Keynote Speech by Eurogroup President Jeroen Dijsselbloem at the Atlantic Council

"New Growth Deal for the Eurozone: connecting reform agenda, budgetary consolidation and supportive investments"

Friday, October 10th 2014, Washington D.C.

Ladies and gentlemen,

It is a great pleasure to be here with you today at the Atlantic Council, at the start of the IMF Annual Meetings.

In the current challenging geopolitical climate, our collective goal is to foster a stable and job-rich economic environment. Not an easy goal, but a very important one.

As president of the Eurogroup, which comprises the finance ministers of the euro countries, I will focus today on the eurozone.

Where do we stand today?

The recent economic turmoil has been caused by imbalances built up over a long period of time.

Bubbles in the financial sector and the housing market fed through into the real economy and had a devastating impact on public finances and competitiveness.

Eurozone countries acted decisively to address the challenges to the currency union.

We took unprecedented steps to address the crisis.

We launched financial support programmes for countries that had lost market access.

Programmes which gave a strong push for necessary reforms.

We strengthened our budgetary governance framework, also allowing countries more time when economic circumstances required.

And we set up a Banking Union at a remarkable speed. The eurozone is stronger now than it was before the crisis.

Thus, we have been determined in dealing with the key structural challenges.

The strategy is now paying off.

Countries that vigorously implemented reforms have returned to growth.

Greece, Ireland, Portugal, Spain and Latvia all achieved positive growth rates in 2014.

And next year, all of these countries will grow faster

than the eurozone average.

On the other hand, countries like France and Italy are now faced with below average growth.

Their reluctance to reform over many years is reflected in weakened competitiveness.

The new ambitious governments in both countries are working hard to deal with this.

For example, this week the Italian Senate has adopted a very

ambitious jobs act.

As external conditions have been largely the same for all countries in the eurozone, the growth differentials are due mainly to national policies.

This shows that we must remain committed to our strategy and step up our efforts to strengthen our growth potential in a rapidly changing world.

The eurozone must get its act together and regain its competitiveness and job-creating capacity.

This requires further reforms.

We owe this to our citizens.

What does Europe need now?

There are no simple solutions or quick fixes to major structural challenges.

Eurozone policymakers must pursue the right mix of sound monetary and fiscal policies, as well as ambitious structural

reforms and high quality investments.

At this stage, we have to move quickly to accelerate economic reform. Basically we should do it all, and do it well designed.

With well designed I mean that the design of fiscal, structural and investment policies has to be more tailor made and has to be coherent.

Let me go into more detail.

Firstly, monetary policy.

I can be relatively brief as this is the realm of our independent European Central Bank.

The ECB recently took an accommodative stance to keep inflation rates on target.

Furthermore, its Targeted Long-Term Refinancing Operation and the announced purchase of asset-backed securities are designed to strengthen credit growth.

As the recent weak credit performance has gone hand in hand with lower growth, I welcome efforts to get credit flowing again. However, credit growth is not an end in itself.

The quality of credit matters just as much as the quantity.

To those who call for even more action, I would point out that the full impact of the ECB's measures will not be seen in the real economy until this autumn or even the beginning of next year. So we should not jump to hasty conclusions.

We should also realize that monetary transmission stands or falls on the results of the Banking Union and the completion of the assessment of bank balance sheets later this month.

Secondly, fiscal policy.

There is broad agreement among finance ministers in the eurozone that our set of common budgetary rules, the Stability and Growth Pact, is our anchor for confidence.

Confidence among euro countries as well as confidence of the financial markets.

All countries - large and small - must abide by these rules, without exception.

The rules offer us some flexibility, but this does not mean that "anything goes".

In recent years we have shown that budget consolidation and growth can go hand in hand.

Growth-friendly choices can still be made during consolidation.

Spending cuts should avoid categories of expenditure such as education and job training programmes that are critical to future growth.

On the revenue side of the budget, a shift in the tax burden away from labour can contribute to the creation of more jobs and growth.

Thirdly, back to structural reforms.

As I have already mentioned, countries that made comprehensive reforms, such as Spain, Ireland, Portugal and Greece, have successfully returned to growth.

This is the key challenge.

No monetary or fiscal stimulus can replace the need to make our economies more competitive and fit for the 21st century.

These kind of measures only buy us policy makers time.

Time to do our part of the job of taking the reform agenda forward. This requires political courage, as the political and financial obstacles to reform in some countries are immense.

