Speech at the World Economic Forum Annual Meeting

ANGELA MERKEL

Mr Schwab,
Excellencies,
Ladies and gentlemen,

I’m delighted to be back here again in Davos. The World Economic Forum is, of course, as great a magnet as ever. It offers not only interesting insights and outlooks, but also interesting panoramas – of mountains, obviously, but also as regards current economic developments. We find here food for thought, trends, succinct analyses – in these very turbulent times that can all be of great value.

In almost all industrialized countries the past year has been one of relatively modest growth. Overall the global economy grew in 2012 by just three per cent. Apart from the crisis years of 2008 and 2009, this is the lowest figure for a decade. I’m well aware, of course, that the situation in the euro area has been a factor in this admittedly modest global growth. This had to do first and foremost with the question of confidence, with the prevailing climate of nervousness. But what’s also crucial here is how strong the political will is to keep the euro area together, how open to reform its members are, how willing to show solidarity. Over the past twelve months I believe we’ve made significant progress on that score.

The motto of this year’s meeting is “resilient dynamism”. And it’s certainly an excellent choice. Yet how, we may ask, is this to be achieved? Part of the answer might lie in concepts of sustainability and development. As I see it, that’s what we should be aiming for. Not some kind of breakneck dynamism at all costs but a dynamism that’s capable of withstanding shocks. That’s why I find this motto so apt.

We in Europe intend – and this has also been agreed in the European Union – to develop our economic and monetary union into a real stability union. This is anything but a quick-fix emergency operation. It’s a strategy for the long term – a strategy that combines structural reforms designed to enhance competitiveness with the consolidation of public finances. Let me emphasize here once again that for me these two things very much belong together. When it comes to restoring confidence, consolidation and growth are basically two sides of one and the same coin.

The situation we have right now is one where time is clearly a definite factor. We’ve made headway on consolidating public finances – since 2009 new borrowing in the euro area has roughly halved – and a whole series of structural reforms are now under way. We realize, however, that structural reforms and budget consolidation need time to work – their impact won’t be felt the moment such measures are taken. That’s something we learned from our own experience in Germany – the results of the action we took only started to show two, three or four years later.

So what’s crucial now is to factor in this time-lag, so to speak, and stop the political situation escalating and creating new instabilities. This means that when unemployment in Spain, Portugal or Greece, for example, is running at over 50% or even 60% perhaps, in the case of young people, our most important task is to convince people that they do have a future and if necessary to introduce temporary schemes that will keep them going until structural reforms begin to really kick in and unemployment falls. That has to be our main priority for the near future.

I’d like to touch briefly on this whole debate that’s under way here, too, as to when to implement structural reforms and when to reduce public spending. When’s the best time, economically speaking, for such measures. In the view of many economic experts, it’s clearly easier to cut spending and introduce structural reforms when the overall economic situation is reasonably good, when growth is not a worry. Experience teaches, however, that often structural reforms are tackled only when the political pressure to act becomes irresistible. In Germany, for example, it wasn’t until unemployment reached the 5-million mark that policy-makers were willing to take decisive action. So as I see it, the reality of the difficult situation Europe is now in means that we must take action now on the structural reforms needed to ensure a brighter future.

Today we have new instruments at our disposal – European instruments, instruments of practical solidarity. For one thing, there’s the European Stability Mechanism or ESM. Five years ago the idea of establishing such a permanent mechanism to protect the euro would have been inconceivable. It’s now up and running. That sends a very positive message. To enhance fiscal solidity, for another thing, we’ve introduced the so-called fiscal compact. It, too, entered into force at the beginning of the year.

In the euro area we now have better and stronger instruments for budget management. We have solidarity mechanisms. Where banking supervision is concerned, we’ve made considerable progress. From 2014 onwards a new banking supervision system will be operating in the euro area, in which other European countries may participate if they so wish. What we are still lacking, however – and this is something we must work on in 2013 – is an answer to how, throughout the common monetary union, we can ensure greater coherence over the years ahead in the matter of competitiveness. By coherence here I don’t mean some kind of European median score. Our yardstick should be whether our products can compete in global markets. Obviously euro area countries can grow only if their products sell around the world. That’s why the issue of competitiveness is so important.

What I’m thinking of here – and this is something we’re currently discussing in the European Union – is a compact for competitiveness along the lines of the fiscal compact. The way this could work would be that countries would conclude agreements or treaties with the European Commission committing them to become more competitive in areas where they’re lagging behind. This could often concern things like non-wage labour costs, unit labour costs, research spending, infrastructure and the efficiency of public administration – things that fall within the competence of the European Union member states. So of course such treaties would have to be ratified by the national parliaments. And these treaties would need to be binding, too, so we can see to what extent competitiveness in the euro area is really improving.

