Blog Post

Keynote address from Enrico Letta, Prime Minister of Italy for the Bruegel Annual Dinner 2013

"I do not intend to deliver a standard speech on where the euro area stands and what is the “to do list” for the next months. Rather, if you will allow me, I would prefer to address some political issues about the future of the EMU and the future of Europe."

By: Date: August 25, 2014 Topic: Macroeconomic policy

Dear President, Jean Claude Trichet,

Dear Director, Guntram Wolff,

Dear Members of the European Parliament,

Ladies and Gentlemen,

Thank you so much for your kind words of introduction, Jean Claude, and for your invitation to attend the dinner of the Annual meeting of Bruegel.

I do not intend to deliver a standard speech on where the euro area stands and what is the “to do list” for the next months. Rather, if you will allow me, I would prefer to address some political issues about the future of the Economic and Monetary Union and the future of Europe. 

I am full of optimism but I do not assume that the crisis is behind us and we can turn our attention away from economic challenges. Some leading indicators tell us that the economy is gaining momentum in the euro area. Confidence is returning. However, the recovery is fragile and uneven. Unemployment remains dramatically high in many Member States, as in Italy. Much work remains to be done.

What I want to say is that we are not short of opportunities to debate the technical aspects of EU monetary and economic policy. We talk much less about the political foundations needed to build a more stable Economic and Monetary Union and a European Union fit for the challenges of our time.

Over the past years, Europe has made extraordinary progress in responding to the crisis. The decisions taken have set in motion a process of transformation that has not followed a deliberate ex ante design.

The new arrangements have marked a break with the past but we don’t see yet a fully-fledged architecture emerging. We have moved away from the old arrangements butwe have not yet completed the transition to a new one. At the same time political tensions are emerging, disenchantment with or even rejection of the European integration process is growing. As we move forward from crisis management to more structural issues, things become more difficult.

The time has come to address these issues. If we do not do it, it will become difficult to move forward and we will remain stuck half-way.

The reason why I raise this point tonight is because in the second half of next year Italy will hold the Presidency of the Council of Ministers. The Italian Presidency will come at a crucial juncture for the European Union. In May next year the European citizens will elect a new European Parliament. In the following months the European institutions will choose the new President of the European Commission and the new members of the Commission, the new President of the European Council and the new High Representative. The persons will change, the policies must change.

Europe will go back to drawing board and set out a new set of priorities and objectives for the future. And the next five years will mark a crucial phase in the evolution of the Union. They will be the moment to choose if we want to take a leap forward, and make progress towards a new phase in the life of the European Union.

I want the Italian Presidency to be a connecting point, a time during which we conclude the adoption of important measures we launched in 2013, from banking union to economic and fiscal union and we reflect on broader steps needed to have a stable functioning of the EMU and a stronger European Union.

We can use the opportunity well only if we start building the political foundations for future progress already now. Our task is like that of an athlete who has to run a 100 metres race. If we do not jump off from the starting blocks and make the first steps right, it will be difficult to win the race. I believe that we can move forward only if we address openly some tough questions about what is required for the Economic and Monetary Union to function in a more stable manner and deliver what we expect from it.

Thus, I want to focus on three issues that in my view illustrate why more of the same will not work and why we need a greater integration: first, how to deepen economic integration to support structural reforms at national level; second, how to further greater integration in the single market; third, how to introduce some forms of risk sharing in order to make the EMU as a whole and the Member States more resilient to shocks.

In all these areas progress does not depend on technical discussion, but on reaching agreement on a different political approach. Thus, I will conclude with some thoughts on how we can make progress at a time in which support for European integration is getting thinner.

Let’s start with economic union. The main tool we have devised to promote structural reforms at national level is the coordination of budgetary and economic policies. Indeed the new coordination framework anchored in the European semester is one of the main advances made in response to the crisis. The striking symbol of this change is that this year all Member States will send their annual draft budgets to Brussels in line with the requirements set out in the “two pack”. This system reflects the principle, that “economic policies are a matter of common interest”. In short, interdependence requires responsibility.

Let me just say here that this notion of responsibility is already at the heart of the economic policy pursued by Italy. The government is determined to maintain the public deficit below 3% this year and in the coming years. We have one of the largest primary surpluses of the euro area. We have stabilised long term spending for health care and pensions. To enhance the competitiveness and the growth potential of its economy Italy has implemented a strong reform agenda. In the coming months we will add new measures to speed up civil justice, create a better business environment, lower the tax wedge on labour to boost employment. We will launch a specific programme, Destinazione Italia, to attract private foreign investment and privatise state owned assets. At its meeting in Saint Petersburg, the G20 has recognised Italy’s track record of reforms. We have taken new commitments in the 2013 Action Plan. We will deliver on them.