Overcoming them may upset vested interests and what some define as ‘security’.

But it must not lead to delays.

Let me dispel some of the myths surrounding structural reforms.

Myth number 1: Structural reforms harm growth in the short term. This is unfounded.

As a number of euro countries have shown, well designed reforms can and will strengthen growth.

The IMF’s Global Policy Agenda highlights the short-term growth effect of some labor and product market reforms by restoring confidence, boosting investments, and increasing productivity.

The OECD has calculated that an extensive package of reforms in the labour and product markets could increase the eurozone’s GDP by more than 6% over 10 years.

What a waste it would be not to use this potential!

Myth number 2: Structural reforms affect only the supply side of the economy.

Once again, this very much depends on the type and design of the reforms.

Reforms can not only raise potential growth in the medium term. They can also spur demand in the short run.

Take for example a reduction in the tax burden on labour.

On the one hand, it would lower labour costs for employers and thereby increase employment over the medium term.

On the other hand, the disposable income of employees would

be higher, boosting both consumption and demand in the short run. Reforms dealing with the rising cost of health care or pension payments, can also free up household budgets.

Myth number 3: Structural reforms come at a cost to the budget. On the contrary, they can improve our public finances even in the short term.

Clear examples are an increase in the pension age, or an increase in the number of hours in a working week.

It pushes down the costs of the pension system, both for government and for households.

Reforms to improve the business climate, such as shortening the time needed to set up new businesses, are another example.

They boost investment, demand and tax revenue.

Finally, investments.

There is a consensus that investment levels across Europe are too low and should be higher.

Most of the increase should come from private sources.

A well-capitalized financial sector, sustainable public finances and a profitable business climate are key preconditions to private investors.

As the confidence that companies have in structural reforms grows, the more likely they will be to invest.

Reforms at the national level should contribute to an improved business climate.

At the European level, initiatives such as the completion of the internal market, the Banking Union and free trade agreements, as well as a capital markets union, the Digital agenda and interconnected energy grids, will also attract new investments.

In the same context, certainty for private investors also requires that we stick to our commitments, such as the Stability and Growth Pact. This is critical to maintain confidence.

In addition I support measures to improve the quality of public investment.

Some countries could and should increase the level of public investment as long as there is a proven need for sound investment projects.

And investments are not just about roads and bridges, but also about digital infrastructure, education and R&D.

And let me stress that any public incentive to the economy - be it expenditure or investment - will have no impact unless economic reforms attract private investments back to Europe.

The new European Commission will develop its 300 billion euro private and public investment programme towards the end of the year.

Details still have to be presented, but I expect the Commission to make better use of existing instruments and to contemplate additional financing options.

The identification of high-quality investment projects is crucial in this respect.

New Growth deal for euro area

As I have just said, the political and financial obstacles to reform are massive.

We need to improve mechanisms so that policymakers can implement an ambiti ous reform agenda.

This is vital for employment, consumption and investment in the short and in the long run.

We need a new Growth Deal for the eurozone, comprising an investment programme, sensible budgetary consolidation and an ambitious reform agenda.

First of all, I propose to link the implementation of structural reforms to the budgetary consolidation targets.

In short, ambitious reform agendas should be taken in full consideration as regards to their effect on the structural deficit. Countries asking for more time to reduce their deficit or debt levels should be required to step up their economic reforms.

Promises of reforms cannot replace budget commitments, but frontloaded measures should be taken into account.

In a comprehensive Growth Deal for the euro area, the investment agenda could also be used to bring about reforms in all eurozone member states.

This makes sense to me because reforms are vital to improve the investment climate. A European investment facility can support a tough reform effort.

Any country seeking investment from European financial sources should put forward a detailed reform agenda with clear deadlines, a list of eligible investment projects and a clear commitment to honor budgetary recommendations.

The eurozone Growth Deal would connect the reform agenda with the pace of budgetary consolidation and supportive investments.

Conclusion

Ladies and gentlemen, in conclusion, my main message today is one of consistency, and of better design in the eurozone's strategy.

To me, consistency in this phase of our recovery means two things. Firstly, all eurozone countries should adhere to our stability and growth pact.

And secondly, we should step up our reform efforts now.

Both are preconditions for the survival of the European social model. Preconditions for investments to return to Europe. And preconditions for growth in a changing world.

It is not an easy or quick solution, but it is the only one that will bring lasting prosperity to our citizens.