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"The European Union: Tackling the Global Financial Crisis" 
Ambassador David Daly, Head of Delegation of the European Union Delegation to Australia and New Zealand
at the NZ Institute of International Affairs
Wellington, 18 February 2009
Introduction
Good evening ladies and gentlemen,
I am delighted that my first speech - indeed, my first public engagement - as Head of Delegation of the European Union to New Zealand is here, to the New Zealand Institute of International Affairs in Wellington.
I would like to thank Brian Lynch, Director of the Institute, for his generous invitation to speak this evening, the day after my accreditation by the Governor-General of New Zealand.
My topic is "the European Union: tackling the global financial crisis". And certainly, there could be no more pertinent issue for us all than that!
The topic of the world financial crisis dominates policy discussions and media reports. It touches us all. There is - regretfully - no immediate escape from it. The present aim is that with appropriate actions, matters will be resolved, and the world will be able to take full advantage of the eventual upturn.
I am sure that we all agree on the severity of the crisis encompassing the world and now impacting on the real economy. It is the worst financial crisis since the Second World War. Indeed, some go further and say it is the worst since the Great Depression.
While the global financial crisis affects us all, it is also true that its impact is not the same everywhere, in line with the particular situations of individual countries. It may nonetheless be helpful to look at what others are doing to combat the problem; this might help in assessing what might be best done here.
This evening, I will cover three areas in my talk:
- First, I will talk about the severity of the crisis in Europe .
- Flowing from this, I will talk about Europe 's responses - the way the EU is coordinating its policies to try to reduce the impact of the crisis on our citizens.
- Third, I will delve into the international repercussions of domestic responses.
Economic situation in Europe
The European interim forecasts for 2009-2010 were released last month. As you know, like elsewhere in the world, there has been a rapid deterioration in the economic situation and outlook of Europe since the previous set of forecasts were issued in the second half of last year.
Worryingly, we are seeing the effects of the financial crisis on the real economy right across Europe, in the United States and further afield. GDP is contracting. Industrial production is falling at a record fast pace.
Economic growth is forecast to have dropped to about 1% in 2008 in both the EU and the euro area, from just below 3% in 2007.
In 2009, real GDP is expected to fall sharply, by 1.8% in the EU and 1.9% in the euro area, before recovering moderately by about 0.5% in 2010.
It is likely that the euro area is entering its first technical recession, as GDP contracts for the second consecutive quarter this year.
Employment is forecast to fall this year in Europe by an estimated 3½ million jobs. The unemployment rate is expected to increase to 8.75% in the EU in 2009 (and 9.25% in the euro area), with a further increase in 2010.
Banks have become warier about lending. For businesses, the toxic mix of a deteriorating business climate and tighter financing conditions is especially worrying.
Deficits within the EU are expected to more than double this year to 4.25% in 2009 (and from some 1.75% to 4% in the euro area).
However, inflationary pressures are abating rapidly. Inflation is now expected to fall from 3.7% in 2008 in the EU (3.3% in the euro area) to 1.2% in 2009 (1.0% in the euro area) and just below 2% in 2010 in both regions.
This reality is felt throughout Europe. Although EU citizens have by and large taken the downturn stoically, there have been signs of social and economic tensions in certain Member States.
Initial work within the EU - bank rescue plans & collaboration
Amidst these difficulties, what action is the European Union taking?
Since the beginning of October, the Commission, the European Central Bank with national banks, and Member States have worked hand in hand to restore confidence. Europe has recognised the imperative to cooperate.
In October, the Heads of State and Government of the Euro area countries and the Commission created a common frame of reference that allows all Member States to take action that is both effective and mutually reinforcing.
We did not waste time, but got right to the heart of the immediate challenges that confront us: liquidity, recapitalisation, and guarantees for retail deposits. These initiatives have helped protect European citizens' savings and rescued banks in difficulty.
Since then, 17 Member States have mobilised bank rescue plans that so far total €300 billion in recapitalisation operations and €2.4 trillion in different guarantee schemes. Responses have ranged from deposit guarantees, debt guarantees, capital injections and asset purchases.
