President Werner Hoyer`s speech at the 24th Euro Finance Summit in Frankfurt, in which he calls for greater integration of the capital, banking and services markets of Europe, and greater investment.
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Mr Scholz,
Luis de Guindos,
ladies and gentlemen,
I am pleased to be here for the second time on the opening day of Euro Finance Week to talk to you about Europe and the enormous challenges posed by climate change and the ongoing consequences of the pandemic.
Germany is on the verge of getting a new SPD-Green-FDP government. The coalition talks suggest that the new government will be open to innovation and will actively pave the way towards a more climate-friendly future.
But there is too little mention of Europe for my liking, which also barely featured in the Bundestag election campaign. Unfortunately, this reflects a general phenomenon — in recent years, we have become accustomed to equating EU policy with crisis policy.
Europe has of course grown through crises. Back in the 1950s, architect of the European Union Jean Monnet said that European unity “will be forged in crises, and will be the sum of the solutions adopted for those crises.”
At this time shortly after the Second World War, the common agricultural policy was introduced to tackle food shortages. The European Coal and Steel Community was a response to the steel crisis. The 1968 Customs Union paved the way for the single market. More recently, Brexit and the pandemic — after an initial return to the nation state — have brought Europeans closer together.
Europe has contributed a lot to the economic recovery following the pandemic-related lockdowns. After President of the European Central Bank Christine Lagarde urged a “fat, fast and flexible” response early on in the crisis, the European Union did a lot right:
- It eased the debt limits of the Stability Pact and state aid rules to enable major national aid packages to be pushed through.
- Funding for vaccine research, production and distribution was massively increased.
- The European Investment Bank provided liquidity to businesses across the EU.
The European Union has thus shown that it has learnt from the financial crisis and the subsequent euro crisis when its responses were not “fat, fast and flexible,” especially in the early stages. Even then it took years before the crisis was eventually under control in 2015.
Although Europe is usually capable of turning crises into successes, why should we stop there? Why don’t we focus more on building a strong and powerful Europe between crises?
We could do so well.
In a world of “America first,” “Russia first” and “China first,” we need the European Union more than ever. It is the only way that we will be able to continue taking action and to shape global development.
Jean Monnet was already well aware of this back in 1954 when he said that “our countries have become too small for today’s world, faced with the America and Russia of today and the China and India of tomorrow.”
This couldn’t be more true today. In 1954, Europe accounted for 37% of global gross domestic product and represented 13% of the world’s population. Today, its global economic output has fallen to a mere 15% and it accounts for just under 7% of the world’s population. Germany’s share of global economic output is only 3%.
Individual European nation states are therefore insignificant from a global perspective. No country has enough clout to make themselves heard in global trade talks alone or to significantly influence trading conditions.
Europe is therefore more important than ever, and not just for economic reasons. A strong EU is also key to maintaining our social security systems.
Globalisation reduces individual countries’ ability to tax companies and fund their welfare systems. With the free movement of capital, businesses are free to take advantage of differences between tax systems. This unlimited freedom is now at least somewhat contained by the new global minimum tax rate. But international companies can still threaten to cut jobs and relocate production abroad.
This can prompt states to lower their labour and social standards in order to gain a competitive advantage. Without common minimum standards, the race to the bottom will continue, making it more difficult to uphold these social standards.
This is not just a matter for the experts — it affects us all. A race to the bottom would erode public support for our values of the rule of law, human rights, freedom and social cohesion, giving populists a tailwind. Let Brexit and Trump’s regime in the United States be a warning to us all.
Member States will only be able to respond to such developments if Europe joins forces. And only together — through innovation and cooperation — will EU countries be able to catch up with the United States and China on the technology front. Low levels of investment in all EU Member States over the past 20 years have come back to haunt us.
Very few European inventors manage to successfully market innovative products and services beyond their home countries.
Europe is simply not taking advantage of its potential. The European Union already has a single market for goods, but no fully functioning one for services. Employees from one EU country are required to register in others, professional qualifications are often not recognised beyond national borders, and there is a lack of advisory services for EU immigrants, even though this is actually required by the EU Services Directive.
This is stifling the all-important digital economy, which urgently requires a large domestic market of 450 million people to compete with startups in China or the United States.