Boosting labour mobility in the internal market is another issue we must tackle. There are evidently language barriers and barriers to the transferability of social security systems. So what’s needed here is to use the opportunities afforded by the common internal market to develop also a common labour market.

And there’s yet a third thing we need to do. We need to ask ourselves what must be done to make the European internal market a truly major player in global markets. That means we mustn’t take a purely insider’s view of the internal market. What’s crucial above all is to ensure that we in Europe have companies which are major players internationally. If the European Union and the European Commission are to become still better prepared for the global challenges ahead, there will have to be some changes in perception in this area, too.

Overall, let me emphasize – and this is a point my colleague David Cameron has also been making today – competitiveness is a key factor for Europe’s future prosperity. That’s why these days we talk not just about whether investors thinking of investing in government bonds or European companies have the confidence to do so and the assurance they’re onto a good thing. The plain fact is that from a European standpoint we must aim to be so competitive that we not only stay prosperous but become even more prosperous. That’s been the key issue in recent years – and will remain so in the years ahead. Clearly we’re not yet at the stage where we could say the danger is over. But a great deal has certainly changed in Europe.

One of the great drivers of growth – from a global as well as a European perspective – is free trade. Protectionist leanings are rife, as Pascal Lamy constantly reminds us at G20 meetings. We must do everything possible to keep them under control. The WTO’s Doha Round has not gone as well as we’d hoped. So increasing emphasis will also have to be put on bilateral free trade agreements. In this whole effort Germany will be very proactive in pushing for more free trade agreements.

We now have a mandate for drawing up a free trade agreement with Japan. We’re on the point of concluding the negotiations with Canada. And it’s vital that we as the European Union also conclude such an agreement with the ASEAN countries. Despite decades-long failed attempts, we’re also keen to negotiate a free trade agreement with the United States. Often the biggest obstacle on both sides has been the issue of agricultural exports. But I think an agreement can and must be reached. It would be good for everyone.

Currently the EU has around 7% of the world population. When economic growth picks up again, Europe may account for almost 25% of global GDP. Yet Europe also accounts for nearly 50% of global social spending. That clearly means our prosperity depends on us being innovative and aspiring to be as good as the best.

So let me comment briefly on a point that’s often made about Germany. Right now growth in Germany is driven primarily by domestic demand. We’ve been doing everything we can to increase it. But when we’re criticized on account of the imbalances that still exist, it’s important to note the reason for these imbalances. Take unit labour costs in Europe: if they were to converge exactly at midpoint on the spectrum, the average of all European countries, Europe as a whole would no longer be competitive and Germany’s export industry would be finished. That can’t be the goal we’re striving for. So up to a point, obviously, current account surpluses show that countries are scoring well on competitiveness. And that’s something it would be pure folly to put at risk.

The last issue I want to touch on is financial market regulation. As we heard today from David Cameron – and the German and British finance ministers have already launched a corresponding initiative – the G8 will this year be focusing on tax evasion and tax fraud. In my view, this is a very important issue. At the G20 summit in Russia I believe regulation of the shadow banking system, too, must be a top priority. The capital requirements for banks are now very much higher – thanks to Basel III. We need to watch out that we don’t end up with a situation where lending capacity is actually below what’s required to generate economic growth. I can only hope that the United States will introduce Basel III as well. Otherwise it will be yet another case of global rules not being implemented by everyone.

More rigorous regulation as regards banks’ capital requirements, however, has driven some business into the so-called shadow banking system. Let me remind you once more that, in 2009, shortly after the international financial crisis broke out, we all agreed that in the finance sector every product, player and world region should be subject to regulation. We’re still a very long way from that goal. I can only appeal to those active especially in the real economy to support us in our efforts to change this. For if we allow another bubble like that to develop and once again plunge the world into a deep economic crisis, our democracies will be very hard put to remedy the situation, since people will no longer believe the economy exists to serve their needs.

In dealing with the crisis, we in Germany were greatly helped by the fact that we could rely on the two sides of industry to take responsibility, true to the spirit of the “social market economy”, as we call it. But they won’t forgive us if we make the same mistakes yet again. So in this matter of financial market regulation I still see gaping holes that need to be closed.

I fully share the views expressed yesterday and today in this forum that the central banks, too, cannot solve the structural problems that political decisions have caused. They can build bridges, of course. The European Central Bank has helped to do just that. But it’s also made clear that only those who carry out structural reforms and meet the required conditions can expect support. So the key challenge remains political in nature. This is to create an economic environment in Europe that is investment-friendly and which generates new investment, growth and jobs that will also be competitive over the long term.

Thank you for your attention.