His Excellency Mr Bruno Julien

Ambassador and Head of Delegation
European Commission to Australia and New Zealand

Speech to Chamber of Commerce and Industry Western Australia in Perth
11 December 2007

The EU economy: reflections on the past, outlook for the future
and what it means for Australian business

Ladies and Gentlemen:

Although nothing should be taken for granted, there is much cause for optimism in Europe today. Aside from a whole host of other reasons, the economy of the EU has shown signs of a recovery after a long period of disappointing growth. And our future prospects are looking bright.

In my remarks to you today, I will first of all examine why the EU economy is important to Australia and to the world.

Next, I would like to take a closer look at the EU's recent economic performance. What are the key macroeconomic indicators where we have seen progress?

Then - and possibly more importantly - I will examine what I believe to be some of the key drivers of this promising economic performance, and furthermore, how an understanding of such drivers can inform policies and programs to sustain our economic good fortune into the future.

Finally, I will examine how a strong, competitive EU economy is in all our interests - including those of Australian business.

A. Importance of the EU

Although frequently overlooked by commentators, the European Union is the largest economy in the world , accounting for roughly 30% of global gross national product, or $A19.3 trillion in 2006 . This is 10% larger than the next largest economy, the United States , which had an estimated GDP of $A17.5 trillion.

The EU is also the world's largest trader , accounting for approximately 20% of global trade in goods and services. In goods, the EU is the world's largest exporter and the world's second largest importer. In services, it is both the largest exporter and the largest importer in the world.

In addition to being the world's largest trader, the EU is also a competitive economy . The 'Global Competitiveness Rankings ' produced by the World Economic Forum found that 6 of the world's 10 most competitive countries were EU Member States, with 25 out of 27 Member States featuring in the top 50. Meanwhile, a separate report, prepared by The Economist Intelligence Unit, forecast that 8 EU Members States would be in the top 15 countries worldwide with the best business environment over the next five years (2007-2011).

The EU, therefore, commands economic muscle that should not be overlooked.

B. EU-Australia trade relationship

As an active trading nation, Australia also benefits from a strong, competitive EU economy. Although the focus in media and political circles tends to be on Australia 's trading relationships with Asian economies, in fact, the EU has been Australia 's largest two-way trading partner for over 20 years.

In goods, the EU is Australia 's largest source of imports, and recently regained its ranking as the third largest export market for Australian goods.

Reflecting the EU's lion share of world services trade, the EU has consistently been both the largest exporter and importer of services to and from Australia .

Importantly, in investment, the EU also plays a leading role, which is often overlooked. The EU is Australia 's largest investor , accounting for 33% of total inward investment stock ($A480bn) and contributing to 10% of the Australian workforce (direct and indirect employment). This is comfortably ahead of the next largest investor, the United States , with a 25% share ($A363bn).

There has been much media focus in recent times on increasing levels of Chinese investment in Australia . However, it is significant to note that China 's total share of investment stocks in Australia did not even total 1% of the EU's share in 2006.

Furthermore, the EU is also the second largest destination for Australian investment overseas, accounting for a 31% of total Australian investment stocks in 2006.

Developments in the EU economy, therefore, are significant from Australia 's point of view, as they underpin our strong bilateral relationship in trade and investment - which is important for the prosperity of European and Australian citizens alike.

Now, let me turn to examine in greater detail some of these recent developments in the EU economy.

C. Overall snapshot

After a period of disappointing growth from mid-2003 onwards, real GDP growth in the EU accelerated sharply in 2006 to 3%, up 1.2 percentage points from just 1.8% the previous calendar year. This represents the strongest growth performance since 2000. According to the latest forecasts, sound growth is set to continue in the near future, with GDP growth rates of 2.4% forecast for 2007 and 2008 respectively. Indeed, these estimations put the EU growing at a faster rate than the both the United States and Japan for this year and the next. In other words, the EU economy is set to be one of the fastest growing major developed economy in the near future.

This sound growth rate has been coupled with macroeconomic stability and low inflation . Inflation stands at just above 2%, the lowest average since the 1970s and a considerable achievement when compared to the inflation rates regularly experienced during the 1980s and 1990s. As a result of low inflation, both short term, and more importantly for businesses, long term interest rates are at low levels (5% compared to 6.75% in Australia ).

Private investment also rebounded strongly in 2006, showing that business was confident about the durability of the recovery. Earlier this year, business and consumer confidence in the EU and in the euro area reached record highs (114). While these moderated slightly in the most recent October survey, confidence nonetheless remained strong overall, and well above the long-term average. This reflects confidence in the sound fundamentals of the European economy.

After several years of escalating unemployment, the rate of unemploymen t in the EU is now steadily decreasing, recorded at 7.0% in September 2007, down from 7.4% in August and 8.0% in September of the previous year. Twenty-two Member states recorded a fall in their unemployment rate over a year; while the rate increased in four Member states and remained stable in one. The employment rate for the EU15 is at its highest level for more than 20 years.

