Speech by Minister for Finance Magdalena Andersson at the Policy Networks conference" "Beyond Brexit: Can the EU-27 re-engineer growth?".
London, 24 October 2016.
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Thank you so much for the invitation.
Today we see worrying tendencies towards beliefs in simplified solutions, in Europe and elsewhere. Quick fixes and promises without substance are abundant in the debate. The political landscape is getting more difficult for responsible politicians.
And so are the policy challenges such as large migration flows, rapid technological change, and the continued rise of income and wealth inequalities. Policy challenges we know only can be addressed by collective solutions and international cooperation. Yet, the debate is often going in the other direction.
But one thing is clear, both the real challenges and the political debate would benefit greatly if we would see better growth. So the theme for this session is well chosen. We need a growth agenda for Europe...
I'm going to talk a lot about the European Union. And I will be critical. And Sweden is often seen as an EU-sceptic country, together with the UK. So let me just make clear that Swedes are in general in favour of the EU. In fact, Swedish public opinion towards the EU has become more positive after the Brexit vote.
And I agree. We need a well-functioning European cooperation. Without for a moment forgetting problems and deficiencies, the EU single market is the world's largest domestic market, we have the four freedoms, applying to 500 million citizens and to our firms. For a small and open economy like Sweden – being part of this market is a great advantage.
But let's now turn to problems, challenges, and hopefully some potential solutions, that is the job of politicians.
We know that growth has been low ever since the financial crisis. When it hit, it became painfully obvious that we were not prepared for it. We simply did not have our house in order. A lot has been done since then, both at the national level and at the EU level, but we are still confronted with serious problems.
Trend growth is low. So is productivity. Unemployment is very high in several Member States. The banking system has weaknesses. Public debt levels are high, implying no or limited room for manoeuvre for national fiscal policy. Underlying some of these problems may be structural changes that have led to a fall in the natural interest rate and thereby difficulties for monetary policy to support growth and employment.
Our economies are also burdened by recent shocks. We have seen an unparalleled inflow of migrants, where a few countries shouldered most of the responsibility. Sweden for instance. The referendum here in the UK to leave the EU did not have the outcome I think most of us in this room were hoping for. Furthermore, there is not enough progress with the important free trade agreements with Canada and the USA.
There are a lot of challenges. And I see people having very different solutions to those challenges.
Some say that now is the time for further EU integration. For new grand projects in Europe. A fiscal capacity or a Eurozone finance minister, for instance.
Others, including Sweden, think that we should focus on well-needed structural reforms, implementation of the frameworks we have already agreed on and on policy areas where there is a clear added-value of working together.
It is clear that the EU has a confidence problem. I believe the European Union needs to focus on those tasks that generate value for the citizens. Where there is a clear added value of acting together. Active collaboration against terrorism and organized crime, effective supervision of our external borders and a shared responsibility for asylum seekers, joint efforts against climate change and, the further initiatives to promote more and better jobs within Europe.
But we need to be careful going forward. For some challenges EU-institutions and bodies are best suited to address common cross-border challenges, whereas for others national authorities are far better at identifying challenges, as well as shaping and executing policies at national level. Striking the right balance between EU and national responsibilities is therefore key.
Frankly, I have seen many demonstrations across Europe the last years. But I have very seldom heard demonstrators shouting – more power to Brussels.
So –what do we do instead? What should a growth agenda look like? Well, I think we should do four things. We clean up our public finances and the European banking sector, we implement already agreed on measures such as the investment plan for Europe, we renew our efforts to finalize trade deals with Canada and USA and we carry out structural reforms on a national level.
First – I cannot see how we can renew growth and become an investment-friendly continent as long as many countries run large deficits and have very high public debt.
But, this is not only me. We have agreed on the Growth and Stability pact. A pact that stipulates no more than 3 percent deficit and a maximum public debt of 60 percent of GDP. And we have agreed on this for a reason. Namely that it is sound economic policy – not an unwelcome constraint. So we have a pact that we have all agreed on. Why don't we just stick to it.
