Davos World Economic Forum Annual Meeting


Professor Schwab,
Ladies and gentlemen,

I’m delighted to be back in Davos following my last visit two years ago. The motto of this year’s event is «Shared Norms for the New Reality”. I believe one key feature of this new reality is that we’ve learned that we are globally interconnected, that we are dependent and reliant on each other. Anyone who didn’t believe that until recently will have been finally convinced by the collapse of Lehman Brothers and the aftermath. For anyone who had forgotten the interconnections and international dependencies that exist today can now see that this was the only way to act. It then became apparent that this must not be allowed to happen again.

The last two years have therefore shown something very positive, something very reassuring, namely that political leaders were able to take action. The world has shown that it can deal with a collapse, a global international financial and economic crisis. We have rescued banks, we have launched stimulus packages, we conducted the first G20 meeting on this issue in Washington, which was followed by others, and we have made considerable progress in the sphere of regulation. All of this shows that political leaders around the world were capable of taking action. We can say, therefore, that we have been able to prevent the worst, the complete collapse of the global economy.

But, of course, the question now is: have we really learned from this? Can we say that we will avert future crises? Can we say that we already have the right mechanisms and structures in place to ensure sustainable and balanced growth on a global and durable basis? I believe we have made a start but that, all in all, this is not enough. We have to do more.

Now that the fallout of the crisis is no longer so visible, there is of course a danger that the momentum and impetus in the G20 will slow down somewhat. I’m therefore convinced that our task in the period ahead will be to counter this very development, for we still have a tremendous amount of work to do. Only when we can answer «yes” to the questions I’ve just asked – can we rule out a repetition of such a crisis and how can we generate a reasonable level of growth throughout the world? – will we be on the right track.

What do we need? On the one hand, we need even more regulation. We’ve decided that in the finance sector every product, player and world region should be subject to regulation. We haven’t yet found an internationally coordinated response to the question: what happens if a major systematically relevant financial institute collapses, and how do we prevent taxpayers ultimately having to bear the burden?

However, an even more important question is: what have we done to ensure sustainable growth really does happen? In this connection, this year’s French G20 Presidency has a key role to play – during the transition from a period of crisis to a time in which the world has to learn to work together better and on a more durable basis, not only during a crisis but at all times. I’m firmly convinced that the agenda put forward by the French President sets precisely the right priorities. In South Korea, we adopted a Framework for Growth – sustainable, strong and balanced growth, that is.

We have to take a look at various key aspects in order to implement this agenda. The first aspect are the questions relating to the monetary system. I believe we have to understand that exchange rates must always reflect the macroeconomic fundamentals of the countries involved, that is to say that the exchange rates depend on the particular economic situation of any given country. The monetary system must be robust enough to prevent financial excesses and destabilizing movements of capital. It goes without saying that we cannot allow pronounced imbalances to develop in the world. Germany is always aware of this. However, there will always be imbalances when the competitiveness of countries is very different. One of our tasks, therefore, is to harmonize competitiveness around the world or to allow exchange rates to reflect economic fundamentals. Germany gladly accepted the task of joining together with Mexico in a working group to look at a future global monetary system. This will require patience. I’ve no doubt that this problem won’t be solved in a year. However, we have to define the direction we want to take. Germany is ready and willing to shoulder responsibility.

Second. Perhaps the greatest concern in the wake of the crisis are the signs of protectionism. Free trade is perhaps the easiest way to really boost growth around the world, and it’s also the fairest way. That’s why the conclusion of the Doha Round is of such incredibly great significance. We’ll talk about that with David Cameron after this event. Britain and Germany have joined forces with Turkey and India to launch an initiative and have requested experts – Mr Sutherland and Professor Bhagwati – to look at what still has to be done. With regard to the conclusion of the Doha Round, we are just a few metres from the finishing line. However, we’ve been working towards this goal for the last ten years. If it’s not possible to reach it this year – I say this in an apodictic way – then there will again be an extended period during which nothing happens. However, free trade is one of the basic prerequisites for good and strong growth worldwide. This will now require a considerable political effort. Everyone will have to compromise to a certain extent but it will be worthwhile for us all – that’s the good news.

Third. We have to take a look at speculation with raw materials. On the one hand, this is about the volatility of prices for raw materials which is both dangerous for those who sell raw materials and for those who buy them. But this is about more: it’s about transparency in the exploitation of raw materials and it’s about fair access to raw materials. There have been very different discussions on this around the world; the best example are almost certainly the debates on rare earths. We really have to take a close look at this issue so that we can make growth predictable and sustainable here, too.

These, therefore, are three points on the agenda for global growth: currency, trade, raw materials. These are the global issues which we can discuss with each other within the G20 framework. What’s more, every region has, of course, to do its own homework and live up to its responsibility.

That brings me to my own continent, Europe. Europe demonstrated its determination by taking coordinated action to overcome the crisis. We have launched stimulus packages and rescued our bank sector. That required considerable effort. Today we are struggling with the consequence of these efforts, the debt crisis in Europe. I want to expressly point out that there isn’t a euro crisis as such. Rather, this is primarily a debt crisis. The debt crisis was, in some ways, foreseeable, but we have to overcome it.

In Germany – I spoke to you about this two years ago – we decided during the crisis to include a debt brake in our constitution. The goal was and is to ensure that, regardless of which political parties are in government in Germany, sustainable financial policy and stability remain the top priority. This is especially important to Germany because during the next few years we will experience a significant demographic change. The age structure will shift considerably, with the number of older people rising.

