Commissioner Lamy's Speech on 'EU-25 in the Global Economy'

Sehr geehrter Herr Minister Hirche, sehr geehrter Herr Schmidt, meine Damen und Herren,

herzlichen Dank für die Einladung zu diesem ersten Niedersächsischen Außenwirtschaftstag. "EU-Erweiterung: neue Dynamik für die Wirtschaft", so lautet der Titel dieses Forums. Zehn Tage vor der Wiedervereinigung des europäischen Kontinents (denn um nichts Geringeres handelt es sich) bieten die Hannovermesse und Ihre Veranstaltung eine ideale Gelegenheit, sich mit den ökonomischen Auswirkungen des Beitritts unserer zehn Nachbarländer noch einmal präzise auseinanderzusetzen. Als EU-Kommissar für Außenhandel, der die Hälfte seiner Zeit außerhalb Europas verbringt, möchte ich hierzu gerne meine Perspektive in Ihre Diskussionen einbringen. Und ich bitte um Ihr Verständnis dafür, dass ich dies auf Englisch tun werde.

The European enlargement which will occur the 1st of May is an extraordinary achievement, and arguably Europe's most important ever. It is geopolitical in scale. In business speak, we are about to "merge" our fifteen existing member states with ten countries to our East and South. This enlargement will bring huge benefits in political terms - promoting peace, stability and democracy across a wider geographical area, expanding the EU's ideals of freedom, tolerance, plurality and diversity.

And, of course, the importance of enlargement should not be underestimated in economic terms. Three figures about enlargement are enough to allow us to assess the challenges: we will add 20% more people, two thirds more Member States and 5% of GDP. Enlargement implies the incorporation of economies with very different levels of development and economic structures and this against the backdrop of a complete system transformation in the countries concerned. Diversity in the EU will grow, no doubt: for instance, the share of the public sector and of agriculture in GDP is on average significantly higher in the acceding countries than in current EU Member States. The industry in the new member countries is in general more specialised in labour intensive sectors than the EU's. As a consequence, the industrial structure of the incoming countries is to a large extent complementary to the structures within the current EU. Substantial differences exist, though, with respect to such issues as technology, productivity, and capital stocks. Moreover, income disparities within the EU will increase due to enlargement. Obviously, reducing the significant disparities in wealth and development between old and new Member States will require major efforts. We have an historic duty of solidarity here. But we are not starting from scratch: we can build on a serious, thorough preparatory effort in the "pre-accession phase", including substantial economic upgrading and institutional capacity building.

But if the challenges are impressive, so are the potential gains: this "merger" will create a market of more than 450 million consumers the biggest market in the world, bigger than the US, Mexico and Canada combined, accounting for roughly 20% of world trade and contributing to more than a quarter of the world's gross domestic product. So I would like to encourage you to take a serious look at how to exploit this potential.

But let us be clear: the 1st of May will not be a "big bang" in terms of integration between the old and new Member States. In fact, over the last 15 years, we have already achieved a remarkably high level of interdependence between our economies. Trade and investment have been the two main channels of this integration.

In fact, from a trade perspective, enlargement has already taken place in the 1990s: we opened trade when we signed the Europe Agreements. Today, over 95% of our trade in industrial and agricultural products with the future member states are already free.

The Europe Agreements also contain steps towards the free movement of services and capital, as well as commitments of our partners to align their economic legislation on that of the EU. Today, 70% of the acceding countries' trade takes place with the EU (a similar percentage of trade, incidentally, is carried out between the existing EU15 Member states). The massive inflow of Foreign Direct Investment has been the other important driving force of economic integration: From 1989 onwards, that is, since the beginning of the transformation process, the future Member States have attracted more than 150 billion € in FDI. Two thirds of net capital inflows to the accession countries originated from present EU Member States. So when people argue that enlargement will lead to a delocalisation of production from current EU-Member States to the incoming countries, it's worth pointing out we have crossed this bridge in terms of trade and investment, as economic operators have already anticipated enlargement since the early 1990s. Indeed, it is if anything the incoming countries themselves that are beginning to worry about delocalisation from their countries further east, to Russia or Ukraine or indeed China or India. Which goes to show that the increased external competition EU Member States are all facing is less a question of enlargement and more one of increased opportunities and challenges resulting from the end of the Cold war and the ensuing further wave of globalisation, which have opened up, politically and economically, countries hitherto closed. Challenges and opportunities we will only be able to address by innovating, leading to better competitiveness. And I will come back to this point.

The EU-25 will, because of its sheer size, obviously be a big elephant in the global economy. But how do we translate size into influence how can we ensure that this bigger EU will be a shaping factor of globalisation? Because with size comes responsibility. What does it take to enable Europe to exercise this responsibility, both vis-à-vis its own citizens and vis-à-vis our economic partners outside the EU?

