press - Council of the European Union

EUROPEAN COUNCIL
THE PRESIDENT
São Paulo, 16 July 2010
PCE 167/10
Herman VAN ROMPUY,
President of the European Council,
Breakfast speech to the Brazilian Bankers’ Association
São Paulo - Brazil
Ladies and Gentlemen,
It is a pleasure to be here with you and to talk about the economic and political situation of Europe.
During the World Cup, some commentators in the international press could not resist the temptation
to translate football results into an analysis of global politics. In this regard, two themes stood out in
the beginning: The Decline of Europe and the Rise of Latin America.
The European big football powers Italy and France -- the finalists of 4 years ago -- were
immediately knocked out of the tournament, just like 5 other European teams, whereas 6 out of 7
Latin American teams made it to the second round. There could be no doubt: Europe down, South
America up. Was this not something we perceived in the world economy as well? So these media
commentators said.
However, these intelligent and perceptive considerations proved short-lived. Ten days later, we
witnessed an all-European final between Spain and the Netherlands... So far for the art of
"footballistic geopolitics"! (Let me add for the sake of modesty that my own country, Belgium,
participated for the last time in the World Cup in 2002. Some of you may remember this, because
we lost in the eighth finals against... Brazil!)
Ladies and Gentlemen,
It's better to be prudent when talking about the rise and fall of nations and continents. Politics and
the economy, just like football, are full of surprises.
This is also true for the situation of Europe. I should like to give you some thoughts on the way
Europe has dealt with the global financial crisis. We took decisively the necessary measures to
stabilize the Eurozone. The Union and the Member-States took courageous decisions. The President
of the European Central Bank, Jean-Claude Trichet -- a prudent man! -- confirmed last week that
the global gloom over European growth prospects was overdone. Economic data "are not
confirming this pessimism", he said. I fully agree.
P R E S S
FOR FURTHER DETAILS:
Dirk De Backer - Spokesperson of the President - +32 (0)2 281 9768 - +32 (0)497 59 99 19
Jesús Carmona - Deputy Spokesperson of the President +32 (0)2 281 9548 / 6319 - +32 (0)475 65 32 15
e-mail: [email protected] - internet: www.european-council.europa.eu/vanrompuy
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Let me start with some fundamentals. The European Union today, with its 27 countries, represents
an area of stability, prosperity and strong public institutions. We are 500 million well-educated and
talented people. With only 7 percent of world population, we still generate almost 22 percent of the
world’s wealth. These surely are remarkable assets, unlikely to disappear overnight.
A recent study confirmed this: Western Europe is perceived as the second most popular destination
for Foreign Direct Investment (FDI), right after China. And Eastern Europe is perceived as more
attractive than both India and the US/Canada.
Indeed, attractiveness for investors is not just about low labour costs and taxation, no, it is also
about stability, about a reliable legal framework, about a schooled population. It is about access to a
large and sophisticated market. These elements play in favour of the EU as a whole.
Our single currency, the euro, has strong fundamentals as well. Since its creation in 1999, we have
had eleven years of low inflation (less than 2 percent); the Eurozone is close to equilibrium on the
balance of payments and has an average budget deficit half as important as other main players. Now
we need convergence in economic development and policies to underpin the credibility of our
common currency.
The latest economic and financial turmoil did not change these strong fundamentals. Nor did they
undermine the strong will of European political leaders to work together. On the contrary.
Seen from Europe, there has been a cascade of crises. It started as a crisis of private debt, which we
imported from the US, from 2007. Then it became an economic crisis. However, thanks to active
political intervention and coordination at the global level, including the G20, after only a year -- say
mid 2009 -- most countries were out of the recession. That was not bad at all!
It then evolved into a crisis of public finances. This was a paradox. Our governments had been
obliged to spend a lot of money to avert the economic crisis, but after that they ran into financing
trouble themselves.
Early 2010, we were facing something what could have been a monetary crisis. Because of the
financing needs of one small European country, Greece, the global finance community held its
breath -- from Tokyo to Washington, from Beijing to Abu Dhabi. Through the financial sector, we
are all linked -- worldwide. I suppose many of you in Brazil also kept a close eye on these
developments.
We now seem to be at the end of this cascade of crises.
Ladies and Gentlemen: today I propose to go into three issues.
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Firstly, I should like to share with you how the European Union dealt with the euro crisis.
Secondly, what are we doing to avoid a repetition? Some recent reforms of the banking sector
will no doubt be of interest to you in this regard.
Thirdly, how do we plan to improve our economic growth?