We’ve been berated at times and told that we have to contribute towards growth but that it would be a mistake to consolidate too quickly. I’d like to take this opportunity to tell you that we’ve had a very interesting experience during the last two years. In 2009 we experienced a fall in growth of almost five percent; that was unprecedented in the Federal Republic of Germany’s 60 year history. Last year, our economy grew by 3.6 percent which, at first, was clearly down to exports. I’ve always said that in this crisis every country around the world will be dealt a new hand. China and other Asian countries are the winners of this crisis. We, too, have experienced growth thanks to our exports. And yet the interesting thing is that in the second half of 2010, and to a greater extent in 2011, consumer confidence in Germany has returned and demand at home is growing rapidly. To me, this shows that cuts and growth are not necessarily mutually exclusive but, rather, that consumer confidence is a valuable asset when it comes to stimulating domestic demand. We can thus say that in terms of growth, we haven’t suffered any setbacks as a result of making budgetary consolidation a priority on our agenda.

Therefore, the problem facing the eurozone is excessive debt levels. I want to take this opportunity to make it quite clear once more that the euro is our currency. Indeed, the euro is much more than a currency, it is today’s Europe. I’ve often said that if the euro fails, Europe fails. Europe is a peace project, Europe is a political project. As a continent with 500 million people whose countries are competing fairly with other countries with more than a billion inhabitants, today Europe gives us a chance to pool our interests. We will therefore defend the euro – there’s no doubt about that – and actively champion it. We have to ensure its long-term stability.

What matters most now? Solidarity, of course. We demonstrated our solidarity by establishing funds to provide guarantees which will be used to bail out other countries when they find themselves in difficulties. But we have to be realistic. It’s very often said that this is all about speculation. Yes, it’s also about speculation but this speculation is rooted in reality, for we stoke speculation. We have to combat this. The reasons for this speculation lie in the high debt level in some countries, as well as the fact that the markets are not sufficiently confident that these debts will be tackled with the current level of competitiveness, with the current economic performance. I’ve therefore always believed it’s important to remember that solidarity is just one side of the coin: solidarity is crucial, that’s why we’ve demonstrated it, but solidarity has to be coupled with solidity, stability and greater competitiveness in Europe.

This crisis has certainly made one thing perfectly clear – and this applies to the entire European Union – and thus perhaps changed our entire mindset: debt poses the greatest threat to prosperity, to wealth on our continent. That’s why we have to do something about debt. But it has to be something which will also improve competitiveness. That’s why protecting the euro will mean embarking upon new paths. For those members of the European Union which have the euro as their common currency this means introducing something we neglected when we introduced the euro, namely political cooperation and political coordination. All of this cannot be achieved very quickly. Some things will take longer, some will be achieved within a short space of time. But we are determined – and we are cooperating closely with France on this – to set an example in the eurozone, not only in the sphere of debt reduction but also in those spheres which help improve competitiveness, and to coordinate our policies more closely. That’s the lesson we’ve learned.

I cannot name everything we want to do in the coming two months. I’d just like to mention one example: you cannot have a common currency and, at the same time, radically different social security systems. Therefore, in a single currency area we should expect the retirement age and the demographic situation of a country to be linked. I believe the same applies to education and research. I believe we should make doing business as easy as possible in our countries, that we should reduce red tape and that we should say: what matters most are competitive jobs.

The reality is that we in Europe are not yet sufficiently competitive – at least not in all sectors – and that we haven’t sufficiently secured our competitiveness for the future. However, I firmly believe we can do that, for we’ve fulfilled all the prerequisites. However, we shouldn’t be satisfied with the successes in the present situation. We have to harmonize investment ratio with consumption expenditure in our states, move closer together and show those looking to Europe that we are becoming more similar in this respect. Our yardstick should always be the best among us and not the average. For this is not about making Europe more homogeneous. That may be nice but it could bring us all down. That’s not what I want. Rather, Europe must measure itself against global competitiveness. Stronger political coordination in future must be based on this. We have an obligation to do this and will do it.

Of course, we also need a tougher Stability and Growth Pact. Europe has to regain confidence. I ask everyone observing Europe to look at what has happened during the last twelve months. We’ve beefed up the Stability and Growth Pact – now, of course, we have to show that we will comply with it – and we’ve geared it to macroeconomic targets. We’ll now implement all of this step by step, coupled with more coordinated political and economic cooperation. This is where I see our homework. I believe that solidarity and competitiveness are, as it were, two sides of the same coin when it comes to European strength. They belong together. That’s why it was so important to me that those who experience solidarity in Europe have to fulfil certain conditions regarding the tasks they have to perform at home.

Ladies and gentlemen, this is our homework. By doing this homework we as Europeans will make our regional contribution as Europeans towards what we have to do at global level, also in the G20 format. We should always keep in mind who we are doing this for. That’s why I say: when we rescued banks and launched stimulus packages during the crisis, we really were driven by economic factors, that wasn’t simply the impression gained by our citizens. My aim, indeed our aim, should be to remember who policies serve. Our policies serve people at home, they serve everyone in the world. Policymakers must therefore aim to shape globalization – and this is the great opportunity we have following the crisis – to serve people. We should take advantage of market forces which bring us prosperity, but our main priority must be people. We know that’s not possible if we don’t move closer together.

As I said two years ago: we need global responsibility, we need global fora which point out where things have gone wrong. We as nation-states then have to accept what these fora say. That will perhaps be the most difficult learning process – letting others tell us what to do. But this is the only way forward. «Shared Norms” are therefore what we have to achieve together in order to shape the new reality and future for the benefit of the people for whom we are responsible. That is our guiding principle, and I can tell you that it gives us satisfaction.

Thank you very much.