So based on this concept of responsibility, Europe has been shaping up a system of coordination based on an intergovernmental logic. It is now proposed to extend ex ante coordination also to major economic reforms and introduce some form of mutually binding contractual arrangements between EU institutions and member states. There is a strong case for upgrading the existing framework. Indeed today, euro area economies are not less diverse, if anything they diverge more than they did before the crisis

While the economic rationale is there, we should also be aware that we might end up with an imperfect or even counterproductive instrument if we do not take a broader view of supranational coordination and of its implications for legitimacy and accountability.

The reforms to tackle the rigidities of our economies and enhance their growth potential are complex and painful to implement. Some of them require financial investments that are not possible in time of consolidation. Some others produce effects only after some time, too much time for the patience of many citizens and voters.

Citizens, and voters, are ready to accept the sacrifices needed to reinvent our economies. But they need to see a reward, a payback. So if we are serious about the need to support Member States structural reforms, we need to match greater surveillance and coordination with a system of targeted financial incentives. These incentives can expand the options for governments struggling with fiscal consolidation and represent in the eyes of public opinions a signal that Europe is a partner supporting their effort.

A stronger coordination framework should also address issues of ownership and accountability. By setting policy objectives and framing national choices, the European Union today intervenes in areas such as pension reforms, wage setting mechanisms, labour policies, which are at the heart of national politics and of the prerogatives of national Parliaments.

Some national parliaments feel under pressure, for what they see as an “intrusion” that disempowers them. Some others stepped up controls on their executives, to avoid that they take financial commitments in Brussels prejudging their budgetary decisions. At the same time, there is not an adequate discussion of common economic policy priorities at EU level. The European Parliament is searching for a greater role in this area. The involvement of the EU Parliament is essential to ensure the legitimacy qnd consistency of a system of contractual arrangements between the EU institution and the individual Member States. If we build an essentially intergovernmental system of economic coordination, the tension with national parliamentary democracy is unavoidable. We may end up with one Parliament against the other and we risk a paralysis of decision-making.

So to move forward towards greater economic union we should embrace a broader notion of responsibility, which recognise a greater role for the EU level.

Let’s now turn to the Single Market. The Single Market is Europe’s best asset to restore growth. Market integration can also play a role in reabsorbing internal imbalances in the euro area. Yet despite the political investment made by President Barroso and Commissioner Barnier, with the Single Market Acts I and II, despite various European Council conclusions, progress is very slow.  Everywhere we see signs of resurgent economic nationalism.

Can we reverse this trend and deliver real open markets just by discussing a list of new directives or regulations? I don’t think so. The only way is to build consensus for a new political approach. So far we have liberalised national markets, encouraging private companies to operate cross border. The result is a patchwork of interlocking national markets, rather than a true single market. We need European champions, operators that are truly active on a continental scale. Today we have national champions, national banks, national energy companies, national telecommunication companies. To give an example, in Europe we have 100 telecom operators. They are 5 in the US and 3 in China.

If we want to unleash the full potential of the Single Market, we must have the courage to look at it as a European Market, and adopt coherent policies.

This applies to the financial and banking sector, where we need to complement the single supervisor with a single resolution mechanism that ensures effective resolutions of the crises. This is very important for Italy and we will insist that the calendar agreed by the European Council is respected. This applies to the telecommunication and the digital sector, which will be on the agenda of the next European Council. The ICT-driven economy can be a boost for employment and growth. A true Single Market can be instrumental to achieve this result.

My third issue is the role of risk sharing and financial solidarity within the Economic and monetary union. I believe that a genuine EMU will require some degree of risk sharing. The crisis has shown that we cannot rely only on national budgets to absorb shocks and support the necessary adjustment. National tools can be inadequate and, without a form of support from the central level, the economic and social price to pay for a Member State can be dramatically high.

The question is: what type of solidarity is acceptable and justified within the context of the EMU? In truth, during the crisis we have made important steps towards mutual insurance. The European Financial Stability Fund, the European Stability Mechanism, the ECB Outright Monetary Transaction arrangement are forms of collective insurance.

At the same time, any move towards forms of financial solidarity between Member States, has met with resistance and has fuelled a growing divide between debtor and creditor countries, the North and the South of Europe. One of the most worrying aspects of the euro crisis is that the embryonic sense of community that was emerging in Europe, cemented by the Erasmus generation and the use of the euro, has been shattered.

Can we overcome this divide and agree on a common notion of solidarity? I believe that a notion of solidarity cannot be construed as a moral obligation of some to help others. This type of absolute solidarity presupposes a sense of community, which is not there. By some, that solidarity would be even perceived as unfair, a code for a “transfer union”. But solidarity can also be just enlightened self interest, a form of reciprocity, from which everyone benefits in turn and that does not lead to permanent transfers. That notion is in my view compatible with the logic of the EMU.

