Address at Warsaw School of Economics: A Speech Delivered by International Monetary Fund Director, Dominique Strauss-Kahn
In this emerging global world order, in the wake of the current economic crisis in Greece...
After the Global Financial Crisis—The Road Ahead for Europe
Address at the Warsaw School of Economics by IMF Managing Director Dominique Strauss-Kahn
Warsaw, Poland, March 29, 2010
As Prepared for Delivery
Introduction: Poland and Europe
Good morning. I am delighted to be here today, and to take part in this important discussion on the challenges facing Europe in the post-crisis era.
In many ways, Poland is the ideal location for this conversation. Poland’s recent history spans the range of European experiences—transitioning from plan to market economy, joining the European Union, and tackling the financial crisis. Poland’s experience also shows how sound policies and strong political leadership can deliver economic success.
As the pioneer reformer in ex-communist Europe, Poland’s leaders showed great courage in adopting a bold macroeconomic stabilization plan and equally ambitious structural reforms. These actions laid the groundwork for the vibrant economy that Poland is today.
And during the recent financial crisis, sound macroeconomic and financial management allowed Poland to emerge relatively unscathed. Indeed, Poland was the only economy in the EU to register positive economic growth in 2009.
I commend the government and the people of Poland on these achievements.
Over twenty years ago, the Polish “Round Table Talks” started a peaceful transformation in ex-communist Europe, which culminated in the fall of the Berlin Wall. This historic event unleashed two decades of remarkable social and economic progress across Europe—delivering democracy, prosperity, stability, and peace.
But the recent crisis has laid bare some troubling weaknesses in Europe’s institutional framework. As Europe works now to reshape its institutions—making them stronger, more resilient, and better able to promote balanced and sustained growth—these weaknesses must be repaired.
Indeed, I see a historic opportunity to create the European institutions needed to deliver success for many decades to come. And that is my main message today: in the wake of the crisis, European integration must be sped up, not slowed down. Yes, the crisis has been a setback—but the benefits of integration are beyond doubt. Now is the time to take the European project to the next, higher level.
European Integration: Opportunities and Challenges
Crisis in Greece leaves EU future in balance, warns Angela Merkel
German leaders issue stark warnings and insist on punitive new regime for euro countries if monetary union is to survive
Europe was threatened with its gravest modern crisis tonight as Germany warned that the EU's future was on the line in the Greek emergency.
The spiralling tension over Greece's ballooning debts and Europe's first ever bailout of a country in the single currency has exposed fundamental questions about the EU and Germany's pivotal role as the union's biggest power.
In Berlin, where Chancellor Angela Merkel faces a groundswell of hostility to sending the Greeks a €22bn lifeline next week, leaders issued stark warnings about the prospects for the EU and insisted on a punitive new regime for the 16 euro countries if the monetary union is to survive.
The leaders of the eurozone's 16 nations are to assemble for an emergency summit on the Greek crisis in Brussels on Friday evening, with the mood bleak and the stakes high.
"Europe is at a crossroads," Merkel declared to the German parliament in Berlin today. "This is about no more and no less than the future of Europe and about Germany's future in Europe."
Her sombre tone was echoed by the opposition leader and former foreign minister, Frank-Walter Steinmeier, who said the Greek crisis presented the EU with its biggest challenge since the union was created in the 1950s.
The strongest warnings in months of wrangling in Berlin over how to respond to the first risk of national insolvency in Europe's single currency zone coincided with an explosion of anger in Greece, where households face years of hardship and declining living standards to meet the terms of the bailout from the eurozone and the International Monetary Fund.
There is strong scepticism in the financial markets over whether the bailout will work and over whether the Papandreou government in Athens will be able to deliver its side of the bargain. Should Greece renege on the terms of a €110bn rescue package, agreed at the weekend, it will lose the funds, say European leaders. It would then face financial collapse, defaulting on some €300bn of sovereign debt. There are also increasing warnings of the debt crisis cascading across the Mediterranean into Portugal and Spain. The tensions within the eurozone could see the single currency unravelling.
Merkel comes to Friday evening's summit in Brussels armed with stiff new prescriptions to defend the euro and ringfence the Greek crisis. She is also engaged in a simmering power struggle with the European Commission over who should police the new regime – Brussels or the member states.
After months of prevarication and deep reluctance to come to Greece's rescue, she committed passionately to the bailout today, portraying herself as the saviour of the euro and Berlin as indispensable to a solution. "Europe is looking to Germany today," she declared. "Without us or against us, there will be no decision."
