Statement by H.E. Dr. Michael Spindelegger at the London School of Economics and Political Science
"The Crisis in the EU and Euro-Zone – Austria's Response"
I am delighted to have the opportunity to address friends of the London School of Economics (LSE) and friends of the Austrian Society here today.
It is a great honor for me to speak at this university, one of the leading academic institutions in the UK and the world, in particular in social sciences and economic research. The LSE is always ranked among the top universities worldwide. This shows the dedication of its students, professors and management.
It is very impressive to have a look on the statistics: 9.000 students from over 140 countries, speaking 100 different languages – a real microcosm of London and the world. No wonder, that this university has not only produced heads of State and Government but it can also look back to an impressive list of Nobel Prize winners. And I’m sure that many names will follow.
One of the distinguished winners of a Nobel Prize and lecturer and professor (1931 – 1950) at the LSE was the Austrian Friedrich von Hayek. He won the Nobel Prize in 1974 in Economic Sciences, together with Gunnar Myrdal from Sweden.
Hayek is an important representative of the so-called Austrian School of Political Economy. His work gives us a better understanding of economic and financial systems, about causes of crisis and about possible solutions.
During the recent and still ongoing financial and economic crisis, the thinking of men like Hayek plays an important role in discussions and debates of how to solve the current difficulties and problems and how to build a more sustainable model of economic development. We can draw important lessons for today’s challenges from that.
This leads me to the topic of my lecture: The Crisis in the EU and Euro-Zone - Austria's Response.
How has my country dealt with the crisis so far?
The most recent report of the International Monetary Fund (IMF) of 6th September concludes that Austria has dealt with the crisis well and the recovery is on firm grounds. With a rebound in external demand and sound fundamentals, the Austrian economy recovered rapidly from the 2009 recession. Private consumption and employment held up well during the downturn.
When external demand - especially from Germany – picked up, the stage was set for a swift recovery; GDP growth reached 2.1 percent in 2010, with a marked acceleration in the second half of the year. Strong growth performance is estimated to continue in 2011, but prospects for 2012 have dimmed. At only slightly over 4 per cent, unemployment is among the lowest in Europe. The current account registered a surplus of 2.7 percent of GDP in 2010, reflecting the competitiveness of the economy especially in the services sector. So everything is all right? Not entirely.
The fiscal deficit widened from 0.9 percent in 2007 to 4.6 percent of GDP in 2010. However, the economic recovery and a combination of tax increases and expenditure cuts will bring the deficit down to around 2 percent in the medium term.
But the main problem is structural reform, or the lack of it. IMF, OECD and the European Commission criticise a lack of ambition and recommend improvements in three main areas: early retirement, health care and subsidies.
The employment rate of older workers in Austria is still well below the EU average. Altogether 72% of all new pensions in 2010 were granted before the statutory retirement age, 65, was reached. This poses a heavy burden on those who continue to work. Additional pension costs will be very high from 2020 onwards, when the “baby boom” generation retires.
Another cost-driver of the current systems is the existence of separate pension schemes for civil servants at state and municipal level. While at the central Government level pensions of civil servants are by now fully harmonised with the private sector, similar reforms at the state level are still not there yet.
Let us now have a closer look to the health care system. Austria dedicates very large public resources to health and the share of total health spending in GDP is among the highest in the OECD. 16 percent of total general Government spending is for health.
However, maintaining the high level and quality of public health care will be a major challenge in the future, when a still higher share of older people increases demand for health care services.
Hospital planning must be carried out on a nationwide scale to optimize size, degree of specialization, and distribution of hospitals across Austria´s territory.
Austria spends around 6 percent of GDP on subsidies and capital transfers, about 3.5 percent more than the Euro area average. More than a third of it is disbursed to Austrian Railways. A comparison with the Swiss Railways suggests that there is scope for rationalization in the operational business. With respect to pensions, the low average effective retirement age of Austrian Railway employees – which is about 54 – indicates potential savings from utilization of older workers, for example by transferring them to other posts coupled with necessary retraining. This would be better than sending them into early retirement.
The Government has taken initiative to create a “transparency databank” to improve the situation with regard to subsidies. If successful, this initiative could be the first step to a comprehensive stock-taking and evaluation of all programmes and for setting clear priorities in the future.