Don't get me wrong - I did not join the social democratic party some 35 years ago because of my deep conviction of sound public finances or my love for fiscal policy frameworks. I wanted to change the world, like many of us - I still do. But one crucial thing has changed. With age and experience comes the insight that the world cannot be changed without the responsible use of our common resources.
Too often we hear of a false contradiction between sound public finances on the one hand and growth and employment on the other hand. I do not agree with that. Sound public finances are a prerequisite for growth and employment. Jobs and growth must be built on a solid foundation. Investments are not drawn to countries with unstable macroeconomics.
We are therefore deeply worried about the disrespect for the rules in the Stability and Growth Pact. The tendency to make the rules more and more flexible and to create additional loopholes is a cause of concern. We have endless EU discussions among ministers and technical experts on creative accounting, on extra time for complying, on bending the rules in ever more inventive ways. The countries which are fighting hardest for changes in this direction, do they have the best growth and employment record? No, they certainly do not. Deficit and debt is not the road to sustainable growth and employment.
The euro would be a stronger project with sounder public finances. One effect is that there is less room – or no room – to use fiscal policy in a downturn. When the next crisis comes – and it will come – the Eurozone is more vulnerable. History tells us that this will hurt the weakest in society. Basically, it is time for each Member State to do its home work. There are no shortcuts. Weakening the Growth and Stability Pact is not a shortcut. Nor is a fiscal capacity for the Eurozone or Euro finance minister. We simply need more budget discipline.
But we also need to clean up the balance sheets of the European banking sector. As with public finances, we can't really talk about growth before we've done that. Banks not only play a key role in financing the private investments, worries around banks also tend to spill back on the country itself. For instance by pushing government borrowing rates higher or decreasing foreign investment because of fears of an unstable banking system. In my view, stabilising the European banking sector could deliver more investments and growth within the Eurozone than a further deepening of the monetary union ever could.
And, to be fair, a lot has been done since the financial crisis in this area. The introduction of a Banking Union. Higher capital requirements, a new resolution framework, a single supervisory mechanism.
But still, the latest update from the European Banking Authority showed that the non-performing loans of banks in the EU remain up to three times higher than in other global jurisdictions. That's just not sustainable. More has to be done.
So, sound public finances and stable banks. The second thing we need to do is to implement the investment plan we decided on last year. The plan, called the Juncker plan, rests on three pillars.
- The European Fund for Strategic Investments, or Efsi, which is supposed to mobilise investments of at least €315 billion in three years.
- A list of projects as well as an advisory hub supporting investment.
- And the third pillar of the investment plan is creating an investment friendly environment.
This is to me the most important pillar. We need to do more here. Because, given the low interest rates – why doesn't private companies decide to do more investments? How can Europe become more attractive for private investments?
For a start, we should continue to strengthen the single market. Here, the EU has launched a number of interesting initiatives. We are very supportive of Frans Timmerman's better regulation agenda. We are also supportive of the aim of the capital market's union, to provide a complement to bank funding. The digital single market is another important priority. We need to harness the growth potential of increased eCommerce through harmonised regulations as well as simplified and more secure online payments and data flows. We will also work for an energy union with forward-looking climate policies.
The third thing we do is finish the trade agreements with Canada and the USA. We will fight for them.
But we know that globalisation and free trade are currently coming increasingly under fire, paradoxically in some countries that benefit tremendously from free trade.
The fact that countries on the whole benefit from free trade and globalization doesn't automatically make each and every one better off. The last decades of world growth have improved living-conditions for millions and millions of families. At the same time, working class families in several OECD-countries have not had the same experience. As an example, the bottom half of the income distribution in the US has only seen 8 percent increase in real wages since 1979.
Their jobs have moved to Asia, or have been taken over by robots. They are worried about their future and many feel insecure.
So they are, not only in the US, rather skeptical towards more globalization, more free trade. Some see no point in being part of the European Union any more.