In return for leading the rescue attempt, Germany is demanding new rules and penalties for the 16 countries taking part in the single currency.
The 16 could not keep muddling along turning a blind eye to the fudges and fiddling of fiscal miscreants, she argued. Instead, persistent breakers of the euro rules could be "suspended" from the single currency, fiscal sinners would have to forfeit their voting rights in EU councils, and would lose EU subsidies.
If there was no alternative, a country using the euro should be allowed to go insolvent, meaning hundreds of billions in losses for international banks and other creditors. This was seen as a warning to the markets betting on a country's sovereign debt default, while confident that investors would recoup their money from European and German bailouts.
As a last resort, Wolfgang Schaeuble, the German finance minister, is proposing that a persistent rule-breaker be expelled from the eurozone, though not from the EU. Olli Rehn, the European commissioner for monetary affairs, is to unveil proposals next week for new rules that would give Brussels the power to scrutinise national budgets, withhold EU funds, and impose penalties in the eurozone.
The Germans support and oppose some of Rehn's measures, but are against vesting the powers in the European Commission. Merkel's proposals are radical and would require renegotiating the Lisbon Treaty defining how the EU works. Few leaders in Europe have the stomach for that.
The stark warnings came only three days after 15 EU countries and the IMF agreed to rescue the stricken Greek economy. As Germany, Europe's economic powerhouse, is liable for more than 22 of the eurozone's €80bn. But the bailout is unpopular with Germans and costly politically for a chancellor facing a crucial regional election in the large state of North-Rhine Westphalia this weekend.
But parliament in Berlin is expected to give a green light for the bailout so the funds can be released before 19 May, when Greece has to redeem €8.5bn of debt.
Let me set the opportunities and challenges in context.
What began as an association of six countries in 1951—with the European Coal and Steel Community—has now grown to an economic union of 27 countries, with three additional countries as candidates. The integration of Europe’s goods, capital, and labor markets has brought tremendous benefits to all its members—with the economies of the new member states in particular enjoying a rapid catch-up.
Here in emerging Europe, after the painful early years of transition, economic growth took off, trade flourished, and stable institutions took root. Growing economic and financial ties with western Europe accelerated this process, and boosted foreign investment. All these produced a remarkable rise in living standards, with incomes beginning to converge toward western European levels. And that surely is what is most important: integration has improved the quality of people’s lives.
Of course, with integration also came policy challenges. In some economies in emerging Europe—and also some in Western Europe—easy access to inexpensive foreign money was allowed to fuel excess consumption and asset price bubbles, leading to unsustainable current account deficits. And when the global financial crisis hit, many of these economies found themselves terribly exposed when foreign capital withdrew.
European institutions and mechanisms were able to provide some cushion from the crisis. A few examples:??• For members of the eurozone, monetary integration proved a valuable safeguard, providing protection against additional disturbances from destabilizing currency gyrations. In addition, the ECB made emergency liquidity facilities available, extending a financial lifeline to banks in the euro area.??• EU structural funds helped bolster investment in new member states, and thus support economic growth.??• Countries outside the eurozone facing external financing difficulties could make use of the EU’s balance of payments facility.??• Finally, through the European Bank Coordination Initiative, western parent banks agreed to maintain exposures in a number of emerging European countries.
Of course, what mattered more for how Europe’s economies fared during the crisis were domestic factors—including macroeconomic fundamentals, financial sector policies, and political will. How did this relate to emerging Europe?
Tackling the Crisis: Emerging Europe
Think back to a year ago: frankly, the mood in much of emerging Europe was grim. The troubles affecting the Baltic economies looked set to hit all former transition economies—and possibly even the EU itself.
Thankfully, this nightmare never came to pass. Instead, the economies of this region, though hit hard by the crisis, have weathered the storm and are now on the path to recovery.
Naturally, given the tremendous diversity in the region, countries in emerging Europe have experienced the crisis very differently—ranging from Poland which virtually escaped recession altogether, to Ukraine, the Baltics, Romania and Hungary—all of which suffered severe downturns. What has made the difference in terms of a country’s response to the crisis has been the quality of its economic policies and institutions.
In this regard, Poland stands out. Thanks to strong economic institutions and commendable policy management, Poland has avoided the excesses seen in many other countries in recent years. And because there was sufficient fiscal space to adopt temporary stimulus measures, the impact of the crisis on growth was lessened. Indeed, as the largest economy in the region, Poland is leading the economic recovery.
Overall, then, the lesson is clear: good policies and strong institutions matter.
