11 June 2012

Commission VP Rehn on the European Semester: "A very profound and thorough exercise of screening the European economy"

The stability and convergence programmes of the EU Member States confirm their commitment to stay the course on consolidation. This will mean that on average, fiscal deficits in the European Union will be below 3 per cent in 2013. If confirmed by the concrete budgets for 2013, this should go a long way towards easing market pressures.  We expect the ratio of government debt to GDP to continue to increase this year and reach 93 per cent next year. The stability programmes of euro area Member States are somewhat more ambitious and foresee a level of about 90 per cent in 2013 and a decline thereafter.

This clearly confirms that one of our main priorities – the need for growth friendly consolidation – will remain valid. And we will have to make certain that the necessary consolidation is indeed brought about in as growth-friendly a manner as possible. One important part of that is the need to differentiate the overall consolidation effort across Member States and let automatic stabilisers work in full where that is possible.

Following the announcement by the Spanish Government, the Eurogroup took decisive action in this regard by agreeing to establish a credit line for Spain for the necessary restructuring and recapitalisation of the country's banking sector; with a safety margin, the loan amount is estimated as summing up to €100 billion.

We also concluded that in Hungary, serious imbalances have developed, as can be seen in the large negative net international investment position. In Slovenia, there are serious imbalances in relation to corporate sector deleveraging and banking stability, as well as external competitiveness. Italy faces serious imbalances as its export performance has worsened and it has been losing external competitiveness for a decade. France faces serious imbalances due to the sizeable losses in competitiveness and export performance owing to both cost and non-cost factors.

The main building blocks towards a financial union could include, at least for larger banks of systemic importance for Europe's macro-financial stability, stronger EU/EA financial supervision, a resolution authority and a single deposit guarantee scheme. The basic point here is the same: the sharing of risk in the guarantee scheme seems difficult to square with decentralised responsibility for supervision.

But any step in the further sharing of risk can only be taken on the condition that it is balanced by provisions to avoid free-riding on the consolidation efforts of others. Considering fiscal integration, the proposal of a Debt Redemption Pact by the German Council of Economic Advisers is no different. It would balance the suggested mutualisation of debt with very strict fiscal rules for the participating Member States for a large number of years. To make it rational for all participants to agree to further risk-sharing, interests must be balanced out, which would require a fundamental debate about fiscal sovereignty.

Full speech

© European Commission