In terms of future projections , the EU is expected to create 8 million new jobs over the period 2007-2009, which is in addition to the 3.5 million new jobs already created in 2006. This will help increase the employment rate from 64% in 2005 to just over 66% in 2009, while reducing unemployment from a peak of more than 9% in 2004 to 6.6% in 2009 - levels not witnessed in the EU for 15 years.

Since 2000, most of the new jobs created in the EU have been in the services sector . Services accounts for roughly 65% of Europe's total economic output (a similar proportion as in Australia ). Europe 's new services directive, which is on target for full implementation in 2008, will break down internal barriers in the EU services market and make cross-border supply of services within the EU more competitive. We can expect measures such as these to continue to fuel the competitiveness of the EU economy, and in turn provide fuel for future job creation and growth.

D. Drivers of growth

So what is driving this promising economic performance? Like in Australia , probably the most significant factor is the continuing growth of the global economy. Demand for European exports has also been supported by sustained high economic growth in emerging Asia, and particularly China . But Europe has not only relied on external sources for its economic recovery.

Structural features of EU economy

Some structural features of the EU economy have been particularly important. Low inflation and fiscal discipline brought by the euro have improved economic stability in Europe . The average inflation rate across the EU has been around 2% for the past 7 years. This, together with qualified workforce and world class infrastructure - a leading example of which is Europe's ICT sector - has made Europe more attractive for investment. Domestic demand has also risen sharply, amid a surge in investment spending and a pick-up in private consumption.

Reform

But the upturn can also be traced to another source, which is the deepening and the extension of the Single Market coupled with far reaching reform process that has been underway in Europe in recent years. This is tackling some of the most difficult and politically sensitive areas such as the labour market, the welfare system and the liberalisation and deregulation of sheltered markets. A lot has been done but still more needs to be done.

A few words about the single market, that is among the most central tenets of the European project. First came the launch of a European customs union in 1957, then the ambitious Single Market Program during the 1980s and 1990s. Building on all these successes, we have now continued on an ever-more ambitious trajectory with the launch of the Lisbon Strategy - which is the cornerstone policy of the current European Commission.

The Lisbon Strategy aims to raise productivity and employment rates while promoting knowledge and innovation as the engines of economic growth. Originally conceived one year after the launch of the single currency in 2000, it was designed to complement the European Monetary Union's framework for stability and growth. In 2005, the Lisbon strategy was renewed, drawing on the lessons of the first five years in practice and focusing on increasing partnership between the EU and Member States .

Since the launch of the Lisbon process, the strategy has been instrumental in focusing minds of governments and stakeholders on the need for reform. Let me elaborate in detail just some of the key reforms already implemented by Member States:

• Firstly, across the EU, governments have introduced tax cuts and changes to the welfare benefit system in order to 'make work pay.' For example, countries such as Belgium and Finland have introduced tax measures that target low wage earners while France , Germany and others have established systems for the early activation of the unemployed.
• Member States have also introduced reforms to their healthcare and public pension systems. Indeed, pension reforms coupled with changes to early retirement rules have already increased the employment rate of older workers and have raised the retirement age by one year.
• In addition, a host of initiatives are underway to foster research and the diffusion of new technologies. These include the use of targeted investment, support for start-up companies and a higher availability of risk capital. Current targets aim to increase R&D expenditure from 1.9% to 2.8% of GDP by 2010. In addition, the EU's seventh research program, known as FP7, has just been launched, which represents a 41% increase in funding on the previous program, or a total of $A85bn over the next six years. FP7 will be the principal instrument for funding research at a European level in key priority areas (such as biology and medicine, environment.) over this time period, and an investment which is open for Australian researchers and companies to participate in.

There is also an accumulating body of evidence illustrating the benefits stemming from structural change . For example, resilient employment growth, especially among women and older workers, coupled with the rapid decline in unemployment suggest that structural improvements have taken place in the labour market. Despite the slow growth in Europe in the first half of this decade, between 2000 and 2006, Europe still created 9.9 million new jobs. This compares to 7.4 million in the US over the same period.

Indeed, it is estimated that reforms in areas such as unemployment benefits, taxes and the ease of entry for new firms have reduced the structural unemployment rate by almost 1.1% and have boosted GDP in the euro area by 1.7% since 1995.

On top of this, there is growing evidence that reforms are also partly responsible for rising productivity . Annual labour productivity in the euro area accelerated to an annualised 1.8% in the first three quarters of 2006 compared to an average of 0.7% during the decade preceding 2005. It was the first time this decade that Europe's productivity growth exceeded that of the United States , and can in part be attributed to the better functioning of EU labour and product markets.

The contribution of other areas of EU economic policy to this ongoing reform process should not be overlooked. Across various policy areas, aspects of decision-making take place at a Community level where this is judged to be a matter of Community interest. Community-wide policies in international trade and intra-EU competition have for example all played a role in promoting reforms and enhancing the competitiveness of the EU single market.

The same can be said for a range of other Community policies , including Trans-European Networks in telecommunications, transport and energy, as these are vital for strengthening the internal market and for the reinforcement of economic and social cohesion. Another example of how Community policy has contributed towards the EU's competitiveness is the European Central Bank, which has the principal task of maintaining the euro's purchasing power and thus price stability in the euro area.