If a Silicon Valley startup develops a good product, it has immediate access to a huge domestic market and can grow to the point where it can hold its own globally. But in Europe, that same startup would have to spend its early years dealing with so many foreign tax or consumer lawyers that international expansion is barely even worth it, or is at least much, much slower.
There is also no capital markets union or true banking union with a shared deposit guarantee. Right now, investors in Europe have to deal with different insolvency, securities and consumer rules in the 27 national sub-markets.
None of these sub-markets can compete with the large US capital market. This is why shareholders and corporate bond investors regularly shy away from offerings beyond their own borders, meaning that too little venture capital flows into innovative startups and investors miss out on returns.
The completion of the banking union — which includes common banking supervision, a banking settlement mechanism and a shared deposit guarantee — is still being held back by fears that Northern Europe might have to bail out banks in the south. Yet in the regular stress tests, Spanish and Italian banks perform just as well as German banks.
Strong EU policy that works towards greater integration on all these fronts is urgently needed. Given their importance for European competitiveness, we must not put these issues off forever — nor should we accept that Europe will only be there in times of crisis.
This is also important when it comes to the issue of investment.
Since the year 2000, EU countries have invested on average less than 2% of their annual GDP on research and development, despite the 3% target set in the Lisbon Strategy of 2000.
We urgently need more investment in our infrastructure. I think we are punching far below our weight when it comes to digital infrastructure in particular. With this backlog, we will not be able to keep up with the internet of things, let alone take the lead — even though the strength of our industry means the conditions are right.
There are still bottlenecks in other areas of social welfare, such as schools and the slow expansion of electricity lines. The longer we wait to adopt pragmatic and viable solutions, the more expensive it will become, the greater the competitive disadvantage and the flatter our growth trajectory will be.
The promotion of new technologies, better infrastructure and our transformation into a sustainable and digital economy and society require enormous sums. According to the European Commission’s calculations, Europe needs to invest an additional €350 billion each year for the next ten years just to fight climate change.
So where will this money come from? This is the question that the coalition parties in Berlin are also asking themselves — and quite rightly so: we can no longer simply rely on perpetually low interest rates, nor on increasing levels of debt. But it would be just as detrimental if we financed huge government spending through significantly higher taxes. Because — even if nobody says it — Germany is already a high tax country. For example, corporations pay some of the highest taxes in the OECD across all tax types.
And even if right now there is a widespread feeling that the state can and must fix everything, we need to focus on privately financed investments.
More public investment is, of course, also needed, for example in the field of fundamental research and traditional infrastructure. But all other investments are down to the private sector, which must also bear the entrepreneurial risks.
It is therefore more important than ever to encourage private individuals to invest more.
The completion of the capital markets union could play a major role in this: 60% of US companies secure finance from the capital market, while in the European Union just 20% do so. If more European companies did this, it would free up vast sums for investment.
And new forms of public-private partnerships, in which the state assumes a certain degree of financing risk, can also be very helpful in mobilising private capital.
The best way to illustrate this idea is through the COVID aid measures: during the coronavirus crisis, the state issued a guarantee to public promotional banks, such as KfW in Germany or the EIB at an EU level. On the basis of this guarantee, promotional banks ensured that eligible projects — despite extremely high risks in the market — continued to be financed by partially guaranteeing lending from commercial banks and other financiers (we have also worked closely with venture capitalists at the EIB).
I believe that this approach can also be extended to high-risk investment projects with high social added value — especially in the field of innovation — instead of relying on public investment alone.
The advantage is clear: risk-sharing instruments, as we call them, are in line with the market, exploit the full range of creativity from the private sector and require little use of public funds compared to the investments that are mobilised.
I hope I have convinced you that a strong European Union is far more than just managing crises. As a true community of values, a completed internal market with common social standards, and a capital markets and banking union, it can also become a model for climate transformation.
So why should we wait until the climate crisis has become even more pressing than the floods and forest fires of last summer demonstrated before taking the next step towards integration?
Yes, Europe can sometimes be complicated, and yes, Europe can often be difficult.
But there is also creative potential in our diversity, which we can confidently put our hope in. After all, the conditions for achieving the green transformation, for example, are not so bad: Europe is still the world leader in environmental technology.
I stand by the statement that we need Europe now more than ever, so that we can continue to live in peace, freedom and prosperity.
Thank you, Mr Scholz, I look forward to your comments.