Excerpts:
Some wounds have still not healed, however. As unsettling as it may sound after so many years of economic hardship, the euro area architecture is still not crisis-proof.
Growth remains cyclically too weak to fully restore fiscal space in countries where public debt is unacceptably high. The profitability of banks remains low and, in many cases, below the cost of equity, reflecting risks to business model sustainability.[3]
And productivity growth, the main component that underpins our living standards and social safety nets, remains low in many Member States. As a consequence, unemployment in some countries, in particular among young people, remains unacceptably high, despite the progress made at the euro area level on average.
True, many other advanced economies are facing similar challenges. But the combination of weak potential growth and high debt is toxic in a monetary union with decentralised fiscal policy and insufficiently integrated financial markets.
It implies that country-specific shocks remain a potential source of instability for the euro area as a whole.
It weakens political support for further integration. And it means that the single monetary policy has to shoulder the burden of macroeconomic stabilisation in the face of adverse shocks.
The arrival of the new European Parliament and Commission provides an important opportunity to address more decisively the remaining vulnerabilities, refocus priorities and sequence actions accordingly. And it presents us with a time frame for achieving these goals.
In my remarks this evening, I will argue that we need to both strengthen the institutional framework to make our currency union more resilient and implement the right policies to boost the growth potential of our economies.
I will argue that flexible and dynamic markets are the first line of defence in the euro area.[4]
They are the key to unlocking sustained productivity growth, and thereby allowing faster normalisation of monetary policy. They also reduce the need for macroeconomic stabilisation and they curb contentious debates about crisis management.
The second line of defence relates to sustainable and growth-enhancing fiscal policies. Countries that have fiscal space should use it to foster investment. Countries where debt is high should calibrate their policies so as to regain fiscal space in the future, limiting the risk they pose to their neighbours. And all countries can improve the quality of their spending.
The third line of defence relates to strengthening our common toolkit – to new policy instruments that are needed to protect the stability of the currency union if shocks are too large to be absorbed by markets or national fiscal policies, and that provide a safety net against poverty and social exclusion.
The first line of defence: integrated and flexible markets
No euro area country features in the top 10 of the World Bank’s ease of doing business index. Many are not even in the top 30.
A consequence of a less business-friendly environment is that business dynamism in Europe is weak.
Compared with the United States, European countries have, on average, larger shares of “static” firms and smaller shares of both growing and shrinking firms.[5]
Low business dynamism feeds and reinforces the misallocation of resources across firms in the euro area. [6]
Empirical evidence shows that an increasing proportion of capital is concentrated in firms that are less productive. In Italy and Spain misallocation is currently higher than at any point in time before the crisis.[7]
The absence of a Schumpeterian process of creative destruction weighs on innovation and growth.
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There is overwhelming evidence that new firms are more likely to adopt new technologies.
There is a significant link between business entry rates, technology creation and diffusion, and productivity growth.[8]
New and young firms also contribute disproportionally to job creation relative to their share in employment. [9]
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Several euro area countries lack an effective framework for early private debt restructuring. In Portugal, Greece and Slovakia, for example, it takes more than three years to resolve insolvency. It takes less than one year in Japan, Norway and Canada.[10]
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But member states don’t walk the talk. The macroeconomic imbalance procedure always lacked teeth and none of the 2018 recommendations for euro area countries have been fully implemented.
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