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First on the euro crisis. A few months ago, the euro was in the eye of a storm. So was the European
Union: both destinies are linked. It was rather difficult to deal with this crisis for us. In my
judgment the EU did reasonably well. We stumbled, but we did not fall.
The Union works under a lot of political constraints, these must not be underestimated. We are not a
single state. In the case of the Eurozone, we are dealing with 16 governments and 16 parliaments,
with very different public opinions. Nevertheless, last year we found agreement on a number of
fundamental issues, for instance on climate change and financial supervision.
In the case of the Greek crisis, there were three further obstacles.
To start with, the EU treaties did not provide us with the instruments to deal with such a situation;
they expressly forbid a bailout of a Member State. We had to invent a financial rescue mechanism
on the spot.
Second difficulty: because of a very strict constitutional requirement, Germany could only intervene
as a last resort, when the stability of the euro itself was in danger.
Third element: Greece only asked for help after three months, on April 23rd. As a former Prime
Minister, I can understand this delay. There is a very strict conditionality attached, by the other
Member States and the IMF; any government would prefer to postpone this as long as possible.
In Brazil, you have some experience with the IMF. Recently I read an article by President Lula in
the Financial Times about his career. Lula wrote himself:
"There is no little irony in the fact that the union leader who once shouted "IMF out!" in the
streets has become the president who paid off Brazil's debts to the same institution -- and
ended up lending it 14 billion dollar."
A substantial change indeed! It reflects the changing role of Brazil in the world economy.
In any case, once Greece introduced its demand for support, we provided (together with the IMF)
110 billion euros under strong conditionality, within 10 days. When a risk of contagion to other
countries developed, we acted again. In the week-end of 7 to 9 May, in a common effort of all
European institutions and Member States, an historic rescue package of 750 billion euros was
decided and designed. And we did not stop there. At the same time, several countries started to
implement measures to reduce budget deficits and restore fiscal sustainability. Those countries
where fiscal risks are higher (Spain and Portugal) prioritised fiscal consolidation. Their actions
should help restore confidence and further reduce borrowing costs. Finally, the ECB, our
independent central bank, has started the purchase of sovereign bonds in the secondary market. This
is a temporary measure and it is implemented in a way that does not affect the monetary conditions
in the Eurozone; hence it should not affect inflation.
As you can see, these measures represent an impressive package. Some outside observers and
analysts were surprised at its announcement, in the early hours of Monday 10 May. To them I
would say: do not underestimate the political will of European leaders to defend the single currency
and to guarantee the Union's economic stability!
The measures are already reaping benefits. Markets are gradually stabilising and confidence is
returning. This is key because without confidence the recovery will falter.
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At the moment, we are very active and determined in implementing reforms to prevent new crises
and to strengthen our economy. (The second subject of my talk). The European Union is building
now on the momentum we gained in tackling the crisis. The urgency is clear, and so is our
determination.
I felt this in the last meeting of European Heads of State or Government I chaired, four weeks ago.
All national leaders are ready to address the core of the problem, including the levels of public debt.
Individually, national governments know they have to restore confidence of both the markets and
the consumers. Countries cannot go on living above their means. Already, the governments have
shown the political courage to act.
Last week, Greece showed its first progress report to the EU and this was very positive. Greece
really has delivered upon its commitments. I am confident they will keep up the pace. The Spanish
government of Prime-Minister Zapatero has also announced an impressive reform package. In many
other Member States, discussions are going on about pension reform (for instance in France), or
other means of reducing public spending (e.g., the UK). These are positive signs.
EU governments also have to get better organised collectively, as a Union. It is another big lesson
of the recent crisis. We are a strange thing: a monetary union without being a fiscal union or a
political Union. It is hard to understand for outsiders, and sometimes it is hard to understand for
ourselves!
However, the events have shown to both the general public and the EU governments what it means
to share a single currency (with 16) and a single market (with 27). People have experienced that our
economic and monetary destinies are fully intertwined: what happens in one country, affects all.
This requires from member governments both solidarity and responsibility. But we also need
stricter rules.
All 27 governments are participating in efforts to draw the right lessons from the crisis in this
respect. I personally chair a Task Force composed mostly of the 27 Finance ministers on "economic
governance" of the European Union. The key priorities are fiscal sustainability, competitiveness and
being able to deal more effectively with financial trouble. I will not go into the details here of our
proposals (they should be ready in October), but you may be sure that we will have these stricter
fiscal rules in the EU's Stability Pact and we will have more efficient surveillance of
competitiveness. Because we have to.
