Speech Munich European Conference Madam Christine Lagarde, Managing Director, International Monetary Fund Munich, Germany

A Commitment to Shared Prosperity: The Next Chapter of Unity in Europe

Keynote Speech — Munich European Conference 
Christine Lagarde, Managing Director, International Monetary Fund 
Munich, Germany

February 14, 2019

As Prepared for Delivery

Introduction

Distinguished guests, ladies and gentlemen, good evening  Guten Abend!

Thank you, Dr.Waigel, for your generous introduction and thank you to everyone at the Munich European Board for this invitation. It is an honour to be here tonight.

I would be remiss if I did not wish all of you a happy Valentine’s Day. I hope that your idea of a romantic evening is filled with a conversation on the benefits of economic convergence. Because that is what you will get this evening.

There is another milestone we should celebrate tonight. As you all know, 2019 marks the 30th anniversary of the fall of the Berlin Wall. I wanted to ask a question about this anniversary. Was the fall of the Berlin Wall a beginning, an end, or middle? Think about it.

What is the beginning? Beginnings are full of optimism, the promise of achieving something new. A time when people are committed to making sure the future is brighter than the past. This certainly could describe the feeling when the wall fell.

The ending, what is an ending? The moment when your work hopefully succeeds. Endings can be a time when an idea becomes a reality. This also seemingly describes the fall of the Berlin Wall.

But what about the middle? The middle involves effort, hard work, and sacrifice. It means finding common ground where none seems to exist. Well, here too, is perhaps a good description of what the fall of the Berlin Wall meant to Europe, and the world.

So, keep that question in mind — and when I conclude tonight I hope we might have a better sense of the answer.

I want to begin with the theme of this year’s conference — Europe Works — because, despite well-known difficulties, Europe has worked, and worked quite well. And it is important we recognize this success. History matters. You do not plant cut flowers.

And then I want to move on and look at the next chapter of Europe’s story. The challenges the European Union faces today require a commitment to the spirit of multilateralism and unity that created the EU in the first place. That is particularly true of the area I want to focus on — restarting economic convergence.

  1. Economic and Political Success of the European Union

First, a little history. Imagine it is 1949. Europe’s economy is desperately trying to recover from the war. Millions are still unemployed. Hundreds of thousands of refugees languish in displaced persons’ camps. In this city, many of the streets are still strewn with rubble and destruction.

Now, fast forward seventy years. The European Union, representing over half a billion citizens, represents the second largest economy in the world. It is also the largest trading bloc in the world. In fact, if you include the countries with which the EU has free trade agreements —including the new ones signed with Canada and Japan — the trading block now accounts for over one-third of global GDP.

And tomorrow, this city will play host to world leaders gathering to collaborate on international security.

How did we get here? Through courage and creativity.

The promise of the EU has always been both economic and political. The founders believed that the free flow of goods, services, investment, and labour would lead to interconnected economies and in turn widely shared prosperity and peace.

The promise has largely delivered. From the forties and fifties when the Marshall Plan helped rebuild a war-torn continent, to the transition from dictatorships to democracies in southern Europe in the seventies, to the fall of the iron curtain and the economic transformation of eastern Europe in the nineties.

Two of the most historic steps in realizing the vision of a united Europe were the creation of the single market and the Euro. Here, Germany played a unique and defining role.

As Dr Waigel famously said, “Germany brought the Deutsche Mark into Europe, and in so doing brought the Euro into being.”

So our history has a common theme: The marriage of political and economic fortunes is an incredibly difficult but worthwhile endeavour. And one that is as difficult to build as it is to disentangle. And it can only work when all of Europe is successful. This requires economic convergence.

What does this word mean precisely, convergence?

Put simply, it means poorer countries’ incomes catch up to their wealthier neighbours.

Think about the last twenty years.

During this period, the promise of EU membership for former communist countries led to market-driven reforms and institution building that unleashed their economic potential.

From 1993 to 2017, real income per person nearly doubled in the Czech Republic, Hungary, and Slovenia.

It increased by more than two and a half times in the Slovak Republic, Estonia, and Poland.

And it more than tripled in Latvia and Lithuania.

The IMF was proud to play a part in this transition. In fact, we created a new lending instrument specifically designed to address the needs of the former communist countries.

Success breeds success.

The reforms new member states implemented in order to join the EU made them an attractive place for the original EU members to invest.

As a result, Europe’s economies have become deeply integrated, with highly sophisticated European supply chains.

The dedication of the new member states has paid dividends for all EU members.

From the mid-1990s to 2007 new member states’ real income per person doubled, and the original EU members saw a 42 per cent increase.

But the Global Financial Crisis put a pause on Europe’s progress.

Convergence took a back seat to survival. The European Union — rightly — united to save itself.

But the need for convergence did not go away. And now we must focus on it once more.

Why? Because Europe is once again facing a defining moment.

  1. The New Challenges to European Unity

Over the last few years, populist movements have called into question the fundamental value of integration.

Migration from the Middle East and North Africa has sparked concerns over cultural identity and security.

The rules-based global trading order — a key source of global growth over the past 60 years — is facing unprecedented pressure.

