-5Rompuy, has made progress on a
number of issues.
In particular, there is much support for the proposal that the level of
government debt should play a much more prominent role in the assessment
of fiscal policy. A speeding up of the deficit procedure also has found
common ground.
The issue of sanctions has been discussed thoroughly.
Using structural funds in order to exert financial pressure seems to have
gained ground in the Working Group. Predictably, there is strong opposition
by some.
Whether sanctions can be applied in an automatic manner and no longer be
dependent on a majority in the Council, is still an open question. The treaty
would probably have to be amended for such an important change.
Germany supports a significant strengthening of the Stability and
Growth Pact, including Treaty changes if necessary.
In our view, a Stability and Growth Pact that has sharper teeth and allows
earlier action is necessary. The crisis has shown that.
Surveillance of competitiveness.
However, better fiscal surveillance is not all that is necessary. Surveillance of
budgetary developments will not address a lack of competitiveness, which
is at the root of the current crisis.
Losing competitiveness must therefore be a major cause for concern for all of
us. This is all the more true in a monetary union, since devaluation is not an
option.
The Commission, the ECB and also the German government have developed
ideas for early warnings in this respect. You probably have heard about the
scoreboard, which uses a number of indicators to provide signalling.
Such signalling is useful to put authorities on guard and to highten political
awareness.
It is even more important however, that developments in individual Member
States are analysed thoroughly and that any recommendations take into
account their individual circumstances.
There can be no schematic solutions to issues of competitiveness.
Furthermore, we also would like to see a more independent treatment of
structural issues at the level of the Council. Fiscal considerations should not
dominate them any longer.
In our view the Council on Competitiveness should assume a major role in
economic surveillance.
Yesterday [on 29 September, check], the Commission has presented
a number of proposals for legislation on a strengthened fiscal and economic
surveillance in Europe.
We will have to discuss these proposals in detail. They may not go far in
enough in some respects.
Crisis resolution mechanism
Let me mention a third major issue, which has not yet been addressed by the
Van Rompuy Task Force at all, although it is in the purview of its mandate.
-6I am referring to a crisis resolution
mechanism. In our view the
development of a robust crisis management framework should not be put
aside.
We should make sure that private creditors are involved in any crisis
resolution that may be necessary in the future.
A clear procedure could avoid the rather chaotic decision making we had to go
through in May.
Most importantly, it would have to set clear parameters for a private sector
involvement.
At the same time it should aim at avoiding contagion and keep at a minimum
the moral hazard that is implicit in any ex-ante rescue scheme.
A clear procedure for a debt restructuring would enhance risk awareness on
financial markets. It would also strengthen budgetary discipline.
It would help to reduce uncertainty and economic damage in the case of a
crisis.
At the end of this month [28./29. Oct.] the Task Force will present its
Report to the European Council.
Further work for strengthening economic surveillance and crisis prevention will
probably be necessary.
The Task Force may therefore have to continue its discussions.
Global agenda
Finally, let me make three short remarks on the global agenda.
We have made considerable progress towards restoring financial stability
world wide. The forceful response by governments and central banks has
helped to stabilize bank funding markets.
Stress tests, including the one in Europe, have contributed to rebuilding
market confidence.
However, increased sovereign risks have led to a set back in financial
markets. There is a risk that bank funding will be affected by large public
sector financing needs.
Furthermore, the process of cleaning up balance sheets and of adjusting
business models in the banking sector remains incomplete.
The restructuring or resolving weak banks is still a thorny issue.
The systemic effects of too-important-to-fail institutions are still to be more
fully addressed.
Many commentators therefore deplore a lack of progress in financial
regulation and oversight.
In my view, however, we are on a good path towards improvements overall.
A viable compromise has been found with the recommendations of the Basel
Committee on Banking Supervision on stronger capital requirements (12
September 2010).
Legislation on improved oversight has been passed in major financial
centres like the USA, although much detail still has to be hammered out.
In the EU, the setting up of a European Systemic Risk Board and a System
of Financial Supervisors is well underway.
-7Financial regulation and supervision
must be reformed thoroughly but
also with a good sense of proportion. The overall effects of the reforms on
the real economy must be taken into account.
The transition to a reformed regulatory system must be smooth so as not to
constrain credit availability as the economy recovers.
In the coming months we must also see to it, however, that the
implementation of the new standards proceeds at a broadly similar pace in all
major financial centres.
Secondly, let me make a short remark on the issue of rebalancing global
growth.
Global imbalances have been an important backdrop to the emerging crisis.
They have been reduced in the recession - most likely for cyclical reasons. We
still need to address them in a lasting way.
But we must be aware that rebalancing will not be brought about simply
by more or less expansive macroeconomic policies.
It requires a great variety of structural reforms in many countries and at
different levels of development.
Germany is pursuing a number of policies to strengthen growth potential
which have to go hand in hand with our consolidation efforts.
Increasing labour participation, strengthening innovation and improving
education are major fields of reform. Tax reform, especially with regard to
medium incomes remains an important goal.
Germany is actively contributing to a more sustainable and balanced
global economic development by these policies.
Trade policy
I cannot end this overview of challenges for European economic policy without
mentioning trade policy. The effective functioning of the multilateral
trading system, and the elimination of trade barriers remains of
paramount importance at the global level.
The revised EU trade strategy should concentrate on facilitating trade and
thereby contributing to sustainable growth and job creation.
Bringing the Doha Round to an ambitious, comprehensive and balanced
conclusion remains the primary trade policy goal of the EU.
At the same time we strongly support the conclusion of comprehensive,
balanced and ambitious free trade agreements.
In this connection, it is important to uphold the WTO-plus approach and to
achieve comprehensive liberalisation in the goods and services sectors.
Ladies and gentlemen, I have overstretched your patience.
Thank you very much for your attention.