In view of the fragile global outlook and the vulnerabilities in the Euro area my general conclusion is the following: Important challenges remain. Reducing the debt burden and enhancing structural reforms must top the policy agenda for the period ahead.
Let us have a look at the Euro summit of 26 October 2011. Were the decisions adequate to the seriousness of the situation?
Generally, Member States are required to strictly observe fiscal stability. The compliance with the rules and regulations will be increasingly monitored in the months to come.
Member States will be required to engage in measures aimed at stability and growth. This is of particular importance for Spain and Italy. Spain has already implemented far reaching measures especially in the banking sector. Italy has so far only undertaken isolated measures with a temporary nature as can be seen in the draft budget for 2012.
Indeed, the Italian Government has decided upon a comprehensive reform-package just before the Euro summit. The package will be subject to discussions with EU partners.
Without a clear picture of the binding nature and the timetable of implementation investors will not be ready to start buying sovereign bonds again. The fact that - as an outcome of the recent G-20 summit in Cannes – the IMF is called upon monitoring the implementation of the reform measures is important.
Let me now turn to Greece.
The political situation in Greece permitting, the country will benefit from the disbursement of the 6th tranche of the EU/IMF support program. In order to ensure debt sustainability, a second support program, this time using the EFSF, will be set up. It will include a Private Sector Involvement (PSI), which is more substantial than that of 21st July. In order achieve a sustainable debt ratio of 120 percent of GNP the so-called haircut has to be at the magnitude of 50%.
The mechanisms for the monitoring of the implementation of the Greek program will be strengthened. The Euro summit reaffirmed the Greek ownership of the program and that full implementation is the responsibility of the Greek authorities.
As far as our general approach to private sector involvement in the Euro area is concerned, the Euro summit reiterated that Greece requires an exceptional and unique solution.
Are the measures agreed upon by the Euro summit good enough?
This is the crucial question. We have taken unprecedented steps to combat the effects of the world-wide financial crises. I think it is fair to say that the measures agreed upon by the Euro summit reflect our strong determination to do whatever is required to overcome the present difficulties and take the necessary steps for the completion of our economic and monetary union.
This policy, however, can probably be maintained over a period of several years. So what should come next? I think more needs to be done in order to supplement the monetary union with a fiscal union and eventually a truly political union.
In other words: We need more Europe, not less. And this, if need be, through a Treaty change:
This would mean transferring important sovereign responsibilities and fiscal powers to the European level.
During the course of the last months we have witnessed a number of valuable contributions to the ongoing discussion on strengthening economic convergence and fiscal discipline within the Euro-Member States. France and Germany proposed to strengthen further the governance of the euro area, in line with existing Treaties. A Dutch proposal aimed at addressing the issue of budgetary discipline by establishing an independent EU budget authority to supervise budgetary discipline. The interim report to be presented by Herman van Rompuy in December will be a further key document in discussing deeper integration steps within the Eurozone.
Today we find ourselves in a dramatic situation and it is clear that the future of the Euro is at stake. It is important to develop a long term strategy. We are aware that Treaty changes will not contribute to immediate problem solving. Nevertheless, we must develop a long-lasting plan which would allow us to act quicker and more decisively.
In this case I believe that the European Commission should have the leading role and we should follow the Community method which has served us well in the past; it should not be replaced by an ad-hoc mechanism where a very limited number of bigger Member States decide on others behalf.
Austria has been traditionally a strong advocate of the Community method, in which the European Commission plays a central role in initiating legislative procedures and also in taking Member States to court for failing to implement decisions.
We therefore noted with caution the intergovernmental approach of certain Member States whose views might differ when it comes to discussing a common solution to overcome the crisis. As a matter of fact only the Commission will be able to act beyond the immediate interests of individual Member States.
We believe that the European Parliament as an elected body should be fully involved in the legislative process. It goes without saying that this also means that competences are transferred to the Community level.
Through the Lisbon Treaty we have made a considerable step forward when it comes to better and faster decision making through more qualified majority voting. I think we should not shy away from using the full potential of this Treaty and even go a step further, if necessary.
The Lisbon Treaty amended the founding treaties of the Union. It also altered the rules on decision-making in the Union. The treaty has expanded the use of qualified majority-voting in the Council and has made decision-making faster and more efficient.
The treaty of Lisbon has strengthened the role of the European Parliament and national parliaments and has created new opportunities for citizens to have their voices heard. The European Parliament is provided with broader powers regarding EU legislation.