This brings me to an issue no doubt close to your heart, as bankers: the reforms of the financial
sector. It is another angle of preventing new crises. We are working on a range of initiatives. Let me
mention the most important ones.
First of all, next week, on 23 July, the results of bank stress tests will be published. This is an
important measure aimed at assessing the resilience of the main banks in the EU. The tests should
contribute to strengthen confidence by ensuring transparency (and hence dispel harmful rumours).
The exercise is coordinated at the EU level, with the same methodology and scenarios.
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The stress tests of 91 of the EU's biggest banks will be published, together making up for 65 % of
EU bank assets. The exercise is done on a bank by bank basis. The results will be accompanied -- if
needed -- by concrete measures to restructure and/or recapitalise those banks in need. The markets
are reacting rather favourably; they have understood that the EU is serious about this commitment
of transparency.
Secondly, financial sector reform in the EU. It is one of the central elements in our reform strategy.
The EU is in the final stages of an overhaul of financial sector supervision to strengthen it and to
reduce risks.
They include 3 European supervisors for respectively the banking sector, the insurance sector, and
the securities trade. These bodies of micro-economic surveillance will get more power. A
completely new body -- of macro-financial surveillance -- will also be installed, the so-called
"European Systemic Risk Board". This will do an overall risk assessment: a job that was not done
so far. We were only looking at the trees (the individual banks and institutions), forgetting the
forest: the financial system as a whole. With these reforms, we fulfil our G20 commitments. The
system will remain decentralised: it is a web of national supervisory bodies held together by a
European "control tower".
Other measures concerning the financial sector include a limit on bankers' bonuses (agreed by the
European Parliament last week), regulation of the rating agencies, and the introduction of a bank
levy. This latter issue was an EU proposal at the last G20 Summit, as you may know; Brazil was
one of the countries not in favour of it (just like the host, Canada), mostly because you as Brazilian
banks have weathered the recent financial storm solidly. I can understand that choice. In our view,
however, asking the banks to participate is not just about paying for the past crisis, it is also about
dealing with possible future crises. Not to mention the need for the financial institutions to win back
the trust of the general public.
This brings me, briefly, to my last issue: economic growth. It is of course important to avert a crisis
and to prevent new ones, but in the end one also wants the real economy to perform better. It is
about jobs and growth.
Since I entered office in January, I have put growth and jobs high up the Union's agenda. Enhancing
structural and sustainable economic growth is key. In a "business as usual" scenario we have to live
in the EU with an annual 1 percent GDP increase. This is certainly unsustainable with a rapidly
ageing population. It is also not compatible with the role we intend to keep playing in the world.
In the updated growth forecasts for 2010 which the IMF published last week, China and India
would grow with 10.5 % and 9.4 % respectively. Brazil's forecast was moved upward with 1.5 % to
a full 7.1 % -- and I should like to congratulate you on that. The more so since the recent economic
growth has benefited the Brazilian society as a whole; millions of Brazilians having joined the
middle classes.
Continuing the figures, the US estimated growth is at 3.3 %. The Eurozone at 1.0 and the UK (the
biggest EU economy outside the Eurozone) is at 1.2 %.
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The overall trends are clear. One must nuance these figures somewhat, however. It is normal to
achieve higher growth in an emerging economy than in a mature economy, because it is in a process
of catching up. All economies will hopefully become more mature.
European leaders basically know which structural reforms we need. We have to reform and
preserve our social model. The discussion is less on what we do, more on how we get there. It is
about labour reform, the retirement age, and social security. It is about education, R & D and
innovation. In the individual Member States and in the European Union as a whole, we are working
in all these fields.
The European Commission, supported by the European Council, also wants to push for a deeper
internal market. The common market has always been Europe's strength. It is the biggest one in the
world, 500 million people with a high purchasing power.
In this respect, the emerging markets are also very important for European businesses. I could
mention the telecoms market, bio-fuels, the car market. Not least those in Brazil. You all know how
close the economic ties are between Brazil and Portugal -- and it clearly is a two-way-street! Other
EU states have stakes in your economy as well. If I see that our meeting today is chaired by Mr.
Colletti Barbosa of Banco Santander… I do not have to dwell on this further. Another final won by
Spain!
Ladies and Gentlemen,
To conclude, the European Union has passed a difficult moment. We are now back on track to
sustainable growth. We are determined to adapt to the times and to preserve what makes Europe
such a unique continent.
Europe's message to the world is that one can have both. Economic growth AND social justice.
Efficient political decisions AND democratic accountability. A good place to invest AND to live
-- almost a good a place to live as Brazil!!
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