President of the Eurogroup, Jeroen Dijsselbloem, held a speech at the conference to commemorate the 25-year anniversary of the Maastricht Treaty.
“25 years ago twelve men signed the treaty of Maastricht. I still remember the pictures quite vividly. Back then I would never have imagined that I would be dealing with the consequences of the treaty every day. The discussions that policymakers were having back then, are still very much alive today. 25 years ago, some argued that a political union was crucial for a monetary union, while others were puzzled as to what a political union actually meant. Some pointed to the necessity of strict budget rules and the no-bailout clause, while others criticised the rules as constraining member states to respond to crises and thought the no-bailout rule lacked credibility. Some claimed that differences in competitiveness within the monetary union could be dealt with by structural reforms, while others wondered whether these reforms would ever be put into practice voluntarily. Today, all these discussions sound very familiar. So, has nothing changed in the last 25 years? Of course there has. The situation at the beginning of the nineties was very different. First of all, we have to keep in mind the political context of the time. I’m sure you have discussed it today. In 1992, it had been only three years since the fall of the Berlin Wall. This had reconfigured the political balance in Europe and created new challenges that required a political vision of Europe’s future. I don’t need to remind you of that.
“There was also an economic context, which many have forgotten. The 1980s and 1990s were marked by numerous currency crises in Europe. These crises not only held back our economic growth, they also destabilized our economies. To refresh our memories: In 1972 already, the so-called “snake in the tunnel” was introduced.
“This meant that the exchange rates of European currencies were connected within a range of flexibility. And in the following years, markets speculated against the Dutch guilder, the Belgian franc, the British pound, and the Italian lire. In 1974 the French withdrew from the “snake”. In 1979 a new attempt took place with the EMS, which allowed exchange rates to fluctuate only marginally. Within the next four years between the rates were changed 27 times, mainly to devaluate towards the German mark. This was done to compensate for high inflation, which damaged competitiveness. The positive effect of the devaluations was always short-lived. In later years, after France adjusted its fiscal policy, corrective devaluations were needed less.
“In the early nineties, after the unification of Germany created high inflation, our countries suffered from monetary stress again. In September 1992 the Italian lire and Spanish peseta were forced to devaluate. The British raised their interest with 15% and still were forced by markets to leave the European Exchange rate mechanism. A massive rescue operation was needed to save the French franc.
“I’m telling this to remind all of us of the economic context at that time. Monetary instability comes at an price. And people who believe that the economic problems of competitiveness can be solved by devaluation, are advised to examine this period again. The twelve heads of state who signed the treaty had the political balance and economic stability of Europe in their minds. This is of course why Helmut Kohl insisted everybody had to join and the decision would be irreversible.
“Today, we worry about different things than 25 years ago. Then, the fall of the Berlin Wall and the unification of Germany were on the top of peoples’ minds. 8 Years ago it was the fall of Lehman Brothers. 6 years ago the first Greek crisis. 4 years ago the euro crisis. 1 year ago the migration crisis. Then, we saw images of people in tiny Lada’s and Trabants heading west. Now, we see images of migrants on tiny boats heading north.
“To understand where we are today, we have to remember where we came from. And it seems, the faster the news cycle, the shorter our memory. This loss of memory is reflected in many different ways. To give you one example: in the Eurogroup.
“Since I became minister, four years ago, 46 different ministers were member of the group. 46 from (now) 19 countries. In four years time. That does something for the collective memory. As said: to understand where we are today we have to remember where we came from. Looking back, it is fair to say, the EU was built by taking large, historical steps. Sometimes driven by ideals, sometimes by necessity. Sometimes built upon European framework, sometimes on national interests. As a result, the development of the EU and its institutions has been historic, sometimes heroic, but too often too risky. Risks were taken by expanding and deepening the union without strengthening it at the same time. For example, we decided to do away with internal borders within Schengen – which makes a lot of sense – but then failed to protect our external borders. We established a monetary union but didn’t deal with the sovereign-banking nexus. We expanded the union to the east, which was politically the right thing to do, but we didn’t adjust the governance of the union. We start these ambitious projects but never really seem to finish them. And when a crisis hits us, the vulnerability of what we have set up is exposed and emergency policies have to be put in place, at a loss of our people’s trust.
