Key challenges for the European Union: Growth, Enlargement and Governance JOS� MANUEL BARROSO, President of the European Commission, Institute of International Finance's Spring Meeting, Madrid, 1 April 2005 Reference: SPEECH/05/195 http://europa.eu.int/rapid/pressReleasesAction.do? reference=SPEECH/05/195&format=HTML&aged=0&language=EN&guiLanguage=en It is both a great pleasure and an honour to join you at the Spring Meeting of the Institute of International Finance. Your association has achieved a lot in the last two decades. It has acted as an important market place for ideas and the sharing of best practice. And it has provided a clear and influential voice for change in the fields of finance, economics and governance. If the world is reaping the benefits of a more stable financial order now � and I think it is, despite the occasional hiccup � then it is in no small part thanks to the contribution of this institute. It gives me particular satisfaction to see that your European-based members are playing such a large and active role in this important work. You have a global remit to promote sound and competitive financial systems. So today I would like to update you on what progress has been made in facing up to some key economic and financial challenges in our recently enlarged European Union. I will focus on how we are promoting growth in the face of the rapid changes wrought by globalisation. I will also say a few words on some of the economic implications of last year's EU enlargement, and how the draft EU Constitution, when adopted, will improve economic governance in the EU. Increasing Europe's economic growth potential is a crucial challenge; indeed my Commission has made it its top priority. The challenge is made even more pressing by developments in the global economy. Rapid technological progress, and the fundamental changes it triggers in production and trade, are shifting the distribution of economic activity worldwide. These inescapable trends provide both opportunities and challenges for Europe. Opportunities, because rapid growth in emerging markets is boosting global trade, demand and wealth. But challenges too, because greater integration in the world economy has created fierce competition, both from low-cost economies such as China and India, and from innovation-driven economies like the US. Combine this with Europe's demographic squeeze, which becomes more apparent with each passing year, and the conclusion is clear: the status quo is no longer an option for the EU. So a difficult road lies ahead of us. But as that early optimist, the Roman playwright Terence, once said: `Fortis fortuna adiuvat' - fortune favours the brave. It is time for action to meet this growth challenge. And if we do succeed in boosting the EU's low potential growth rate it would not just benefit Europe - it would be a positive contribution to reducing imbalances in the world economy generally. The reason for this is simple. Large growth discrepancies among the various regions of the world have been one factor contributing to the build-up of very large global current account imbalances. On the one hand, current account surpluses have recently increased in the EU, and remain very large in Japan and emerging Asian economies. On the other hand, the current account deficit in the US has been increasing steadily since the end of the 1990s and now stands at around 5.5 per cent of GDP. These discrepancies in growth are set to continue, further widening already large global imbalances. This constitutes an increasing risk to the world economy. A correction of these imbalances is likely to require large adjustments to both exchange rates and interest rates which, if not carried out in an orderly fashion, may have very disruptive effects on financial markets and economic activity worldwide. It is therefore of utmost importance to attain more balanced and sustainable growth at a worldwide level. In Europe, this means quite simply increasing our growth potential. But policy-makers around the globe share responsibility for balanced and sustainable growth. For the US this means reducing its government deficit and ensuring a better balance between consumption and saving. Emerging Asian markets should take steps towards capital account liberalisation and financial market reform in order to allow greater exchange rate flexibility. Japan needs to continue progressing on structural reforms, particularly in the financial sector. However, this lack of progress elsewhere in the world is no excuse for postponing much-needed reforms here. It is in the EU's own interest to change, in order for Europe to fully reap the benefits of ongoing globalisation. To do that, we must strengthen the key drivers of economic growth, namely employment and productivity. And we must increase the flexibility of markets. Lisbon That is why, in 2000, an ambitious reform strategy was launched in the form of the Lisbon Agenda. It aimed to meet the challenge of boosting Europe's competitiveness and enhancing its growth potential, by increasing productivity levels and bringing more people into employment. So where do we stand, five years on? The truth is that progress has been mixed. We have moved forward in some areas, even though macroeconomic conditions have not exactly been very supportive. Between 1999 and 2004, 6� million jobs were created in the EU. Labour market reforms to remove obstacles for low- paid workers and to promote active labour market policies have been implemented. Member States have also supported wider use of information and communication technologies, including the internet. However, in other respects, the pace of reform has been disappointing. Job creation has decelerated considerably in recent years. And in the research and development area, only two countries have attained the target of R&D spending above 3 per cent of GDP. Nevertheless, I believe that the need for continuing reform is now widely acknowledged, and the positive impact of Lisbon-type structural reforms is well documented. A recent paper by the Commission on the cost of `non-Lisbon' shows that the Lisbon reforms could boost the EU's GDP by up to 7 or 8 per cent over a ten-year period. When looking at the Lisbon balance sheet, it is clear that where we have failed is not in the conception but in the implementation of these reforms. This is why the Commission presented a proposal this year for a renewed Lisbon strategy, more clearly