Today's date:
Summer 2013

Think Like Europeans

Mariano Rajoy is the prime minister of Spain. His remarks are excerpted from a speech to the Berggruen Institute’s Paris “town hall” meeting on May 28.

PARIS—“Blow by blow, verse by verse,” in the words of the Spanish poet Antonio Machado, European history of these past sixty years has cemented the peace between former enemies and embedded in them the sense of belonging to a community of values. Successive enlargements—from the six founder members up to twenty eight, with the forthcoming entry of Croatia—are the finest example of the way the conflicts on our continent have been overcome and of the will to share, increasingly, the common destiny we have chosen.

However, this assessment of the European project as a guarantee of the longest period of peace and prosperity in Europe’s history is wearing thin and it is healthy to recognize this. Our young people have grown up in a Europe in which war, a regular protagonist of our history for centuries, is no longer seen as a threat. And even historic achievements like the freedom of circulation, the disappearance of physical borders, the common currency or the rights of European citizens are taken for granted.

In my country, in Spain, which continues to be very closely linked to the European project, it had a magnetism which attracted the whole of society and was founded on the drawing power of freedom, democracy and prosperity.

Without claiming that this magnetism has faded, it is true that the times and circumstances have changed. It is necessary to renew the project to ensure it has life, vigour and importance in a 21st century which is shaped by new challenges and new paradigms of development.

This is why we must do whatever it takes to ensure our fellow citizens view theEuropean Union as an essential contribution to the solution of our current problemsand an exciting project for the future. And we must act now, because the world will not stop turning while it waits for Europe to sort out its problems.

TWO CRISES | Europe faces two crises, which are very closely related to each other. An economic crisis, whose clearest manifestation is unemployment, and the slump in activity. We are the only continent, the only one, to have suffered a double dip recession during this international financial crisis. And a political crisis, reflected in citizens’ disaffection, mistrust and indifference to the European unification project. We policy makers are obliged to resolve both crises. And from this starting point, allow me to share with you a series of reflections about what we are doing and a series of proposals about what we should do.

Almost a year ago, I wrote a letter to the Presidents of the European Council and of the Commission in which I outlined my vision of the task ahead for all European governments. The intention was to explain the strategies, both at national and European level, which all of us together should set in motion in order to overcome the current crisis.

This is a crisis which has been aggravated by mistakes and indecisiveness, both by national and Community authorities, when applying reforms. The result has been that our economies are not flexible enough to tackle the challenges of monetary union, and that there remain important weaknesses in its design which need to be corrected. I suggested five lines of action and reform, two at national level and three at European level.

• First, fiscal consolidation.

• Second, reforms within each of the States.

• Third, reforms within the framework of the European Union to strengthen the internal market.

• Fourth, ensuring the financing of our economies.

• Fifth, the reform of the design of our European and Monetary Union, through stronger banking and fiscal integration.

Well, one year on, no doubt we are better off:

• The worst of the crisis is over.

• No one doubts that the Euro is irreversible.

• And the monetary storms have abated.

Without doubt, important progress has been made but this must not allow us to become at all complacent because there is still much to do.

With regard to national measures, resolute progress has been made in fiscal consolidation and structural reforms. In my country, in Spain, in one year we have reduced the primary structural deficit by 3.5% of Gross Domestic Product, which is unprecedented among OECD countries, and this at a time of economic recession, and with the toughest financing conditions in memory.

We are determined to continue reducing this deficit until we comply with our pledge, both national and European, to achieve structural equilibrium in our public accounts. And yes, it is true that I have been obliged to make decisions which are as painful as they are inevitable. I am not saying this because of the unpopularity which it entails, but for us all to be aware that citizens need to perceive that the sacrifices which European integration demands will have tangible compensation in the near future.

Budgetary stability, in my opinion, is a prerequisite for growth and prosperity. Its clearest benefit, under normal conditions, is improved access to more and cheaper credit. This is what happens under normal circumstances, but when monetary union is fragmented, its routes of transmission are blocked and the euro’s institutional weaknesses become so evident. Then, the beneficial effects of the stability policy also slow to an exasperating level.

In these circumstances, logic requires us to moderate the pace of fiscal consolidation to adapt it to the current reality.

The main issue is commitment to the goal of stability; the time allowed to reach this goal is an element which must be adapted to the exceptional financial circumstances and the present recession, as set out in the Excessive Deficit Procedure.