This stopgap intervention of bank rescues had three objectives: to stabilize financial markets, to stimulate inter-bank lending and to ensure that the flow of credit to the real economy does not dry up.
European Economic Recovery Plan
In November, the Commission responded with the European Economic Recovery Plan, which was approved by European Heads of State and Government in December.
Whereas the initial response was aimed at halting the spread of the crisis, the recovery plan plotted the actions necessary to get Europe 's economy moving again. It provides a common framework for the efforts of Member States and of the European Union as a whole, with a view to ensuring consistency and maximising effectiveness.
The aim is to restore consumer and business confidence; restart lending and stimulate investment in the EU's economies; create jobs and help the unemployed back into work.
The package is worth about 1.5% of the GDP of the EU - approximately €200 billion.
Its aim is that Member States coordinate national budgetary stimulus packages to optimise their impact and avoid any negative spill-over effects from one country to another.
Like New Zealand, EU countries are increasing their investments in infrastructure and also key sectors such as cars, construction and smart green technologies. Existing funds to help the unemployed and those at risk of losing their jobs are being mobilised.
We recognise that the key to success is creating solutions that are tailored to the specific situation in each country.
But at the same time, we also need to be sure that the actions of one Member State contribute to - and are coherent with - the effectiveness of action in other Member States.
Future-proofing the regulatory framework
Concurrently, the Commission is taking decisive action to reinforce the regulatory framework for the future.
There are two main strands to the work underway. First, we seek to install more responsible and ethical behaviour. The Commission has already presented a proposal to rein in reckless speculation based on borrowed money.
We will improve regulation of credit rating agencies. We have also taken aim at remuneration, transparency, 'short-term-ism' and excessive risk taking.
The second key task is to improve supervision, notably in order to remove the mismatch between European financial markets on the one hand, and largely national supervision on the other.
In October, President Barroso established a high-level group to work on this matter with Jacques de Laroisière, former director of the IMF, as chairman.
At the end of this month, Mr de Laroisière will present his recommendations. They will help the Commission develop proposals for shaping global financial markets and will play an important part in restoring confidence and preventing crises in the future.
The Euro
What we can say, with pride, is that the crisis has proved the strength and utility of the euro. It has held up where other currencies have weakened.
Without it, more countries might well have fared worse; the euro has been a key steadying force in Europe . It is a fitting tribute to the single currency on this year's 10 th anniversary of the single currency.
Role of the European Commission
During the financial crisis, the European Commission has played, and continues to play, an important role in three different ways.
First, we are a 'bridge', to ensure coherence between national action and European action; between Member States within the euro area and outside it; between all the institutions of the EU and the Member States.
Second, the European Commission is using its power to initiate appropriate legislation. The Commission has presented a legislative proposal for a European-wide agreement on deposit guarantees, for example.
Finally, the Commission has continued to act as defender of the single market. This means upholding competition and state aid rules, while also taking account of a range of different circumstances in a way that respects the fundamental principles of the single market.
In all three areas, the Commission is showing that it can act fast and effectively.
It has also worked hard to ensure a tightly managed European response. Indeed, there has been unprecedented co-ordination in response to an unprecedented challenge.
The Commission's work now
Since the adoption of our Economic Recovery Plan, we continue to work to restore confidence throughout Europe . While we may have averted the threat of a global financial collapse, our financial markets along with others remain fragile.
The Commission's task now is to ensure that the stimulus packages announced by our Member States are implemented as quickly and as fully as possible so that they have the necessary impact on investment and private consumption.
Indeed, the Commission is today in Brussels presenting an assessment of EU Member States' Stability and Convergence Programmes.
The immediate challenge we face together is to prevent a situation where a deepening downturn combines with problems in financial markets and creates a vicious spiral of credit losses and write downs, of negative growth and increasing unemployment.
These issues will be the focus of a meeting of European Heads of State and Government in March.
Until then, the Commission is particularly concerned about the flow of credit into the market. There are widespread reports of businesses being denied access to bank credit.
As well, specific problems have been identified in the financing of large scale infrastructure projects and for financing international trade.
Everything we do is ultimately aimed at preserving the wellbeing of citizens. This means preserving their jobs wherever possible and securing the employability of our workers.
