By Nick Mann | 1 March 2013
European Commission vice-president Olli Rehn has warned governments against narrowly focusing on debt and deficit reduction to restore Europe’s sluggish growth, calling for action to increase the flow of credit to households and businesses.
Speaking in London yesterday, Rehn said the primary problem was ‘excessively tight financing conditions for businesses and households, which are caused by the still-unfinished repair of the financial system and banking sector’.
He added: ‘Today’s liquidity trap is in fact a financing trap.
‘The excessively tight financing conditions, especially in southern Europe [countries] like Spain, Portugal and Italy, are hindering the flow of credit to households and businesses and thus suffocating economic activity and export growth in these countries.’
In the US, the repair of the financial sector in 2008/09 was crucial to the recovery of the economy, Rehn told the Policy Network eurozone event. But in Europe this process had been only partially achieved and was acting as a ‘critical drag’ on growth, he said.
‘That’s why we need to complete the repair of the financial sector, in order to unblock private investment. This is not about "bailing out bankers", it is about letting credit flow to create growth and jobs,’ he said.
Rehn claimed that recent figures showed European countries were getting their public finances ‘back on track’, with the average deficit in the European Union forecast to drop below 3% of gross domestic product this year. The number of countries breaching the EU’s deficit rules was also expected to fall further this year, he noted.
‘However, while deficits are being reduced in Europe, public debt is expected to stabilise only by 2014 and, as said, to do so at above the level of 90% of GDP,’ he said. This could become an ‘even heavier burden’ on economies if it was not reduced.
‘This is particularly important in view of the impact of population ageing, which is set to make itself felt ever more acutely,’ Rehn noted.
However, he stressed that this should be weighed against the ‘short-term’ costs of consolidation.
‘That’s why fiscal consolidation needs to proceed at a carefully calibrated but steady pace that is appropriate for each country,’ he said. ‘The Stability and Growth Pact focuses on improving the underlying budgetary position, taking out the effects of the economic cycle and of one-off measures.’
The commission’s decisions last year to give Spain, Portugal and Greece more time to reduce their deficits showed it was committed to focusing on structural sustainability ‘over the medium term’, Rehn said.
Debt mutualisation also had a role to play in getting countries’ finances back on track, but neither that nor fiscal consolidation were a ‘silver bullet’, the commissioner added.
Plans to explore whether a debt redemption fund should be set up to reduce the borrowing costs of heavily-indebted eurozone countries were agreed last month as part of the agreement between Europe’s lawmakers on the ‘two-pack’ budgetary supervision rules.
Rehn said the fund was a ‘serious proposal’ that should form part of the debate around the European Parliament elections scheduled for 2014. ‘I think it’s certainly something we need to explore,’ he said. ‘It may be something that can be discussed after the German elections in a more analytical manner.’ Germany is set to go to the polls in September.