In Spain, we have carried out many highly important structural reforms, including labor reform and the restructuring of our financial system. And we have adopted these, not only because of our European commitment and our pro-European outlook, but because we believe that, in an open and competitive world, and within a monetary union, if we wish to preserve our social model and the prosperity of our fellow citizens, any other option is illusory.

These measures are enabling us to correct some of our largest macroeconomic imbalances, apart from the public deficit I have already mentioned:

• The inflation in Spain is at historically low levels and will be reduced this year to 1%.

• We are rapidly gaining competitiveness. Spanish unit labor costs are behaving exceptionally well.

• We have gone from an unsustainable external deficit of over 10% of GDP just a few years ago to a surplus which will exceed 2.5% this year.

• For the first time in over forty years, we have achieved a favorable balance of trade, as well as a large surplus in services, thanks to a sustained increase in our exports, which has occurred despite the recession affecting the economies of our principal customers.

• Our financial system has made an unprecedented effort to restructure this year: over 7% of GDP, which places our institutions among the most highly capitalized in the continent.

YOUTH UNEMPLOYMENT | As Spain is the country with the highest youth unemployment in Europe, it is understandable that we are not prepared to waste a moment in combating it. Our young people need work and helping them to find it is the best social policy which can be undertaken.

This is why I feel the reform and adaptation of our education and professional training systems is especially important. My government presented to the Spanish Parliament a bill for the improvement of educational standards. Furthermore, we passed a bill supporting entrepreneurs and their internationalization. This is a very ambitious law which stimulates the creation of companies, their taxation, their funding and their international expansion. It is a law which complements the measures passed in support of entrepreneurship and youth employment.

We will continue down the path of reform until the fruits of these initiatives will begin to be seen.

In the meantime, it is understandable for citizens to ask themselves what we are doing wrong. My response is unambiguous: Europe must do more, better, faster and more effectively. The first thing we need is to comply with and apply what has been agreed and decided, something that seems basic but has to be done: to turn “de facto solidarity” into “real certainties.”

Being responsible means complying with what has been agreed.

Over a year ago the Eurosummit in summer of 2012 adopted far-reaching decisions, both on the design of European and Monetary Union and on restarting growth and employment.

The first steps were taken for the creation of banking union and fiscal union, essential complements for strengthening monetary union. It was proposed to advance much further in economic union in order to harmonize the behaviors of our economies and increase their efficiency. And all this could not be done without going substantially further toward political union.

This greater integration has been enshrined in the Road Map issued by Herman van Rompuy and the Presidents of the Commission, the European Central Bank and Eurogroup. In addition, at that Eurosummit, it was agreed to strengthen liquidity provision mechanisms to reduce the financial fragmentation of the eurozone and to take measures to break the vicious circle between banks and sovereign debt.

A year on, it is right that we recognize the progress which has been made, although it is not enough.

The test of the European Union’s credibility will be the realization of the banking union. The recent crisis in Cyprus, which, despite the low relative weight of its economy, destabilized the Eurozone a few months ago, has reminded us again of the importance and urgency of this goal. I assure you that this crisis would not have occurred had banking union been in place within the eurozone.

First proposal: Last December we approved the design of the single supervisory mechanism and its entry into force in March 2014. This date cannot be put back.

The second one: It is urgent to progress in the speedy adoption of the directive on resolution of credit institutions and the system for the direct recapitalization of banks. Second proposal for June.

Third: By the end of the year we must agree the single resolution mechanism and it is my wish, shared by many others, to agree the basis and dates for a future common deposit guarantee system.

With regard to fiscal union, progress has been overly timid. Practically no progress has been achieved in the last year regarding the Road Map proposals. Some people are afraid that Europe may become a “transfer union” in which the so-called rich countries are forced to use their taxpayers’ money to prop up their less wealthy partners.

There are two responses to this concern.

First, for example, Spain’s contribution to the bailouts of Greece, Portugal, Ireland and Cyprus is proportionally greater than that of the rich countries, which benefit from lower rates of interest, and so the effort made is significantly less than in our case.

Nevertheless, we make this effort because we believe it is essential to support the euro.

Secondly, fiscal union is not a question of transfers but one of providing security, so that risks are better covered. It is the smaller countries that have suffered most from this crisis because they had less capacity to deal with financial or fiscal risks.

Therefore, we need risk-coverage systems for the whole continent, including some kind of common European debt, and systems to compensate for asymmetric shocks, especially those caused by the differential effects produced by monetary policy.