We need to continue our efforts to allow EU decision making processes as efficient and transparent as possible.
Such a step could include streamlining some of our institutions where we could go away from the principle that each Member State must be represented in every institution, for example the Commission or the Court of Audit.
I believe that the lessons learned from the crisis should trigger the desire for more sound integration, more confidence and more joint ambitions and that this will bring about the readiness to deviate from the principle of equal representation of EU Member States in all EU institutions at all times. But I underline: first we have to make sure that confidence and trust in the EU, its institutions and its member states is there. We have to work actively on that.
We have to make sure that we do not lose the peoples of Europe along the way. Therefore we should strengthen direct democracy in the EU through practicing petitions for a referendum at the European level.
The Treaty of Lisbon lays down the principle that „the institutions shall maintain an open, transparent and regular dialogue with civil society“. Dialogue with and participation of the public on European issues is not only politically recommended but constitutes a citizen’s right which is still to be implemented to its full extent, amongst others by the new instrument of a citizen initiative. The governments of the EU Member States will have to make sure that the legal framework for launching a citizen’s initiative will be implemented soon. This will enhance democracy and increase legitimacy in the functioning of the Union.
Where is the issue of enlargement in all of this?
The economic crisis in Europe has led to a certain enlargement fatigue. Enlargement is not popular among our populations, neither in Austria. But we should not forget that the unification of our continent is not yet completed. The integration of the Western Balkans into the EU is not only a firm commitment all of our countries have made, it is also in our own self-interest.
We will not have stability and security ourselves as long as Southeast Europe does not reform the way we want it to. Development in our direct neighbourhood will enhance all of our economic opportunities as well. The best tool we have at our hand is enlargement with strict conditionality. We need and expect well-prepared candidate countries. And the criteria are admittedly getting firmer. But they should serve the purpose and not be used to build up hurdles in effect impossible to overcome. We should also exploit the competition aspect more. The regatta principle should be strictly applied; progress should be purely merits-based.
For us living in the European Union and experiencing its weaknesses it is often surprising how big the appeal to become an EU member still is. Nevertheless, from an Austrian point of view, we should not overburden our populations but apply a step-by-step approach. Let’s finish our job in the Western Balkans first and bind other aspirant countries with tailor-made agreements to the EU, not giving any false hopes or promises we are not able to keep in the future.
And what about the EU common foreign policy?
I am convinced that in the foreign policy field we need also more Europe and not less. We have to speak with one voice. 27 member states all having a different opinion can only lead to our disadvantage. As a result, we will not be taken seriously, none of us. This will weaken us all. More coherence is thus in all of our interests.
None of the EU Member States, not even the biggest, has the weight in the international arena to realise its interests by itself. Those who do not believe this are either living in a romanticized past or are closing their eyes towards the realities of an ever more globalized world. Splitting up our individual potential only makes us weak. If we Europeans want to play a role in the future we have to act united.
Unfortunately, the EU has presented itself very poorly recently. Let’s take the example of the Palestinian membership request in UNESCO. Austria always maintained the primacy of a common position, until the very end, and decided only to take position once it was clear that consensus was no longer an option. Certain member states have early and unfortunately publicly taken position in one or in the other direction and were then unwilling to compromise. Under these circumstances it was impossible for the High Representative to broker a common position. This is not a question of the treaties but simply of political will. The same holds true for undermining the possibilities for joint EU statements given by the High Representative. If we do not give her the tools we will not be able to build anything common.
The result is that Europe is marginalising itself. We are not going to be taken seriously by our overseas partners.
This can become very dangerous in future cases. Let’s take the Iranian nuclear question. So far, with the combination of openness for a diplomatic solution, manifested in the E3+3 negotiation track, and a unified front in putting pressure on Iran through sanctions Europe has presented itself as a serious actor. Just imagine if we were to fall into the trap of division here as well.
Many think that building consensus among 27 is too difficult. I can only argue that creating a common policy does not only make us stronger but also creates a sense of ownership of all Member States. Therefore, I strongly warn of the wish of some to simplify procedures by favouring decision-making in special “clubs”. This policy is doomed to fail. Certain leadership is welcome but without inclusion of all Member States, including the medium and small, the implementation of this policy is put into question from the outset.
I thank you.