First of all, we urgently need to address Europe's twin deficits in growth and competitiveness. Over the past 15 years, the process of European economic integration has seen significant successes: the Single Market Programme was a major step forward, even if a number of problems of coverage and implementation persist (and I will come back to those in a minute); the remit of competition policy was extended to include merger control; the Uruguay Round of trade negotiations, as well as the World Trade Organisation it has set up, gave a significant boost to global trade and investment. Even more remarkable was of course the smooth introduction of the European Monetary Union and the pooling of Member states' sovereignty in the European Central Bank. Yes, I know you want to hear about the Stability and Growth Pact, but I'll come back to that in a moment.

The economic performance of the EU, however, has been more varied: While macroeconomic stability has considerably improved and a strong emphasis on regional convergence and solidarity has been preserved, the EU economic system has failed to deliver a satisfactory growth performance. Our long term economic indicators are at best mixed. An ageing population -and a rather moderate effort to tackle this through public finance reform, to say the least. Insufficient R&D spending my own country of origin is experiencing a full fledged crisis over this at the moment and its impact on innovation further down the industrial chain.

And we not only still face unacceptably high levels of unemployment, but also growing income inequalities, as the little growth we have is inadequately shared. We simply need a bigger pie, with more growth steaming inside.

In short, Europe needs to grow not only in size but also in dynamism. Weight is necessary in today's globalised world. But energy is even more important. A more dynamic European Union will help the integration of new Member States and fast growing new members will in turn contribute to more dynamism.

In turn, the EU will also become a better partner for other European and Mediterranean neighbouring countries, and for the global system. Faster growth is also paramount for the sustainability of the European model, which puts a high premium on cohesion and solidarity. Sustainability is under threat from rapid developments in demography, technology and globalisation, all of which increase the demand for social protection and security. Fortunately, globalisation and technology, like enlargement, should also lead to faster growth. A potential we will only realise, however, if we make the right political choices.

That may mean facing up to some unpalatable truths. Take the so-called Lisbon agenda. In March 2000, the Heads of State and Government of the 15 launched a comprehensive strategy of structural reform and set the objective for the EU to become "the most competitive and dynamic knowledge-based economy in the world". Today, we should recognise that the Lisbon agenda, with its focus on labour, product and financial market reforms, has not delivered. We have simply talked up the Lisbon agenda, but we have neither delivered the resources, nor set the political focus and ambition for these vital targets to be reached. As is sometimes the case in politics, we have oversold expectations. We have underinvested in results. We need a new Lisbon, and I hope this will be high on the agenda of the next Commission after the June elections for the European parliament. Because the challenge is an enormous one: Europe needs to transform into an innovation-based economy. We have built a system around the assimilation of existing technologies, mass production generating economies of scale and an industrial structure dominated by large companies, with stable markets and long-term employment patterns. This system no longer delivers in today's globalised world. What is needed now is less vertically integrated firms, greater mobility within and across firms, more training and retraining, greater availability of external finance, in particular equity finance, and more investment in both higher education and in Research & Development. And we need to modernise the way our European welfare state works, so that it can provide the collective security that the individual needs in order to be able to accept and adapt to change. In particular to look again at the important concept of "life-long learning" and find a way of giving it real meaning. And we need another debate on industrial policy in Europe: a debate the Commission has launched yesterday with the adoption of a policy paper: I hope that this will be debated in Germany, without any ideaological blindfolds, and involving the social partners.

Of course, all this is quite familiar: many of these points have been made in the context of the Agenda 2010, the German government's reform programme. But the key point I want to make today is: the challenges are similar across Europe, and we need common answers to common problems. The EU economy will only grow if Germany grows but likewise, Germany needs Europe in order to tackle its problems. And I'm not just talking about the well-known fact that Germany needs the rest of the EU as an outlet for its industrial production.

I am thinking instead of Europe's contribution to creating a stable, predictable business environment that will help all Member States to prosper. Consider the following list of issues. Enlargement. The ongoing global round of trade negotiations. The buffer role of the euro against exchange rate fluctuations (as Germany trades largely within the euro zone, it is less exposed to variations of the dollar exchange rate than at the time of the D-Mark). Crossborder infrastructure investment. Completing (for real) the Internal Market, for instance in services where the potential is still largely untapped.

In my view, the enlarged EU will have to refocus its instruments and policies resolutely on these objectives. Perhaps the real deficit concerns economic policy coordination. I am convinced this is costing us something in terms of growth. We need two instruments here.

First, a rules-based framework for fiscal policy surveillance and coordination. Hence the Commission decision to take the Member States to Court over their failure to respect the Treaty provisions last November. Is it enough to re-establish the Growth and Stability Pact as such tomorrow? I don't think so. In terms of stability, it is at best a "speed limit" for deficit building, and the experience has shown that this is not enough. In terms of growth, it needs to be reconnected with the challenges of the Lisbon agenda which I have just mentioned.

What we need is a set of behavioural benchmarks for economic policy making. This implies a positive mechanism for coordinating policies. In a strange way, these mechanisms existed before the introduction of the euro. The external constraint of the currency markets and the convergence criteria for EMU were a proxy for them. This has since disappeared, together, incidentally, with the power of finance ministers within domestic political settings!

