Speech commissaris Almunia: aanknopingspunten en lessen voor de EU en Duitse industrie (en)

Conference by Federation of German Industries (BDI) and the Confederation of German Employers' Associations (BDA)

Brussels, 16 October 2006

Ladies and Gentlemen,

Let me first thank the organisers of this conference for their invitation to speak to you today. I am aware that, in addressing the representatives of industry and employers of the largest European economy, I am talking to some of the key players in our quest for economic dynamism in Europe. I am convinced that the success of our strategy for sustained strong growth and higher employment depends largely on your action.

I am pleased to be able to start my presentation tonight presenting the positive macroeconomic situation in Europe. I will then address wider issues that concern our Economic and Monetary Union and global imbalances. I will also take a look at Germany, particularly at its current economic outlook and the structural reforms in the context of the Lisbon strategy. My intervention will conclude on a cautiously positive note on the state of public finances in Germany.

The macroeconomic situation in Europe

During the first half of 2006, European economic performance has markedly exceeded expectations. GDP growth in the euro area and the EU accelerated to an annual rate of 3½%, the highest since the upturn of 2000. Even if activity may slow down a bit in the remainder of the year, GDP growth for 2006 as a whole would, according to our interim forecast presented last month, attain 2½% in the euro area and 2¾% in the EU. This is the highest rate since 2000.

What is most encouraging, Europe no longer relies only on exports, since the pick-up was mainly driven by domestic demand. Private investment, in particular, accelerated to an annualised growth rate of 6%. Also private consumption recorded a trend improvement. If the drop in oil prices in recent weeks is confirmed, this will strengthen real income of households and profits in the corporate sector, providing further support to demand.

Another positive element, and by no means less important: the labour market situation has improved. Employment growth has picked up, and unemployment has fallen to a rate below 8% in the euro area (more than ½ percentage point lower than a year ago). Moreover, productivity grew by an annual rate of 2% in the first half of 2006, a considerable improvement when compared with the average rate of 0.7% in the previous five years.

Price stability is being preserved to a high degree, despite the jump in prices of oil and other commodities. Our interim forecast expects inflation at a rate of 2¼% in the EU as well as in the euro area.

Nevertheless, the benign outlook is not without risks. These mainly relate to the international environment, and may become more prominent after the turn of the year. In particular, the boom in the United States is losing steam. While in our main scenario we expect a "soft landing" of the US economy in 2007, we cannot rule out that the slowdown will be stronger than currently assumed. Related to this, a disorderly unwinding of global imbalances continues to be a threat to the growth outlook. I will now elaborate on this important issue.

Global imbalances

In 2005, the United States recorded the largest current account deficit in its history – equivalent to 6.4% of US GDP and 1.5% of world GDP. The deficit is mostly financed by capital inflows from Japan, China and other East Asian countries, and more recently by oil exporting countries (on the back of high oil prices). Although financial markets have so far been relatively relaxed about this situation, the size and persistence of global imbalances are unprecedented.

A disorderly unwinding of global imbalances, accompanied by large shifts in exchange rates, could have a severe effect on the growth of the world economy and on international financial stability. Although the euro area has a roughly balanced current account, it would not be immune to the effects of such a crisis: abrupt changes in exchange rates and global demand would hurt its exports, affecting also the value of assets held abroad by euro-area residents.

We are currently working to address the issue together with our partners at the G7, and in multilateral consultations organised by the IMF. Tackling global imbalances in an orderly manner requires a gradual shift in global demand from regions with current-account deficits to regions with current-account surpluses. In my view, the United States can play its part by increasing private and public savings. In China, to the contrary, the challenge is to reduce excess savings. Greater exchange rate flexibility in emerging Asian countries would also help the adjustment.

In other emerging market economies notably in East Asia and in oil exporting countries, the conditions for business investment need to be improved. As domestic demand accelerates in these countries, their current account surpluses will be reduced.

Although Europe features a relatively small current account deficit, we are nevertheless ready to contribute to the necessary adjustment. Thus the EU is pressing ahead with its Lisbon Strategy of structural reforms. In this way, the implementation of the Lisbon agenda not only fosters Europe's own growth potential but will contribute to a better balancing of global growth and facilitate the adjustment of global imbalances.

The macroeconomic situation in Germany

Against this background, let us now take a look at the macroeconomic situation in Germany. I am pleased to say that the positive overall picture for this year also extends to your country. Growth in the first half exceeded considerably our expectations of last spring.

It is encouraging that domestic demand is showing signs of recovery, in particular investment. For the second half of this year, we expect demand and output to gain further momentum, notably since consumers will be tempted to bring forward purchases in view of the increase in the VAT rate as from next year. Corporate investment should be supported by the temporary easing of depreciation rules.

Looking ahead, I am confident that Germany has definitely overcome the extended stagnation earlier in the decade, and that the economy will now remain on a firm upward path. Of course, the increase in the VAT rate will leave its trace in early 2007, as we already argued in spring, although the effect may be smaller than originally expected. As a matter of fact, these tax-induced swings mask the underlying trend. The recovery in the labour market should increase households' confidence. This should bolster domestic demand further, especially in 2008. Moreover, consumers – and investors – may draw further confidence from the fact that budgetary consolidation is now making good progress. I will come back to this later.

Trend growth in Germany

Despite the recent good news, the growth performance of Germany has been disappointing since the early 1990s. The growth potential has fallen not only below historical levels, but also below that of the EU and the euro area. Currently, we calculate that Germany has a potential growth rate of just 1¼%. This is, together with Portugal and Italy, one of the lowest rates in the EU. It is also apparent that the second-weakest cluster of countries has a much higher rate of potential growth, around 2% in the Netherlands, Belgium, Austria and France.