I’d also like to highlight another key feature of this crisis: namely the courage of many of emerging Europe’s leaders to take tough policy decisions. They did not shy away from taking deeply unpopular measures that they knew were necessary to save their economies.
Building a Europe for the 21st century
Let me now touch on three priorities for Europe in the post-crisis era.
First, Europe needs a fundamental overhaul of its financial architecture.
There has already been good progress in revamping Europe’s cross-border financial stability framework. With the envisaged establishment of a European Systemic Risk Board and a European System of Financial Supervisors, the ability to monitor financial sector risks—and hence to prevent crises—is being strengthened.
But the reform proposals have yet to address crisis management and resolution, in particular for cross-border banks. What should be done in this area?
As I said in Brussels recently, I see a clear need for an integrated European framework for crisis prevention, management, and resolution. The framework should include a European Resolution Authority, with the mandate and tools to deal cost-effectively with failing systemic cross-border banks. While technically challenging, the elaboration of such a framework is feasible—but it will require strong political leadership to come to fruition.
Europe should also strengthen economic policy coordination. Currently, the major policy frameworks in Europe—macroeconomic, financial, and structural—are relatively independent of one another. One of the lessons of the crisis in Europe is that a single currency without enough economic policy coordination may lead to huge imbalances.
My third priority for Europe is perhaps the most urgent: reigniting growth and tackling unemployment. Again, we must retain a clear focus: European countries must work together to sustain the economic recovery. That is the priority.
In the short run, macroeconomic and financial policies should be geared toward supporting growth and facilitating the necessary adjustment in countries with large fiscal and current account imbalances. To restore confidence in Europe’s fiscal sustainability, policymakers must formulate, communicate and begin to implement strategies for exiting from crisis-related intervention policies as soon as possible. Having said this, policy actions that would undermine aggregate demand should be postponed until 2011. But those that do not should be implemented now.
To sustain growth over the longer run, competitiveness must be increased. Reforms that tackle rigidities in labor and product markets, as set out in the Lisbon 2020 agenda, should be accelerated. In fact, more effective labor markets are allowing many emerging European economies to recover more rapidly from the crisis—and should provide a boost to their competitiveness for many years to come.
The IMF as a Partner of Europe
Let me touch on the IMF’s role in Europe.
The IMF has enjoyed a fruitful partnership with its emerging European members for many years already. The success of the Fund’s early engagement with Poland, for example, which began with the original stabilization program of 1989, provided a roadmap for our engagement with other transition economies.
In addition to financial support and policy advice, the IMF has provided extensive technical assistance for the creation of modern tax and fiscal structures, central banking institutions, and financial supervision. Such advice has helped emerging European economies prepare for membership in the European Union.
More recently, the IMF has lent financial support to regional economies facing financing problems during the crisis. In total, we provided over $80 billion in support in the wake of the crisis.
This financing comes with conditionality, which is necessary to ensure that the causes of the problems are addressed. But I have to stress that if the IMF provides the framework of the program, it is the countries’ authorities who decide on the specific measures. In addition, we have been emphasizing and promoting social conditionality to minimize the effect of the crisis on the most vulnerable.
So, our lending has become more flexible, and more focused on crisis prevention. The Flexible Credit Line for members with strong policy track records—such as Poland, which has accessed a $20 billion credit line from the IMF—is one example of this.
The IMF has also partnered very effectively with the European Union during the crisis—jointly providing balance of payments support to countries in the region. We see this as a both a reflection of our common interests and as a template for better coordination with regional financing mechanisms in the future.
Conclusion: A Powerful Shared Legacy
Let me conclude:
The founding fathers of the European Union were motivated by a most noble goal: to create the institutions needed to secure lasting peace on the continent. As Robert Schuman said in 1949, “We are carrying out a great experiment, the fulfillment of the same recurrent dream that for ten centuries has revisited the peoples of Europe—creating between them an organization putting an end to war, and guaranteeing an eternal peace."
The IMF was also born at this defining moment of history. Its purpose was to unite the nations of the world in a spirit of solidarity, with a mandate to safeguard global financial stability, and thus secure peace and prosperity. It was founded to fight the economic roots of war. And so, we share a powerful legacy with European Union.
And now, as Europe recovers from a major economic crisis, it is time to recommit to integration and cooperation. This means strengthening institutions. This means fortifying the economic foundations of the union. And this means extending the benefits of peace and prosperity to all the peoples of Europe.
I am here today to assure you that the IMF is your partner in this important endeavor.
Thank you very much.