And the continent’s next generation which is still suffering from the econo...— is searching for quality jobs and a stable future. 1 in 4 young people in the EU are now at risk of being in poverty.

Solving these challenges requires a renewed commitment to shared prosperity in Europe.

There have been already signs of renewed momentum.

Daily, the EU is reminding the world that it proudly supports free and fair trade defends multilateralism and seeks ways to reduce the inequality fuelling so much of our discord.

It brings to mind the words of Chancellor Kohl who said, “We all need Europe, not just those of us in Europe.”

Right now, in a world that is questioning the value of international cooperation, the world needs Europe more than ever.

But first, Europe must succeed at home.

For that to happen, Europe needs to rekindle economic converge where it has faltered.

In contrast to the continued convergence of central and eastern European member states, convergence between southern and northern Euro Area countries started to stall over the last twenty years. Since the crisis, the situation has gotten worse.

Between 2008 and 2017, for the five southern Euro Area countries hit hardest by the crisis, average annual growth in real income per person was actually negative.

So our goal should be clear: Restarting convergence and ensuring the fruits of economic growth are shared broadly across the EU. This will help restore faith in the European project.

IMF research has shown that product and labour market reforms can have a significant impact on productivity, especially in poorer countries.

We know it will not be easy. But just as with every difficult undertaking since the war, the hard work will help deliver long-lasting peace and prosperity.

III. Restarting Convergence through Structural Transformation

There are three areas of reform I want to highlight this evening. The EU can play a supporting role in each but by design, it can only assist national reform efforts.

We can learn from the former EU Commission President Jacques Delors who said: “The European model is in danger if we obliterate the principle of personal responsibility.”

Each nation needs to put its own house in order to strengthen the entire European community.

What kinds of reforms are needed?

Labour Markets

First, labour markets. In many southern Euro Area countries, unemployment is far too high, especially for young people.

In Italy, Greece, and Spain, overall unemployment is between 10 and 20 per cent. But for young people, it is over 30 per cent.

Compare that to northern Euro Area countries like Germany and the Netherlands, where overall unemployment is below 4 per cent and youth unemployment less than 7 per cent.

While lack of investment in education and skills training is a critical f...there is also the issue of employment flexibility. Too many companies face undue burdens when it comes to contracting, hiring, and firing.

Addressing this challenge can help unlock job prospects for all citizens — especially young people trying to break in to the workforce or advance their careers.

In Portugal, for example, recent labour market reforms gave businesses greater flexibility. As a result, companies are now more willing to take a chance on new hires and offer them permanent contracts instead of temporary ones.

The reforms are working. Most of the strong job growth in Portugal over the last few years is driven by jobs featuring permanent contracts.

Business Climate

The second important area is making the business climate more attractive to investors.

Here again, we have seen progress in Portugal, where in the mid-2000s it used to take almost a month to start a business. Now it takes less than five days.

There is much more we can do.

In many other southern Euro Area countries, there is ample room to reduce barriers to competition in areas such as professional services and the retail sector.

One stumbling block for investment, especially cross-border investment, is how costly and time-consuming it is for a company to go through the bankruptcy process.

The standards vary widely in Europe today. Resolving corporate insolvency in Greece takes about nine times longer than in Ireland, for example.

Modernizing and harmonizing insolvency regimes will help increase investment and create new jobs.

Investing in Innovation

My third and final area is spending on innovation. Under-investment in innovation is a problem across southern Euro Area countries.

Research and development spending in Italy, Portugal, and Spain averaged just over 1 per cent of GDP between 2000 to 2014.

That amounts to less than half the level of R &D spending in countries like Germany and France.

Boosting innovation will require a variety of reforms, including facilitating venture capital financing and improving public-private sector cooperation on R&D.

But the impacts can be significant. For example, in Italy, improving a firm's access to financing for innovation and expanding public support for R&D could raise GDP by 5 per cent over the long run. This would translate into an increase of nearly 2,000 Euros per year in the average workers’ real income.                                                             

So, these are three key areas where countries themselves can make progress: labour markets, business climate, and investing in innovation. What about the EU’s role?

The EU can help countries implement reforms through technical assistance and advice. They can also devote more resources to supporting reforms and innovation in the next EU budget.

Perhaps most importantly, the EU can continue to foster economic cooperation between countries, while ensuring no new barriers are built between them.

Just as before, success will breed success.

By building bonds of trust between members states the EU can accelerate progress on a whole range of politically difficult undertakings. From a better European economic architecture to meeting the crucial commitments of the Paris climate accord.

This is the way we can generate a new opportunity for all of Europe’s citizens and in the process secure stability for the next generation.

Conclusion

So, let us return to my original question. Was the fall of the Berlin Wall a beginning, middle, or an end?

I would argue it was all three. It was a time of new hope, a culmination of thirty years of work, and it was also a challenge to rebuild.

The same is true of this moment in Europe.

It is a time that requires courage and creativity.

Tonight, I have quoted from the French and the Germans. In the spirit of unity, let me close with a quote from the British.

It was Churchill, who said, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

If the European Union draws on its roots and finds a way forward through shared prosperity, I believe we will look back at 2019 as the start of an optimistic new chapter in the European story.

Thank you very much.

 

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