Speech: Remarks by VP Dombrovskis at the informal ECOFIN press conference: fiscal stabilisation function

Thank you Minister Kažimír,

I would like to thank you for the warm welcome in the beautiful city of Bratislava and for your expert stewardship of this Informal Ecofin meeting.

As you just explained, today's Informal Ecofin gave us a good opportunity to gather the views of Ministers on policies needed to support growth, employment and stability in Europe. We also discussed the Fiscal pillar of deepening the Economic and Monetary Union.

Although much has been done since the last crisis to reinforce the resilience of our economies and euro area as a whole, more work is needed.

The recovery continues but remains moderate. There are downward risks.

There are also persisting weaknesses in our economic and financial systems. Unemployment remains too high in a number of Member States. In several countries, high public and private debt levels act as a drag on economic growth.

So the overall accommodative policy mix - with a supportive monetary policy and a slightly expansionary overall fiscal stance - is appropriate.

Our policies priorities focusing on investment, structural reforms and responsible public finances remain valid and have been reconfirmed not only at EU level, but also at G20 i level.

We also need to further strengthen the health of our financial sector, so that it can fully play its role in financing the real economy. Several Member States should continue addressing the high level of Non-Performing Loans (NPLs) in their bank balance sheets.

Moving forward with completing Europe's Economic and Monetary Union is also a way to support future growth and stability in the euro area.

Today we had a very good debate on the Fiscal Union and the euro area fiscal stabilisation function.

There might indeed be exceptional circumstances - large asymmetric shocks - when stabilisation via national budgets is unable to smoothen the economic cycle. So, a well-designed stabilisation function for the euro area can enhance the resilience to shocks. Having said that, if all countries pursued prudent fiscal policies, their own capacities to absorb shocks would increase considerably.

We discussed the conditions and possible set-ups for such a function. Some Ministers seemed to favor a stabilisation mechanism built around an unemployment scheme. Others pointed to the merits of investment-based mechanisms. But there was also the view that it may not be the time to launch new instruments. So, there is a clear need for further reflection.

The 5 Presidents’ Report uses the example of the European Fund for Strategic Investment (EFSI). One can develop this thinking: there could be a financial mechanism providing loans, under favourable conditions, to support additional investment in countries facing economic shocks. This additional investment should be accommodated while assessing Member States’ compliance with EU fiscal rules.

This would be a way to provide real support to a Member State's economy, but with conditions attached: it should not lead to permanent transfers among Member States, nor undermine the incentives for sound fiscal policy-making at the national level.

It is important to keep in mind that the debate on the stabilisation function is part of a broader process of completing the EMU. It is thus impossible to look at this in isolation, both from an economic and a political point of view.

So let me highlight some points:

The first is to re-launch a process of convergence and restore mutual trust within the euro area.

One question is whether we ultimately need a more binding convergence process, built around commonly agreed benchmarks.

The 5 Presidents' Report mentions some of the policy areas to target: labour markets, competitiveness, business environment and public administrations, as well as certain aspects of tax policies.

To restore and uphold mutual trust amongst euro area members, it is important that current rules are respected.

The second element is an integrated and effective financial system. This is why we should give priority to completing the Banking Union and the Capital Markets Union. Integrated financial markets will provide more private risk absorption capacity, thereby reducing the pressure on the public sector.

We also need to cater for the risk of wrong incentives and moral hazard.

The Commission will soon set up a dedicated expert consultation group. This expert group will help us to prepare a White Paper comprising various options for the longer-term development of the Economic and Monetary Union. We intend to publish the White Paper in Spring 2017.

So today's debate provided very useful input and guidance for those reflections. However, we know that we are dealing with sensitive issues on which views differ substantially, so more work on consensus-building in this area will be necessary.

SPEECH/16/3005