“This also happened when the financial crisis hit us in 2008. The Monetary Union and the euro had, in the years before the financial crisis, led to low spreads, which caused over-crediting in different ways in different countries. Real estate bubbles popped up in Spain, the Netherlands and Ireland. In Greece and Portugal credit to households – and with that consumption – rose sharply. Macroeconomic policies to adjust and correct were not put in place. The financial sector was deregulated and expanded everywhere but was in fact increasingly a risk. Many blame the euro for these imbalances. But a comparison between countries inside and outside the Eurozone shows differently.
“Two examples: the same kind of housing crisis and the collapse of banks occurred earlier in Scandinavian member-states and occurred in the UK. And the economic development per capita in the Eurozone showed the same pace of growth of GDP per capita in the US after 2008. When the crisis hit in 2008, all our vulnerabilities were exposed and we were very much unprepared.
“Banks had to be saved at huge public expense. Government deficit and debts hit the ceiling. Countries lost access to financial markets. There were no crisis instruments and the European leaders at the time had to improvise. First bilateral loans were set up, followed by the European Financial Stability Facility and later the European Stability Mechanism, the ESM. The fiscal framework had to be reconfirmed and strengthened with the so-called Two pack, Six pack and fiscal compact. In 2012 two decisive steps were taken simultaneously. In June the government leaders tasked their finance ministers with setting up a Banking Union. In July Mario Draghi announced: “The ECB will do whatever it takes.” Moreover, national politicians have taken on many structural reforms, dealing with collapsed housing markets, inflexible labour markets and unsustainable pension systems. They had to do this in a crisis. Some did it as part of a European support-program.
“The impact of the Banking crisis cannot be underestimated. Here again, let’s refresh our memory: the total amount of public funds involved to rescue European banks, was 4.5 trillion euros between October 2008 and October 2011. These huge amounts impose a heavy burden on present and future generations. The banking crisis pushed the EU economy into a severe recession, with GDP contracting by 4.2% in 2009. Millions lost their jobs and even their homes. The steps we took in the last 8 years were difficult socially and also politically. They are starting to pay off. Budget deficits have dropped from an average of 6 to about 1.8% this year. Debt stabilized and starts to go down this year in more and more member states. All countries have returned to growth, with an average of 1.7%. And unemployment is finally going down. But the wounds are still deep.
“This is what people feel. The refugee crisis and the threat of terrorism, coming on top of the financial crisis, showed we were unable to guarantee to our people prosperity and security, that are the key values they ask of us. For decades the EU contributed to our wealth and safety. But now people wonder whether the EU is the cause or the solution to their problems and fears.
“In 2015 three German economists published a paper on the effect of financial crises on political fragmentation and polarisation. They looked at data from 20 developed countries over a period of 140 years and 800 elections. They show that after a financial crisis, electorates lose their confidence in traditional moderate parties and are more receptive to extreme right rhetoric, blaming foreigners and “the elite” (the EU qualifies for both…). So what we are facing is not new. Our welfare state is under increased pressure. Globalisation, unequal opportunities, an aging population, and a loss of middle-income jobs come together with migration and a hazardous financial sector. There are many reasons for our citizens to be concerned. People have the feeling they are losing grip on their lives, while governments are not making clear in what direction we are heading or what our community stands for. They have listened to abstract, macro-economic discussions about the far future of the world economy and rightly asked: “But what about me?” I fully understand that people want to take control of their lives again.