In our analysis, Germany's structural problems are found in three areas, namely unemployment, investment and the allocation of resources.

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  To start with, labour input in Germany has been in permanent decline over the last quarter of a century (with the exception of the unification boom). However, Germany has taken initiatives to address this. The decline in working hours, which has been partly responsible for this trend, has been stopped. Reforms aimed at halting the trend to early retirement have been adopted in the pension system, and labour market reforms have provided for more flexibility.

I am sure that many of you can agree with me: there has been a considerable degree of wage moderation in Germany. Unit labour costs have been declining markedly over the last years, thanks also to sustained productivity growth, which has restored Germany's competitiveness. The real exchange rate, one of our standard measures of price competitiveness, is now back at its level of 1990.

Despite this, unemployment remains unacceptably high, and early evaluations of the labour market reforms have given a mixed picture. Especially the low-skilled and long-term unemployed need to find their way back into work. What is needed here is greater flexibility in order for wages to adequately reflect differences in productivity and qualifications and to match more efficiently labour demand and supply.

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  Secondly, the share of investment in GDP has declined from 24% of GDP thirty years ago, the highest level at the time in industrialised countries, to a current 19%, broadly in line with the international pattern. The contribution of a rising capital stock to growth has fallen since 2000. Lower capital accumulation explains a growth slowdown of ½ percentage point over the last five years. Even the substantial gain in competitiveness has not resulted in a substantive pick-up in investment volumes, although the most recent figures may signal a turnaround. Hopefully, these new figures announce a trend of sustained investment over the next quarters.
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  Finally, there is evidence that the productivity of all factors combined has slowed down in Germany. Mainly responsible for this has been the slow uptake of new technologies in the economy. This implies that Germany needs more structural changes.

Structural reform

In its 2005 National Reform Programme, Germany announced a number of interesting measures and the just submitted 2006 update gives a good overview of measures accomplished and timetables for further measures. Public attention focuses on reforms linked to labour markets and welfare systems.

The reforms in the microeconomic area, and these are those which are of particular relevance for industry, receive less public attention. Germany has started to undertake a number of measures to raise potential growth and resilience to shocks. The efforts to reduce administrative burdens also deserve to be praised. In addition, we see progress in reducing the costs to start a new business. Germany set an ambitious target to increase expenditures for R&D and started several initiatives to improve the output of academic research. Overall, the strength of the German reform efforts seems to be the determination to raise the country's innovative capacity.

The German reform programme appears somewhat less ambitious when it comes to intensifying competition. This would not only be important to reap the benefits from a more efficient allocation of resources, but also to create incentives towards stronger innovation. Whereas the German manufacturing industry is known for its technological leadership, the same cannot be said for the service industry.

We have eventually come to an agreement on the Services directive, but you may recall that the initial plans were more ambitious. In its assessment of the 2005 German National Reform Programme, the Commission highlighted the need for more competition, in particular in public procurement, in professional services and in the provision of broadband services.

Let me give you two examples of best practices with measures aimed at improving competition that are of relevance for Germany:

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  One of them is the opening up of public procurement markets. In Germany the value of public procurement which has been openly advertised was only 1.2% of GDP in 2004. In the EU-15, this ratio had been achieved in already 1994, and since then it has more than doubled in many EU Member States including France, Italy, and the UK. Analysis shows that open tendering generates significant cost savings for the public sector and for the consumer;
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  The other is network industry liberalisation in Germany. Regulatory conditions in the German telecommunications sector have loosened up considerably since the 1990's, making telecoms the least regulated network industry. Competitive pressure is translating into price falls: since 1996, the price of telecommunication services in the EU15 has fallen by around 40% in real terms. Similar experiences have been recorded for other sectors. For example, between 1996 and 2004, energy deregulation helped cut the real price of electricity in the EU by 6%.

Finally, I would like to mention tax reform. Germany used to have a high burden from direct taxes. The income tax rate reductions that started in 1999 and the forthcoming reduction in social contributions reduced that burden, which is now being shifted to some extent to indirect taxes. And let me note that despite the increase in the VAT rate, the overall tax burden would remain lower than the euro area average. Yet, our studies show that further reforms to the tax structure might lead to a higher growth potential. In Germany, the effective tax burden on investment is among the highest in Europe. The government has recognised this and has announced a reform of company taxation.

Public finances

In this context, let me say a word about public finances. As we know the German public deficit is expected this year to be at 2.6% of GDP, possibly lower. The Commission and the last ECOFIN Council have just recognised that the government has responded to the requirements under the Stability and Growth Pact and implemented a host of measures to correct the excessive deficit. In view of the low potential growth and the demographic developments, it is important that the deficit is further reduced after the excessive deficit has been corrected. This is not only required by the Pact, but is crucial to progress towards ensuring the sustainability of public finances over the long term. In this respect, the Council, when it assessed the German stability programme of February this year, invited Germany to ensure that the announced reform on corporate taxation does not jeopardise the fiscal consolidation towards the medium term objective of a balanced budget.

Conclusion

Let me summarise: I have argued that structural reform in Europe is needed to make our economy grow and employ more, to make it more resilient against external shocks and to help it benefit the most from globalisation. Unfortunately, there is no single big reform that would lift up Germany's growth potential. Instead, there is a need progress in many areas. Germany has started to undertake major reforms, but efforts need to be continued and sustained on a broad front in order to produce the hoped-for returns over time in terms of growth, income and job opportunities.

I am convinced that the very important community (of industrialists and employers), that is present at this dinner today, is fully aware of the challenges involved and of the role you can play in driving forward and supporting the reform process to the benefit of the whole of the German society.

Thank you for your attention.