Another issue. We cannot set aside the question of economic union. The more integrated our markets, and the more open our economies, the fewer problems we shall have to face, the fewer differential situations to address and the greater the efficiency of our actions. There is a need for more integration in key sectors such as retail banking, services, telecommunications and energy.

Where we are taking more resolute steps, in a way that could transform our economies for the better, is in the field of foreign trade. The possibilities offered by a broad transatlantic pact between the European Union and the United States are enormous. The figures speak for themselves: the EU and the US are the two largest economies in the world, together accounting for 9% of the world population but 50% of global GDP. An agreement between the US and the EU would boost economic growth by 2% and could create over two million jobs.

Although there is already a good level of openness in this area, we must set the bar even higher. Therefore, I do not want to take the traditional approach, nor do I seek a routine “free trade association,” but rather a highly ambitious approach, sending a clear political signal of our resolve. In this respect, President Obama has a very positive outlook and Europe must not fail to grasp the opportunity offered.

IMMEDIATE ACTION ON JOBS | As we work through these European level reforms, our citizens want action now.

The first of these actions must concern small and medium enterprises. In Europe, there are twenty-four million unemployed but there are also twenty-four million small and medium enterprises (SME)s.

The best way to tackle unemployment is to facilitate funding for projects by SMEs, and to do so, I believe the European Investment Bank can play a major role.

A year ago we agreed in the European Council to recapitalize the EIB with an extra ten billion euros. This is now taking place, but we must use this capital well.

I believe that aid can be channeled to small firms through the EIB by three means:

• First proposal: Tripling the annual volume of funds provided, from the present ten billion euros to 30 billion, in order to make a significant impact, Europe-wide.

• Second proposal: Enhancing the capacity of the European Investment Bank to provide commercial banks with high-quality guarantees for portfolios of new loans to small firms, in order to reduce their consumption of capital and to encourage their mobilization in the market through asset securitization backed by a sufficient level of rating. That is, the goal to achieve is to increase lending to SMEs.

• Third proposal: Developing a trade facilitation program to allow European companies to access international calls for tenders and to facilitate export credits. This is very important because now there are European companies which attend biddings outside Europe and cannot use the guarantee of a European bank, no matter how important it is. The EIB must take over. And this is something which, incidentally, we are helping to achieve outside Europe with our contributions to development banks but which we do not practice in our own countries.

I believe that with these three proposals, the action of the EIB would be undoubtedly much more useful than it is today for all Europeans.

For its part, the European Central Bank (ECB) has announced, that it will explore ways to facilitate the flow of credit to SMEs, which is currently blocked due to the fragmentation of financial markets. And I agree. With all respect for its independence, I firmly believe that the European Central Bank can and should do more. On May 2, President Draghi announced his wish to initiate what he called an inter-institutional dialogue to address this issue. This dialogue should begin right now, and I offer him my support for this to be undertaken as soon as possible.

The second of the measures I propose concerns youth employment. I’m also going to make two very specific proposals; only two because I think that, in the end, youth employment is also the result of economic activity, structural reforms, in many things, but today I think we can do two things. This is a key issue.

The first of these, and unquestionably the more important, is to establish a mechanism to temporarily exclude from the national deficit, for the purposes of the excessive deficit procedure, the cost of exemptions granted from social security contributions when young people are hired.

This action, and only this, would enable forceful, immediate action to be taken, providing a real incentive to hire young workers. Because it would lower the social security contributions and, logically, it would facilitate and encourage many companies to hire.

The second measure I propose is to speed up the use of the resources that we already have.

Last February, as part of the financial framework of the European Union approved for the next seven years, we set up a six-billion-euro fund to promote youth employment. Listen, I do not think that money has to be spent in seven years, because six billion euros in seven years will not have the same impact if it is done right now when it is needed most.

If we are to achieve these goals I’ve laid out, we must put into practice a quality that Jean Monnet called upon, decades ago: “think like Europeans.”

Over sixty years ago, Robert Schuman set in motion the most beautiful utopia of the twentieth century. We have come far since then and the path ahead is still a long one. But if we pursue the ultimate goal of a “Closer union among Europeans,” if we put into practice “de facto solidarity” and if we “think like Europeans,” I have no doubt that we will make a reality of the words of Lamartine, who said, “Utopia is nothing but premature truth.”

The way forward is to be found in ourselves, in our action and in our ambition. Just three elements are needed: political will, clearly-defined goals and close cooperation. Let us work for this together so that our Utopia may soon become solid reality for all those who live, dream, work and trust in Europe.