However, as I'm sure you know, there is usually a lag between the onset of recession and an increase in the number of jobs lost. We do not yet have the full picture of the employment situation.
So last week, the Czech Presidency announced a special meeting of the European Council in May to focus on the jobs situation - a Jobs and Social Summit. New Zealand will have a similar summit later this month, I know. We will watch it closely for ideas and suggestions to send back to Brussels.
Toxic assets
Another problem is that for several Member States, toxic assets are a real danger. So long as these remain on bank balance sheets, they will continue to undermine confidence and hamper lending.
One option under consideration is the establishment of a "bad bank" to buy up the toxic assets, thereby restoring trust and kick starting lending.
From the Commission's perspective, any further aid to the banking sector must be based on the principle of transparency.
If governments are to continue putting taxpayers' money into financial institutions, they must know from the outset the situation of that institution: its exposure to various risks, the quality of its asset portfolio and the sustainability of its business model in the long term.
Any recommendations to put an end to an excessive deficit will be taken in the weeks after the expected March meeting of finance ministers.
International consultation
Of course, the EU is not undertaking its course of action in isolation nor without international consultation. There have been ongoing meetings of the G20, including the November summit in Washington . Only last week, there was a G7 meeting of finance ministers.
This weekend, at Germany 's instigation, there will be an informal meeting of the four EU members of the G20. This meeting will help in the preparation of a common European position ahead of the G20 meeting in London on 2 April.
Rejection of international protectionist trends
As you know, at the Washington G20 summit, there was a collective commitment to openness and to reject protectionism.
It was agreed that we need a coherent worldwide approach to supporting the global real economy and that the world cannot afford a descent into protectionism.
As President Barroso said, history shows how that leads to penury and the risk of conflict. Within Europe , we have gone through such unhappy experiences in the past.
Yes, this is easier said than done, as we all know.
But we continue to believe that o pen markets remain the essential pre-condition for a rapid recovery from the economic crisis . As our Ambassador to the United States , John Bruton, said on the 'Buy American' plan:
"T he United States and the European Union should take the lead in keeping the commitments not to introduce protectionist measures taken by the G20 in November 2008. Failing this risks entering into a spiral of protectionist measures around the globe that can only hurt our economies further."
Rejection of protectionism - within the EU
Unfortunately self-protection looks attractive, even within the Union . One of our Member States has just announced €6.5 billion in emergency government loans to its carmakers. In exchange, car manufacturers pledged to keep plants open and jobs at home.
In response, Czech Prime Minister Mirek Topolánek, the current EU Presidency, said the deal underlined the need for co-ordinated European action to prevent "beggar-thy-neighbour" policies among the 27 Member States.
The European Commission is scrutinising the bail-out to ensure Member States' actions do not violate EU competition rules.
It is the job of the European Commission to safeguard against the repetition of retrenchment. It part of the raison d'être of the European Union, of course, to pursue a common European approach.
We must co-ordinate our actions to maximise the benefits for all, and not have negative side effects for our neighbours.
Consequently the Czech Presidency has called an informal meeting of EU Heads of State and Government the week after next. It will address the steps taken by the individual EU Member States to implement the Recovery Plan and to shield themselves from the impacts of the financial crisis.
Both the Commission and the Presidency agree that - at a time of growing pressure to adopt protectionist measures - it is of particular necessity to adhere to the rules of the internal market and fair competition.
Conclusion
The European Union has defined an ambitious and proactive approach for the management of the challenges ahead of us: a roadmap of initiatives for economic and financial market recovery that stretches to the March European Council of Heads of State and Government, the April G20 Summit in London and beyond.
This evening I have tried to explain the impact of the crisis in Europe and the coordinated responses by Member States , the European central bank and its members, as well as the Commission.
Like the rest of the world, Europe is not out of the woods yet. Like the United States, we are feeling our way forward in quite a new scenario, hopeful that the formulas for recovery will be effective.
To quote President Barroso's upbeat note: "using the strength of a European approach, using the strength of coordination among our 27 Member European Union, using the strength of our Internal Market, of the Euro, we can ensure that we emerge from this crisis in better shape, ready to take full advantage of the upturn".
Thank you for your attention. I am happy to answer your questions.
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