“In my mind the key task ahead of us, is to reconnect the freedoms that Europe offers with stability, security and opportunity. First of all: stability. The European project has been very ambitious and very successful. We were able to take big steps in reuniting a divided continent, rebuilding our economies and creating peace in the post-war era. But the post-war era is over. We need to rethink our common future and change the way we think about Europe. First, the time for big leaps in European integration has come to an end. Europe is not the answer to everything. We must be much more critical about expansion of the EU, deepening or widening, geographically or politically. Stability also means strengthening what we have built so far in order to make it less vulnerable. That’s why I am pushing for the full completion of the Banking Union and Capital Markets Union. So the Monetary Union becomes an asset and not a risk to stability. Another example is Schengen. If we take away internal borders we must protect our outside borders. If we can’t, then we are not a Union.
“And that brings me to my second key value: security. Not being able to control and manage migration is a great cause for concern. This has to do with fear of criminality and terrorism. But it also has to do with the protection of our welfare state. Our much valued system of solidarity. And inevitably, any circle of solidarity has to be closed. You need to define who’s part of our solidarity and therefore has access to our welfare system and who has not. A society with a strong welfare state, which I would strongly defend, requires selective migration. We need to control migration urgently. And we need to organize it together since we share a common outside border.
“And that brings me to my last key value, after stability and security, and that is opportunity. Part of the strategy of Europe and the Eurozone is to push for structural reforms at national level to make the Eurozone more competitive. This term “structural reform” has over time got a very negative ring to it. People associate it with austerity and an attack on the welfare state.
“Europe is unique for its high standards of socioeconomic security. This is something we should be very proud of. No part of the world has such a high level of wealth combined with such an extended welfare state. The European social model, with all its differences in different countries, is part of our heritage, part of our cultural DNA. And we must maintain it. Which also means we need to modernize it to make it sustainable for the future. This sometimes requires making difficult choices between the current cost of labour and future pension rights. Or between costs of solidarity today and investing in the future. We should maintain our welfare states but make sure that they create opportunities again, for all. So we should ensure fairness and equity. Between generations, between insiders and outsiders, between globalization’s winners and losers.
“So our reform agenda should shift in focus. First of all, during the Dutch presidency, we’ve put a lot of energy in getting a broad agreement to fight tax avoidance. Our national tax systems, also the Dutch, create loopholes which international companies happily use in order to pay as little tax as possible. And we need to fix this. It’s a matter of fairness. And it allows us to lower taxes on labour and finance key public investments.
“That brings me to my second priority. We need to aim for full employment again. In order to achieve this we need, besides higher level of investments, to reduce the costs of labour. The tax wedge on labour is very high in Europe and I have been pushing reforms on this in the Eurogroup. A number of countries have taken steps the last couple of years. Here in the Netherlands, for example, we reduced the tax wedge on labour, especially for the lower incomes, with 5 billion this year. It needs further work, for example by ‘greening’ our taxes and shifting tax to multinationals and capital. So much more people can get the opportunity to get into work again.
“Thirdly, education is key. In the report ‘Going for growth’, the OECD indicated this year that the biggest gains in labour productivity are achieved through educational reforms. So let’s invest in education, vocational training, improving the quality of our teachers and provide early childhood education. This will promote equal opportunities for all. It will help outsiders and newcomers. Young people who have trouble getting into the labour market and old people that were dropped out. It means that all of us in Europe will have to prioritize education spending and education policies to raise our standards and expectations! Ladies and Gentlemen, let me come to a close. Reading today’s newspaper one would think that Europe and certainly the euro are coming to an end. While in fact the economic recovery is on track and becoming stronger every year. None of the political shocks we had this year have put off that economic track. Perhaps we should stop calling every event in our democracies “the next crisis”? The interests we share have become even more important than the topics that could possible divide us. The process of convergence within the euro area has restarted and need to be pushed. But we need to strengthen and finish what we started, we need to be much more realistic about what Europe could and should take on. We need to put stability, security and opportunity in the lives of people at the heart of our work again. ”
“And I’m willing to work as hard as you are!” said Dijsselbloem.