focused on jobs and growth. I'm delighted to say that this proposal was endorsed by the Heads of State and Government at the Spring European Council last week. It has been condensed into an Action Programme with priorities in three areas: The first priority is making Europe a more attractive place to invest and work. We need to make progress in order to extend and deepen the Single Market, ensure open and competitive markets, enhance European and national regulation, and improve our infrastructure. Financial integration is instrumental in achieving this. It can contribute to raising the growth potential of the EU through better allocation of resources, increased investment and higher productivity of capital. The adoption of the EU Financial Services Action Plan, which harmonises legislation in the financial area, is a step in the right direction. Commissioner McCreevy will elaborate on this issue later today. The second priority is knowledge and innovation for growth. The aim here is both to increase investment in research and development and to facilitate innovation. The uptake of information and communication technologies and the sustainable use of resources are important to ensure that Europe becomes a technology leader, and to contribute to a strong European industrial base. The last, but certainly not least, priority is to create more and better jobs for social cohesion. This means attracting more people into employment and modernising social protection systems. Workers and enterprises need to become more adaptable and labour markets more flexible. There also needs to be more investment in human capital through better education and skill-building. This renewed reform agenda will allow us to create a more flexible, innovative, dynamic and investment-friendly EU economy. This will set the conditions for a sustained increase in productivity levels and, as such, allow for strengthened competitiveness and faster job creation. Enlargement Despite the need for structural reforms, we should not forget that the European Union has always been, and remains, a powerful pole of attraction to its neighbours, as successive waves of enlargement have shown. The greatest and most ambitious of these enlargements took place on 1 May last year when we welcomed ten new Member States. There are more to come. The political importance of EU enlargement must not be underestimated. It has already contributed to the consolidation of political stability, democracy, and respect for human rights throughout Europe. But enlargement is also economically important. Accession to the EU has provided its newest members with the opportunity to firmly anchor their process of economic catch-up with the older Member States. The institutional, legal and economic policy frameworks associated with preparation for EU membership, and membership itself, provide a basis for closing the income gap. The Commission recently estimated that enlargement could raise annual GDP growth in the new Member States by 1.3 to 2.1 per cent in the current decade. The availability of sizeable EU funds is also a clear sign of the EU's commitment to closing the gap. These have reduced risk premia in the new Member States and boosted FDI inflows, which should help modernise the economy and encourage the expansion of domestic financial intermediation, which is as yet under-developed in these countries. The new Member States share some of the same structural challenges which the older Member States face and which we are tackling through the Lisbon strategy. But I am convinced that, with the recent remarkable experience of economic transition of the new Member States, and the dynamic growth of their economies, the new Member States will actually improve the chances of Lisbon success. Constitution Finally, an enlarged European Union requires an adaptation of its governance mechanisms. This is where the Constitution comes in. The Commission welcomes the Constitution as a major step forward in the process of European integration. If ratified by the Member States � and I sincerely hope it will be - the new Constitution will deliver visible benefits for citizens and for the Member States, and will improve the way the European institutions work. I would like now to briefly explain how the EU's economic governance in particular will be affected by the new constitution. The Constitution will clarify the allocation of competences and simplify decision-making procedures. The objective of price stability will be clearly included in the Union's general objectives as a fundamental component of the concept of sustainable development. The constitution emphasises that Member States are to coordinate their economic policies and that it is for the Union to determine the arrangements for this coordination. The Constitution will provide a clearer, lasting framework for the future development of the European Union, in economic governance as in other policy areas. Assuming the ratification process goes smoothly, it is scheduled to enter into force in November 2006. Ratification of the Constitution will allow us also to make progress on the issue of external representation. Far too often, the EU is not able to play a role on the international scene commensurate with its economic weight. Economic integration and globalisation lengthen the list of issues on which a global response is needed. On those issues, the EU's voice needs not only to be heard but also to be taken into account. *** So the challenges are clear, but so are the solutions. It is up to the brave now, with a little help from fortune, to implement those (often difficult) solutions. In this way the EU will continue to play an important role in the world economy. It will continue to exert leadership in shaping and stabilising the international economic system. And it will ensure that its citizens, far from suffering the consequences of globalisation, can reap its rewards instead ------------------------ Yahoo! Groups Sponsor --------------------~--> What would our lives be like without music, dance, and theater? Donate or volunteer in the arts today at Network for Good! http://us.click.yahoo.com/TzSHvD/SOnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. Post economics-related articles and event info to [email protected] If you got this mail as a forward, subscribe to ZESTEconomics by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! 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