Enlargement

Enlargement of the European Union has also been a major driver of the present economic recovery. It has strengthened the European economy by expanding markets, creating new business opportunities and bringing fast-growing economies into the single market.

The May 2004 enlargement - where 10 new Member states acceded to the Union - has been an enormous success story. Empirical evidence reveals a number of key reasons in support of this claim.

First of all, the new Member States have brought new dynamism to the EU economy. Trade between the old and new Member States has quadrupled over the past decade. More new jobs have been created in the old Member States than have been lost due to company relocations.

Secondly, the free movement of workers has not brought the disruptive effects on the EU-15 labour market that some had feared. In fact, workers from the new Member States helped to relieve labour market shortages. Countries like Ireland , Sweden and the UK that did not apply restrictions after May 2004 have experienced high economic growth and a drop in unemployment.

Thirdly, robust economic growth in the new Member States meant that unemployment decreased and domestic labour demand increased in these countries. This was partly fuelled by companies from the old Member States starting activities in the new Member States, which allowed them to compete better with emerging global powers like China and India .

Overall, the economies of the 12 newer Member states have grown at a very fast rate ever since these countries concluded trade agreements with the EU in the early 1990s. This dynamism continues. For example, in Estonia , Slovakia and Romania , gross national product has grown by between 7-10% per year.

However, while these good results are very encouraging, we know that some important structural weaknesses still remain in the EU economy. Weak competition in many markets continues to be an obstacle to growth. For example, Europe could benefit from more adaptable labour markets.

The way forward - and its implications for Australia

Europe 's Single Market is a powerful tool for the EU economy. It offers investors access to almost 500 million consumers, enabling them to achieve huge economies of scale. As a result, in the last ten years, the Single Market created 2.5 million jobs, quadrupled FDI investment and almost doubled EU external trade as a percentage of GDP.

But the Single Market has the potential to bring even greater gains through integrating EU markets still further. As I have mentioned, the new EU directive in services will break down internal barriers to services supply in the EU, giving it a chance to catch up to liberalisation of the EU goods market. We also need to redouble our efforts to streamline and simplify regulation to ensure that it is not unnecessarily burdensome on businesses, and the Commission is actively pursuing proposals to achieve this aim.

In addition to implementing far-reaching structural reform of the EU economy, we are also currently reviewing the policies of the European Single Market, cutting read tape in order to ascertain how better we can maximise its potential.

Last but certainly far from least, we will continue with our work implementing the Lisbon Strategy to promote further structural reform and greater dynamism and competitiveness of the EU economy.

A stronger, more competitive Europe is in the interests of Australian business. It provides Australian business with new opportunities for investment, especially in the new Member States. It provides Australian exporters with enhanced opportunities to sell their goods and services in a growing European market. And it means that more European companies may be likely to invest in your country - noting that foreign direct investment is well-recognised as a driver of job creation and growth.

E. Conclusion

In summary, ladies and gentlemen, Europe has recently experienced an economic upturn, and is currently on track to be one of the fastest growing major developed economy in the near future.

This upturn can be traced in part to European reform efforts as well as successive enlargements of the EU in recent years.

To sustain our current economic good fortune, we cannot afford to rest on our laurels. We must continue to push for reform to address structural weaknesses in the EU economy and to further strengthen the EU single market. As I have mentioned, I believe that a stronger Europe is in the interests of Australia and Australian business.

The existing framework for cooperation between Australia and Europe - the Joint Declaration - was first adopted in 1997, and sets out bilateral cooperation across a range of areas, such as an annual dialogue on trade matters, mutual recognition of standards, and cooperation on education and research. The Joint Declaration, which Australia and the EU are hoping to update in the near future, is an excellent vehicle to further deepen and enhance our cooperation in these and other important areas of our relationship.

There are also a number of existing institutions which underpin our strong cooperation across a range of areas - for example, the Forum for European-Australian Science and Technology cooperation (FEAST), the European Australian Business Council (EABC) and the EU centres, which are devoted to the study of Europe in many of your country's universities.

Looking to the future of our relationship, it is also important to note that a new constitutional treaty for the European Union was adopted in July, and is and now awaiting ratification by the Member States. The new treaty will set Europe further on the path of greater integration, greater strength, and greater dynamism as one of the world's most significant economic and global partners - and a key partner for Australia .

In closing, ladies and gentlemen, the economic progress made in the EU thus far may be modest in some respects but it illustrates the real benefits that can be achieved if the EU presses ahead with its structural reform agenda. While past measures are commendable, they do not go far enough. Above all, now is the time to accelerate reforms when economic conditions provide us with a 'window of opportunity'. To relax efforts now could prove a historic mistake.

The European Union is committed to working to achieve this aim. In the process, we hope to achieve a more competitive, dynamic Europe that brings greater prosperity to all - including to our valued partner, Australia.

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ECONOMIC RELATIONSHIP EU-AUSTRALIA

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