Pierre Moscovici's speech at Bruegel Annual Meeting

by Pierre Moscovici on 7th September 2012

Ladies and Gentlemen,

Thank you so much, Mr. President, for your leadership here at Bruegel, and thanks to all of you in attendance. Independent think tanks can make valuable contributions to public debate - and the Bruegel Institute certainly does. It’s a pleasure to be with you today and share France’s vision – or at least mine – of where the eurozone stands at the moment, and what we think should be the path forward.

The eurozone is afflicted by three interconnected ills which form all together the crisis mentioned by Jean-Claude Trichet earlier: a banking crisis which has morphed over the past couple years into a sovereign-debt crisis, insufficient solidarity among its members, and a democratic deficit which grows every day. These challenges are not new: we’ve been wrestling with them for some time, and some have been more than a decade in the making. To be effective, our response must be comprehensive, encompassing simultaneous action on these three fronts.

Let me expand on this for a moment. The eurozone binds diverse economies with a single exchange rate and a single monetary policy. Diversity – and different exposures to shocks – is only natural in such a large currency area. Diversity can lead to divergence, and this has to be addressed. But this was in the DNA of the euro. But it is by no means the only challenge the eurozone is facing. Insufficient budgetary and economic coordination among euro members, inadequate decision-making processes, suboptimal levels of workers’ mobility and the lack of truly integrated European financial regulation all played a decisive role in our current difficulties to absorb asymmetric economic events.

We all share the same goal for the eurozone: turn it into a fully successful currency union. France believes that the solution Member States are coming up with to reach this objective should rest on two pillars – what we’ve called in my country “intégration solidaire”, i.e. the promotion of mechanisms for risk sharing among Member States, and greater integration of European economies. I’ll discuss in more details in a few minutes what initiatives and priorities are encompassed under this I would say umbrella term, but our ambition must be clear: we should get more out of being in the eurozone than we would get if the eurozone did not exist. Getting more means resisting better to economic shocks, and being able to use European instruments to multiply the effects of growth-enhancing measures adopted at national level.

We will only get more out of being in the eurozone if we adopt a comprehensive approach to the economic challenges we’re facing, and if we are able to offer a promising perspective to the Member States and to their citizens. More of the same – more of the same budgetary discipline, more of the same fiscal consolidation, more of the same social unrest – is not going to work, and it certainly does not qualify as a promising perspective for the people of Europe. It is obvious to anyone that the patient has not correctly responded well to the austerity medicine.

When pronouncing this word “austerity”, don’t get me wrong: I’m not saying that we should not meet our budgetary obligations, quite the contrary. As some of you may know, France has embarked on an ambitious path to return to budgetary balance by 2017, with two intermediary targets: a 4.5% deficit in 2012, followed by a deficit limited to 3% of the GDP next year. We’re on track to reach our objective this year, after Parliament passed a financial bill in July to make the necessary fiscal adjustments. And I’ll be finalizing in a couple days now, with the other ministries, under the approval of the President and the government, next year’s Finance Act, with a view to meeting the 3% deficit target.

President Hollande has campaigned on a platform of fiscal responsibility, not for the sake of it but because we do not want financial markets to constantly be breathing down our neck, and because the French government would rather direct public funds towards public services or growth- and competitiveness-sustaining measures than toward servicing the public debt. One euro less for debt means one euro more for healthcare, education and other public services. 4.5% in 2012, 3% in 2013, budgetary balance by 2017 – at the end of President Hollande’s mandate – that’s the plan, and we will stick to it.

Let’s not be mistaken, we are not tempted to rely exclusively on tax increases to meet our targets. Not so. While the French government will indeed increase revenue at the beginning of its term, we intend to stabilise the overall tax burden by 2014 and focus afterwards on cutting spending and shifting the weight of fiscal contributions away from small businesses and low-income households.

Make no mistake: our determination to implement sound budgetary and fiscal policies is absolutely intact. Given France’s poor budgetary record under the previous administration, it would be understandable if some of you in the audience felt a little bit sceptical, and I imagine that you do. As Minister of the Economy and Finance, however, I see no contradictions between our national reform agenda, and our European reform agenda - quite the contrary. I believe that they complement and reinforce each other, that we should build on European initiatives to obtain better results in France and conversely that we should draw on our achievements in France to strengthen France’s voice on the European arena.

Let me be more specific about that. It is precisely because France has favoured, under President Hollande, a realistic yet ambitious budgetary path and a heightened credibility for its financial policy, that our European partners, and also the markets turn to us again, as illustrated by the satisfying results of the June European Council.

The same logic applies the other way round, too. In June, France successfully instigated the reorientation of Europe’s priorities and policies toward an economic and political agenda not entirely dominated by austerity measures, but dedicated more and more to growth. In return, the growth-sustaining measures Europe agreed upon in June will amplify the effects of France’s economic policies in the long run.

The domestic stage and the European stage should be viewed as two faces of the same coin, just like we should build complementarities between the pursuit of credible fiscal adjustment measures and the pursuit of economic growth. I believe in symbiotic relationships, not artificial oppositions.

That was just by way of introduction.

Let’s consider now where we stand today in the eurozone, and where we should be headed next.

A major step for financial stability and growth was achieved at the European Council in June.

We agreed that stabilizing the eurozone, breaking the vicious circle between banks and sovereigns and preventing contagion among other European economies was the number-one priority. Markets suspected that weaker members would fall out of the eurozone, calling for immediate action. France’s views - and this is the position that my government defended in June – is that the eurozone is not a collection of national units that may break up, but a coherent, valuable political and economic accomplishment that must be preserved.