What new avenues should we be exploring? I see three priorities:

First, more coordination. Including upstream, in the preparation of national budgets, through a common framework;

Second, more scope for our surveillance effort. We need to look at public debt much more than at deficits;

Third, more flexibility which does not and must not mean more laxity. It means accepting differentiated strategies on a country by country basis, depending on their circumstances the mix between consumption and investment, but perhaps also the tax basis on the revenue side and the efforts they have made towards long term sustainability of public finances.

But we all know that in the age of globalisation, preserving our European social model, our own specific combination of market economy, welfare state and democracy, requires action not only internally, but also at the global level, as the challenges of combining competition and co-operation, autonomy and solidarity are no longer confined to the national or even regional level, but present themselves on a global scale. So we need to assure the ability of a united Europe to regulate globalisation and establish a basis for a new North-South partnership. In this area, through the experience of the internal market, we are experiencing in Europe an effective laboratory for harnessing globalisation.

But again, our record in punching our weight internationally has been mixed so far. I won't even mention the crisis in, and over, Iraq, where Europe simply didn't exist. Or the recent crisis in the Middle East. I'll just stick to the economic field. Here, as in other areas, we have been most effective when we have been united and able to speak with a single voice, or rather a single mouth.

This is the case in trade policy (and no credit to me, I have inherited a good system). In international trade negotiations, we have, since the beginning of European integration, assembled all the ingredients of success:

- Ingredient no. 1: a clear strategy, based on a balance of market opening and global rule-making, and a priority accorded to the multilateral dimension, completed with bilateral agreements aiming at higher standards and geared towards fostering regional integration. In this context, let me try to inject a little overdue balance into the recent debate around our current negotiations with the south-American Mercosur trade block. This negotiation is a perfect example of this strategy; characterized by a high level of ambition both in market opening and rules (eg on services, investment, intellectual property) and a major ambition to build the biggest free trade area between two regional entities. It does not, must not, will not undermine our commitment to the WTO trade round.

- Ingredient no. 2: a fairly straightforward and transparent policy process, where it is the European Commission that negotiates, on the basis of a mandate defined by the Member States, on behalf of the EU-25 (yes, this is already effectively the case, as the 10 newcomers have taken part in trade policy-making since April 2003);

- Ingredient number three: a single face or a single "phone number" for Europe, to take up the famous Kissinger quote.

All this has allowed us to become a heavy weight in the international trade system, on a par with the US. I am confident that enlargement will strengthen our weight: our new Member states share this vision and they are strong supporters of our institutional set-up.

Unfortunately, the same is not true for the international financial institutions, where member states hold sway and rarely act as an entity, partly due to the system of mixed constituencies, a situation that will not improve with enlargement. Not even the arrival of the euro has so far led to greater EU coherence or to Member States demanding a single European voice in the international financial institutions. This is, however, in my view an indispensable development if we want the euro to play its full role as an international currency.

What remains to be invented is a common vision of the world and the manner in which we can have a real influence on its evolution. With regard to this objective, the impact of enlargement remains an uncertainty. Will the new members push for the EU to punch its weight at the international level? What will be the sensitivity of their citizens to the effects of globalisation? Will the absence of a classical colonial past shape their attitudes vis-à-vis developing countries in a way distinct from older EU Member States? Will that result in a greater priority on relations with neighbourhood regions? Machrek and Maghreb, Russia, the Middle East? These remain open questions.

To sum up, and I am conscious of having covered a lot of ground in a fairly short period of time, the key set of strategic objectives for the EU need to be growth, solidarity (which could the European brand of security) , and global governance, if we want to turn the EU-25 into a real economic power. And the key opportunity to foster a common understanding about Europe's strategic objectives is the debate the Commission has just opened on the next financial perspectives, Europe's version of "mittelfristige Finanzplanung". For this vital exercise of long term budget planning is of course really about priorities, not who pays what. Or at least, not first about who pays what. We haven't had a really good European level discussion on priorities at all since the last such exercise, Agenda 2000, in other words in the late 1990s. The enlargement process could have been such an occasion, or indeed the Constitutional Convention. But neither turned out that way. So the debate on Financial Perspectives must be that discussion. It must also be about closing the gap between ambitious commitments made at the highest political level and the capability of the EU to deliver on these promises. I am afraid that limiting EU expenditure to just 1% of Member States Gross National Income will not allow us to close that delivery gap. A lot of the expenditure is already cast in stone: agriculture spending has been fixed by EU governments at a high level until 2013. We are committed to addressing the differences in wealth and development between old and new members and to supporting the newcomers in catching up. With the European economy in decline, we need to ensure that projects with a cross-border impact materialise. Real European value added can be achieved by pooling research efforts, by building crucial trans-European infrastructure. There is consensus that we need to further develop the area of freedom, security and justice as well as external policies such as development policies or the stabilisation of our neighbourhood.

A fine list, you may say (or I hope you will say). But I recognise, and you need to recognise, that the good things in European policy, like in life generally, don't come for free. During the upcoming debate, we will have to match ambitions and means. This will not be easy. But on the basis of past experience, I am confident we can get there. But only that will make the EU-25 the success story that all of us in Europe need, now.

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• The New European Union of 25 (6/5/2003)