COUNCIL OF Aachen, 1 June 2011 THE EUROPEAN UNION PCE 139/11 THE PRE SIDENT Speech delivered by Mr Herman VAN ROMPUY, President of the European Council at the Charlemagne Prize dinner (or. DE) It is a great joy and honour for me, here today in Aachen, on the eve of the award of the Charlemagne Prize, in the presence of former prizewinners like Simone Veil, Leo Tindemans and Felipe González, to pay tribute to the President of the European Central Bank as designated prizewinner. The award of the Charlemagne prize has long since become an outstanding event: a kind of European Nobel Prize… As you know perhaps, it was endowed as early as 1949. It is therefore older than the European Union and the Communities – which date back to the Schuman Declaration of 1950. The citizens of the city of Aachen brought it into existence shortly after the Second World War. At a time, then, when the European idea was still literally that: an idea. A magnificent idea, born of history and pointing to the future, but not yet anchored in institutions, in a Common Market, a currency, a community of destiny and values. Today the idea has long since become reality. With determination and patience the peoples of Europe have created an area of peace and prosperity – for today's five hundred million inhabitants of the Union. This is an unparalleled success. We have achieved much. Think only of the internal market, of Schengen, or of the common foreign policy. But more than these European milestones, more than all other symbols, it is the euro, our common currency, that embodies this unity. Not least, nine years ago already the people of Aix-la-Chapelle awarded the Charlemagne Prize to the euro itself. P R E S S FOR FURTHER DETAILS: Dirk De Backer - Spokesperson of the President - +32 (0)2 281 9768 - +32 (0)497 59 99 19 Jesús Carmona - Deputy Spokesperson of the President +32 (0)2 281 9548 / 6319 - +32 (0)475 65 32 15 e-mail: [email protected] - internet: http://www.consilium.europa.eu / EN (or. FR) Permit me to switch from German to French, from the language of Goether and our hosts to that of Molière and our prizewinner…! A good many of you have taken part today in the "Karlpreis Europa Forum", a debate on the major challenges for the European Union. The internal challenge: how to safeguard and raise the standard of living for our citizens? The external challenge: how to defend and promote our interests and our values in the world? Two huge questions – but I will avoid repeating anything that sophisticated thinkers may have said before my arrival among you…! I prefer to talk about a third challenge, the challenge of interdependence. This challenge, more than the other two, leads us to the heart of the current crisis; it is also the bread-and-butter concern of the prizewinner – though he might no doubt wish it otherwise! Indeed the great lesson of the crisis that began in 2010, the crisis of the sovereign debt of certain eurozone countries, is interdependence. It had not really been foreseen that a country representing 2,5 percent of the GDP of the eurozone could endanger the financial stability of the whole eurozone – and even further afield! And yet, as many of you can testify, throughout the 1990s, there was debate in Europe on the risks and challenges associated with the transition to a single currency. But the scale of that risk, of "contagion", was not seen. This is also because monetary and financial integration advanced more rapidly than the integration of economic policies and banking supervision. Thanks to the large financial services market, the savings of Europeans are now to be found throughout the Union. The free movement of capital has followed its implacable course, without all the consequences being drawn from it – in terms of supervision especially. The policy has been overtaken by the markets. Market failure and political failure are at the root of the banking crisis, then the sovereign debt crisis. It has unleashed a storm that has shaken us, and which has not yet totally died down. If I now have to say a few words about the action of the European Central Bank in this crisis, I do so willingly but not without a certain hesitation, in view of my function as President of the European Council. Respect for the independence of your institution forms part of my DNA! (Actually, the first job I had after studying economics at Leuven was precisely with the National Bank of Belgium, the equivalent of the Bundesbank!) The European Central Bank has played a central role in managing the crisis: it has reacted very quickly and boldly as regards its own mission. Thus, in the summer of 2007, when the "subprime" saga started in Florida, it was the first to act, immediately making liquid assets available to the banking system. We have managed the banking crisis better than on other continents! Since, the ECB has played a major role in stabilising the financial system of the eurozone, making full use of its instruments to ensure liquidity. Moreover, it has intervened as an exceptional measure on the sovereign debt markets to ensure the proper transmission of monetary policy – a policy criticised by some, above all in Germany. Without entering here into the substance of the issue, I want to stress that those decisions too form part of the independence of the Bank. 2 EN The "balance sheet" of the first twelve years of the ECB is remarkable. First of all, an average inflation since the creation of the euro of just above 2 percent, in line with the objective of price stability. The this regard, the ECB is the true successor to the Bundesbank. Secondly, despite inflation above 2,5 percent in recent months, associated with the rise in commodity prices, inflation forecasts remain solidly anchored around 2 percent. This good mastery of anticipation effects has made it possible to prevent inflation, in similar situations, becoming self-fuelling ("second round effects"), thus ensuring sustainable economic growth. Let us not forget that in western Europe, we have had significant growth only twelve months after the economic crisis – the largest we have seen since the 1930s. And thirdly, an impeccable mastery of communication and management of market expectations. The ECB was the first large world bank to give press conferences after meetings of its Governing Council. On a personal level, I admire the performance! There was a time when a central bank had the reputation of a "grande muette": now it speaks, but with moderation and wisdom. Alas, I cannot say the same of all the protagonists of the eurozone. Thus has the Bank established its credibility in undeniable fashion. The pioneer, viewed with mistrust, has become a pillar of the world monetary system. An excellent illustration of the weight Europe can carry when it speaks with a single voice. At the same time, the political strength of the ECB is, as I see it, that the national Central Banks are an integral part of it, with the 17 national governors meeting every month to collectively take decisions and then explain them in their capitals. By this means, the institution is fully anchored in the national political landscapes. Thus it has acquired credibility among both citizens and markets. And I know that it is not easy to satisfy those two clients at the same time! As a final asset to credit to the account of the ECB, the euro is a stable currency, one may even say a strong currency. Among those who speak of the euro with a certain pity and disdain, there are some who forget that their own currency has depreciated either by 23 percent in four years or by 17 percent in one year. The eurozone has current account stability and is therefore not responsible for the imbalances at the root of the crisis. We have, nonetheless, budgetary problems. Admittedly, the eurozone is not the worst among the developed countries, as is shown by the situation in the United States, Japan, or the United Kingdom. However, we must admit that we had set rules for ourselves and they have not been respected. Some countries have been able to indulge in "free riding", while others have arranged to change the rules, without anyone realising that the behaviour of each is essential for the stability of the whole (interdependence again!) . A factor which is sometimes forgotten, reflation and deficit spending policies that are too ambitious, even reckless in some countries, way beyond the automatic stabilisers, have aggravated the situation. As Prime Minister of my country, I did as much as possible to curb this sort of voluntarist policy. 3 EN A word this evening about the link between budgetary policy and monetary policy in the eurozone. The dialogue between central bankers and policy-makers is never an easy one. It is structurally more complicated in Europe because monetary policy for the whole euro area is decided by the ECB, while the politicians on the other side are responsible for the budgets of their own Member States. For example: even before the crisis, Jean-Claude Trichet was regularly alerting the Finance Ministers of the Eurogroup to the risk of shocks relating to the accumulating divergences in competitiveness, and had been calling on Greece and Portugal for years to put in place a strategy of competitive disinflation. Unfortunately, this did not have much effect on national policy choices. And yet, in a single monetary area, it is up to governments to use budgetary policy and structural reforms to offset their lack of a monetary policy.