From this perspective, I think there is room to reflect on a fiscal capacity for the euro area. Such a fiscal capacity could provide the financial incentives, at least initially, for the implementation of major reforms at the national level and expand later on into other stabilisation functions. In time, it could issue bonds on financial markets to support public productive investments at the EU level. This fiscal capacity would be based on the principle of budgetary neutrality over time. Its operation could be connected to the conclusion of contractual arrangements for reforms, thus linking responsibility and solidarity.

To sum up, our ambition should be to build a framework that supports Member States commitment to reform their economies that promotes greater integration within the Single Market and provides timely stabilisation when a national economy is hit by a crisis. To do that, we need more common solutions at European level. A framework based on a predominant intergovernmental logic will not work. It will not deliver the greater convergence of national economies, the integration within the Single Market and the resilience against asymmetric economic shocks that are required for a stable and sustainable functioning of the EMU.

This is not just a reflection on governance. The ultimate purpose is to bring back growth and jobs. A better governance will allow the EU to pursue more effective economic policies and to have a stronger role in the global system.

Here comes the most difficult part of the challenge. Can we realistically aim for deeper economic, financial and fiscal integration at a time in which the confidence in  European institutions and the support for the European Union are at an all time low?

Disenchantment with Europe is strong both outside and inside the euro area. In Italy, where public opinion is traditionally pro-European, confidence in the EU has dropped from 75% to 30%. What is interesting is that anti-European feelings are common to Southern and Northern Europe, but for opposite reasons. In Southern Europe citizens no longer see EU institutions as better than national institutions. This is a result of a general disenchantment with politics but also a sign that Europe is no longer seen as a solution, it is a problem. In Northern Europe, support for EU institutions has fallen below that for national institutions. This explains why many voices across the region are calling for a repatriation of competences to the national level.

Does this mean that we have to play defence and focus on implementing and fine-tuning existing instruments?

In my view, we can win back the heart of citizens only if we present a convincing and promising perspective. The European Parliament elections in May 2014 will be the focal point for all the political tensions that are surrounding European integration today. If we do not engage in a real political debate, disaffection and disenchantment will lead to a very low turnout and to the mobilisation of forms of anti-European, nationalistic movements

In my view it is necessary that in the run up to elections the focus of our debate shifts from procedures, indicators, rules to substance, to what Europe can do to help Member States fight unemployment, to promote the competitiveness of the manufacturing sectors, to exploit new sources of growth like the digital economy.

The June European Council was an important step in this direction. On top of that, elections should allow to confront different political programmes on Europe.

It is important that citizens feel that European elections are for real, that they can choose different candidates for President of the Commission and that they can influence the direction of policies at EU level.

If the elections are a confrontation between technocracy and populism, we risk a backlash. The next European parliament could be the most euro-sceptic parliament ever. A Parliament that cannot be an engine for Europe, but is a brake on collective decision-making.

So, in my view we need to strike a fine balance between a realistic pragmatism and the right level of ambition for the future. As we complete and implement the measures agreed for the short term, we should not lose sight of the importance of longer term objectives.

Once we have restored confidence in the EU institutions and forged a new political consensus on what is needed for a stable EMU and a stronger European Union, we can reflect on whether the current set up provides an adequate legal basis or we need a modification of the Treaties. This will also be an opportunity to reflect on how we can reconcile the needs of those members of the EMU who need deeper economic, financial and fiscal integration and those Member States who want to preserve a greater degree of sovereign autonomy within the European Union.

Cher Jean-Claude,

la première fois que je suis entré à Strasbourg au Parlement européen, j’avais dix ans. Quelques année après – j’étais bien jeune – j’étais à Bruxelles quand Helmut Kohl, François Mitterrand, Jacques Delors négociaient Maastricht. Quelques ans après j’ai écrit un petit pamphlet qui s’appelait «Mourir pour Maastricht».

Aujourd’hui je me retrouve avec une énorme responsabilité en tant que Premier Ministre. Je suis à Rome pour faire de l’Italie de nouveau un grand pays européen. Avant l’Acte Unique Européen, il y a eu le Conseil européen de Milan. C’est le Conseil européen de Rome qui a lancé les deux Conférences intergouvernementales qui ont conduit au Traité de Maastricht. La prochaine Présidence Italienne devra être la base pour progresser dans la voie de l’intégration européenne. Je me battrai pour une Italie plus forte et pour une Europe plus forte. Je suis ici parce que la bataille pour l’intégration européen doit être combattue. Je suis ici au nom d’une Italie européenne et pour réaliser ensemble le rêve de nous tous, une Europe plus unie.

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