If we, as politicians are to reverse this trend, if we want to increase global trade, and see new free trade agreements we have to make sure that all our citizens are winners in the globalized economy. That means more redistribution. Of possibilities. And of outcomes.
I see two structural reforms on the national level that provides a base if we are to act against anti-digitalisation and anti-globalisation sentiment. The first one is creating a stronger safety net. Where a decent unemployment insurance is number one. An unemployment insurance on a level that ensures that you don't need to sell your house the first month of being unemployed. Preferably an insurance with requirements on the unemployed to be active.
The second is an active labour market policy. Life-long learning. When I'm unemployed because my job is now done by a machine – or has moved to China – I must have the possibility to re-educate and re-train for another job. It is obvious. It is a smart way to use human capital. But it is too often not done.
Here I see a lot of reform potential and this is an area my government has been very active.
But, it's not only about providing adult education - because we know that people who have a good educational base to stand on have an easier time learning new things when older. So it goes all the way back to having good pre-schools. Basically, it goes back to Tony Blair, and politicians' world wides' most important task. Education, education, education.
A modern labour market can never protect jobs. But it can protect workers through decent unemployment insurance and a good opportunity to re-train. If we as politicians don't provide that – we cannot expect citizens to be enthusiastic about globalization.
But to be honest. This will not be enough. We will have to work more on redistribution. If the rising inequalities are not dealt with by serious political alternatives – other, sometimes frightening alternatives will pop up. And we already see it happening.
Other obvious growth-enhancing structural reforms are the ones that increase women's labour force participation rates. Publically financed child and elderly care as well as paid parental leave are examples of such reforms. Gender equality, through women's increased labour participation, will increase national growth prospects. This is will be important, not least given the demographic situation we are facing in Europe. In McKinsey's Global Gender Gap Report 2015 advancing women's equality is estimated to add 12 trillion US dollars to global GDP by 2025 (11 percent). In a "full potential" scenario in which women play an identical role in labour markets to that of men, as much as 28 trillion US dollars (26 percent) could be added to global annual GDP by 2025. In the words of Christine Lagarde, "women's empowerment is not just a fundamentally moral cause; it is also an absolute economic no-brainer"
To sum up – do I think we can revamp growth in Europe? Absolutely.
Number one: We have to get the basics right.
Sound public finances and a well-functioning baking sector.
Number two: Implement the third pillar of the Juncker plan by strengthening the single market.
Number three: strengthen Europe as an open and free-trade oriented continent by and renewing the efforts to finish negotiations on trade agreements with the outer world.
Number four: Structural reforms on the national level to protect workers, invest in education and increase female labour force participation.
This would at least be a good start for a European growth agenda.
Let me finish by saying a few words about the relationship between the UK, Sweden and Europe after the referendum
The overarching goal for Sweden is to preserve a strong and effective EU for the future, while at the same time preserving a close relationship between the EU and the UK. I think the focus should be on minimizing the joint loss of this separation
That being said, I think there needs to be awareness that there can't be cherry-picking. With access to the single market comes regulation, and the four freedoms are closely interlinked.
But my premise is that we should work towards a deal that is as beneficial as possible for both the UK and the European Union. And I think that will be important for future growth – in the EU and the UK.
In many respects, Sweden and the UK have had similar views on the EU cooperation. Together we have advocated a strong EU agenda on climate issues which contributed to a new, ambitious climate agreement in Paris.
Along with the UK, Sweden has worked to develop the EU's single market and an open trade to the outside world. At the last hearing on the EU's long-term budget, we succeeded to not only defend and preserve our rebates , but also for the first time reduce the total EU budget and redirect the money to more growth enhancing measures.
The UK also has safeguarded the interests of those member states, including Sweden, that have not adopted the single currency.
So, from a Swedish perspective, you will be greatly missed. At the same time – I'm certain that we will find new ways to cooperate after Brexit.
 5.7% in EU, 1.7% in the U.S. and 1.6% in Japan.