DR. OLLI REHN Member of the European Commission for Economic and Monetary Affairs
The 2010 Euro Summit Economic Governance for Sustainable Growth The Lisbon Council 26 October 2010
1. Introduction Ladies and Gentleman, Let me thank you for your kind invitation to address such adistinguished audience, especially as the lecture is named after Ludwig Erhard, the father of the “economic miracle” of the post-war Germany. As the late sociologist Ralf Dahrendorf wrote in his marvellous little book Reflections on the Revolution in Europe in 1990, a country in transition needs a constitutionalist leader to guarantee political legitimacy and another leader of 'normal politics' to drivenecessary economic reforms. Germany had these leaders in Konrad Adenaeur and Ludwig Erhard. Even though the economic challenges standing before Mr. Erhard over 60 years ago and before us today may not be comparable, I see some parallels. Quite like the post-war Germany, we need to rebuild our European economy battered by a deep crisis. Much thanks to Ludwig Erhard and his reforms, Germany made ithappen against most if not all odds. The foundation of Erhard's policy was the currency reform in June 1948, a shock therapy that suddenly freed most prices and all rationing. We have come to know the result as "Wirtschaftswunder". Can we hope for another "miracle" to happen – this time in Europe? Luckily for us, there is nothing supranatural in Erhard's “miracle”. The Wirtschaftswunder was adown-to-earth programme of economic reform, built on the principles of monetary stability and free market to encourage entrepreneurship, bring economic efficiency and facilitate job creation.
2. Stability and growth go hand in hand Let me start with a general remark. There is a school of economic thinking which argues that macroeconomic instability is insignificant in the long run and only therate of growth matters for welfare. This has of course been disputed by many macroeconomists who have underlined the devastation that recessions can create. But many of the same macroeconomists were, just a few years ago, convinced that the instability issues have been largely solved. In the precrisis period "The Great Moderation" was regarded as evidence of successful macroeconomic policy, basedon automatic fiscal stabilizers and on monetary policy aiming at price stability or low inflation. Now we know better. Macroeconomic instability can cause large and long-lasting damage, thus remaining a stubborn policy challenge. At the same time, there is no denying that the rate of economic growth is essential for our citizens' wellbeing. This is a very concrete European challenge. Theprojected 1½ % average annual growth rate in the EU in the coming decade, in the absence of major structural change, is simply inadequate to generate the jobs we need. Neither is it sufficient to redress the consequences of population ageing. Therefore, just as in Erhard's programme, we must focus on both stability and growth. There is not one without the other – they go hand in hand. With this in mind,I'll discuss three sets of issues central for promoting stability and growth in the EU: (1) economic governance, (2) growthenhancing structural reforms, and (3) global economic governance.
3. Strengthening economic governance in the euro area The findings of the Euro Monitor, which were presented here earlier today, display very clearly the severe problems of fiscal sustainability and thedivergences of competitiveness in the euro area. While national policy makers, of course, bear the main responsibility for the situation, it is clear that also our EU framework for policy coordination has failed. Stability and Growth Pact was created to ensure that no country would pursue fiscal policy that would endanger financial and economic stability of the other member states and the euro...