All eyes are on Greece at the moment, for obvious reasons. Let me put this in unambiguous terms: Greece belongs in the eurozone. There is no question that Greece made mistakes in the past, but today France favours a balanced approach combining concrete results on the ground, and effective support by Greece’s European partners and the IMF. Greece has a new, democratically-elected government that must meet the commitments Athens has made over the past months, while other eurozone members provide unambiguous support. We must support them. Let me say again that Greece must stay in the eurozone.

Spain has been another subject of concern. I am confident that under the circumstances, we are on the right track, both in Madrid and in Brussels. Spain’s restructuring plan for its banking sector will be supported by existing financial instruments, but new, innovative instruments have also been foreseen for the near future. From my standpoint, opening up this perspective was a major achievement in our collective response to the crisis. I’ll get back to that in a minute.

From France’s perspective, the June Summit was also a success as it initiated a wider, much-needed effort to strike a better balance between the various macro-economic objectives we’re pursuing. It is high time for growth to reclaim its essential position on the European economic map. In this respect, the European Council’s agreement on a 120bn € “compact for growth and jobs” was a major step forward, with new cash coming from a combination of short-term growth instruments such as project bonds, reallocated EU structural funds and fresh investment capital from the European Investment Bank.

So the June Summit was a promising development. But more has to be done.

I also want to salute the action of the ECB for saying that the euro is irreversible. The ECB is right in saying that Member States have to act together and France welcomes the ECB proposal.

A fully-fledged banking union – i.e., a system to wind down or recapitalise troubled banks, combined with a Europe-wide bank-deposit insurance scheme – would go a long way towards breaking the feedback loop between weak banks and weak sovereigns. France sees the banking union as a key next step for eurozone integration, and feels strongly that it must be completed as soon as possible. When I say as soon as possible I mean in 2012.

Step one is to establish before the end of the year a single banking supervisory mechanism run by the European Central Bank, so that it is fully operational in 2013. France is determined to press ahead with an ambitious timeline on the matter. The reason why we want to keep to this timetable is because it was agreed, in June that setting up such a mechanism would be a prerequisite to provide the ESM with the possibility to inject funds into banks directly and retroactively, i.e. recapitalisation. And we want to get there sooner rather than later.

It won’t be quite enough, though. We need to move forward at the same time on the bank recovery and resolution proposal the European Commission put on the table in June. Why? For the sake of internal consistency, for a start: it does not make sense to have a single supervisory mechanism in place if authorities are not equipped with the necessary tools to intervene in a troubled institution to address problems identified by supervisors.

But also because we all know here that the “too big to fail” approach… has failed. Spectacularly. Over the past few years, a number of large banks have been bailed out with public funds. It is clearly undesirable for public money to be used in this way at the expense of other public objectives. Believe me: as a Minister for the Economy and Finance, and a French socialist at that, I am to think of a million better options to allocate public funds. So can you even when you’re not a socialist.

While there is room for negotiation and flexibility on what exactly a comprehensive bank resolution regime should look like, the endgame is clear: banks must have credible resolution tools in place. All of them, big and small. Not just a number on one side since we cannot exactly define where the limits are in between the banks.

Resolution tools must obviously be complemented by stricter capital requirements and better corporate governance for banks and investment firms – bearing in mind that these requirements must be designed to prevent lending to small and medium-sized enterprises from being penalized. Again: we should stay on course to achieve the target timeline set by the Commission, making sure that the markets get the message loud and clear.

What’s truly at stake here is actually quite simple: the phase we’re going through today is all about Member States’ determination to preserve and cement our common European home, the single currency and the European political project in general. And making sure that financial markets get the message, loud and clear.

Back to my opening point: we will only succeed in our endeavour if austerity is not the only perspective we can offer to European Member States. Fixing the eurozone is a pressing task, but our ambition should not be limited to reaching this objective. I want to submit to you that in the mid to long term, we must go further in shaping and empowering our currency union, and beyond the eurozone, the European Union.

My personal conviction is that we should seek simultaneous improvements in five directions: stronger measures to support economic growth, an effective banking union, real political and budgetary coordination among Member States, enhanced fiscal coordination in the eurozone, and an ambitious social union to encourage workers’ mobility.

Beyond these five priority areas, my personal belief is that we should continue to reflect collectively on improving the governance of the eurozone: not only should it be more effective, it should also abide by accountability standards that are more alike to those that are found at national level. Concrete initiatives such as the creation of a Finance Minister or High Representative for the eurozone – who should be held accountable to European citizens, just like national governments are – would go a long way to counter the misperception that EU institutions are too remote and Byzantine for citizens to feel they have a direct say in the decisions they take. I voted in favour of the Lisbon treaty, but it doesn’t give that much clarity to the citizens.

My view is that at some point, governments will have to find the political will, and secure the democratic legitimacy, to fix the euro's design flaws through greater fiscal union, maybe leading in time, to federalism. By greater fiscal union, I mean eurozone-specific funds, endowed with its own, dedicated fiscal resources, in order to finance a limited, common set of priority spending in the eurozone – I’m thinking about unemployment insurance, for instance. And, in time, this budget should allow the issuance of Eurobonds.

I am aware that altering the current shape and objectives of the EU so fundamentally would probably not be possible within the restraints the current legal framework entails. There is much we can do with the current treaties. I believe the crisis has pushed European governments further down the road of economic integration. While I consider this to be a positive development, it also raises profound questions about sovereignty, accountability and democratic endorsement. Negotiating edits or adjuncts to existing Treaties is not an agenda item at the moment; it is difficult, risky and needs to make sense to the people but it’s a perspective I’m keeping in my peripheral vision, as a prerequisite for deep-reaching changes and, ultimately, the democratic renovation of the eurozone’s institutions I am convinced will be necessary more than ever, in due time.

Thank you for your attention.

This speech was delivered at Bruegel Annual Dinner on 06 September 2012 in Brussels

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