“Check against delivery”
Good morning, it is a pleasure and an honour to be with you today, albeit virtually. Let me thank Professor Schleiter for the welcome and Professor Ruggeri for this interesting background, and of course Dr Garavoglia for organising this event.
When I first received this invitation, back in December, circumstances were very different. The European economy was on a path of strong growth, supported by the rollout of our unprecedented recovery plan, Next Generation EU – which remains of course a key priority.
I would have much preferred to centre my intervention on the challenges of Europe’s post-pandemic economy. Yet, our world has fundamentally, and tragically, changed since then.
Two years since the start of the pandemic, we have been plunged into another crisis, since 24 February.
The focus of today’s event has thus had to shift to the incalculable suffering of the Ukrainian people and the consequences for the European Union of Putin’s senseless war.
We should make no mistake. This is not just an attack on Ukraine, an independent European sovereign, democratic state. It is an attack on all the values we hold dear – democracy, freedom and the rule of law.
Yuval Noah Harari recently argued that what is at stake in Ukraine is the direction of human history. It is about whether the implausibility of war among superpowers painstakingly built in the aftermath of the Second World War will hold; or whether this signals a return to the law of the jungle and the realism of Thucydides: the notion that “the strong do what they will and the weak suffer what they must”.
[Economic implications]
The European economy entered this crisis on a solid footing, on the back of a strong recovery and an improving pandemic situation.
GDP was back at pre-pandemic levels. Unemployment had reached record lows. Accumulated savings were high. And business and consumer surveys were indicating growing confidence.
There were, of course, a number of challenges: notably rising energy prices and supply chain disruptions, both contributing to mounting inflation.
Still, it seemed these challenges would subside over the course of this year.
On 10 February, I presented our winter economic forecast, which projected 4% growth in 2022 for the EU as a whole.
The war will inevitably have an impact on the European economy and aggravate the challenges we were already facing, as a result of three factors:
- significantly higher commodity prices, notably gas and oil, but also wheat prices, among others;
- deteriorating supply disruptions and broken trade links; and
- higher uncertainty, affecting both economic and financial sector confidence.
Indeed, commodities markets have seen large swings, both for energy and agricultural commodities.Oil and gas prices continue to be very volatile and remain at levels last seen in 2008. The price of wheat and sunflower oil has skyrocketed, as Russia and Ukraine are major grain exporters. These trends raise concerns about food security, particularly in developing countries. Egypt, for example, imports around 85% of its wheat from Russia and Ukraine. Somalia is already suffering from drought.
And this emergency will grow in the coming weeks and months.
Spiralling commodity prices will put further pressure on an already high consumer inflation. In February, inflation in the euro area increased to 5.9% from 5.1% in January, driven by energy – energy inflation was 32% in February – but also food prices. The large increases in energy and unprocessed food prices we are seeing will certainly add further price pressures.
The conflict is also exacerbating existing global supply chain disruptions in terms of both lack of raw materials and price hikes. Explicit embargoes, implicit bans and voluntary withdrawal from trade are affecting prices as well as quantities of traded goods. For example, two of the largest container shipping companies, Maersk and MSC, have suspended their operations with Russia. The decision to close the airspace to Russia will increase the cost of flying cargo from Europe to Asia, potentially making some routes commercially unviable. So we are strongly supporting our sanctions decisions and we have to be honest with our citizens that this strategy that is not without a price.
Several industries in the EU and around the world will face important setbacks, as Russia is an important exporter of a wide range of raw materials. The production of semiconductors, batteries, steel and other goods relies on supplies from Russia.
The budgetary impact of the crisis will also be important: providing economic and material support to Ukraine, assistance to the millions of refugees that have poured into Europe and continued support to the economy to deal with high energy prices are all set to weigh on Member States’ budgets.
All in all, while at this stage it is still too early to quantify the precise impact of the war in Ukraine on our economy, it is increasingly clear that the 4% growth we had forecast will have to be revised downwards. And I will present our spring forecast on 16 May.
Just by how much, depends on our policy response. Our task is now to ensure that the recovery is not derailed completely and the European economy only suffers a deceleration.
The coordination of our economic and fiscal policies has a key role to play in this respect. It is what enabled us to weather the COVID-19 crisis successfully, all in all. We are now confronted with a very different crisis, but there are similarities too.
Both the pandemic – which, by the way, is not completely over – and the war in Ukraine are huge external shocks with potentially different outcomes across the EU.
Indeed, all Member States will be impacted, but some Member States will be more impacted than others, because of their dependence on Russian energy, their economic structures, their geographic location and the different impact of refugee flows, and on their fiscal space.
So we need a common response also to tackle the risk of divergence within the EU. This is why we must stand ready to adjust our policies to the rapidly changing circumstances.
At the start of the pandemic, the EU activated the General Escape Clause of the Stability and Growth Pact, meaning that our fiscal rules were temporarily suspended. And they are still suspended. Together with the temporary State aid framework we introduced, this allowed Member States to provide unprecedented support to their economies, which was crucial to avoid an even bigger recession. The rate of bankrupticies in 2020-21 was much lower than in the prveious decade – this is just to show the amount of support provided in this period. At the same time the ECB launched its pandemic emergency purchase programme.
And through the smart deployment of short-time work schemes, supported through the EU’s €100bn SURE instrument, the impact on jobs was far more contained than it would otherwise have been.
If our national and EU policy responses remain effectively coordinated, if monetary and fiscal policies remain complementary, and if we remain agile and ready to adjust as needed, I believe we can ensure that the recovery remains on track. We should avoid the discourse about stagflation becoming a self-fulfilling prophecy.
In this confrontation, the resilience of our economy is crucial not just to protect our citizens, but also to protect our democracies and our model of European society. Because that is what is at stake now.
[Political implications]
During the COVID crisis, the EU rediscovered a sense of solidarity and support for the countries hardest hit by the pandemic. Now the EU is again showing strong solidarity – with Ukraine and with the Ukrainian people fleeing their country and seeking refuge in Europe.
Yet, for the EU this must also be the time for autonomy. Because this crisis is a wake-up call for Europe to reduce dependencies in strategic sectors and strengthen its autonomy.
To some extent, the pandemic had already prompted this broader rethink, especially with regard to reassessing our supply chains in key areas. But the war has drastically accelerated this process, in particular in the fields of energy and defence.
So globalisation will be reshaped by this crisis. We need a new and more secure globalisation, not a revival of protectionism. And the balance will not be an easy one to find.
[Energy]
Ninety percent of the gas we consume in Europe is imported, and Russia provides almost half of those imports, in varying levels across Member States. Russia also accounts for 27% of oil imports and 46% of coal imports.
When one side of this trading relationship suddenly begins to use energy as a weapon, the relationship becomes untenable and must change completely. The European Union will not be blackmailed.
Earlier this month, the Commission announced a bold plan to reduce our overdependence on Russian energy imports – what we have called REPowerEU.
The goal is to slash EU demand for Russian gas by two thirds before the end of the year, and to make Europe independent from Russian fossil fuels by 2027. As President von der Leyen said, this must be backed by the necessary national and European resources.
[Affordability]
Energy prices were already soaring since last year, as the recovery drove up global demand and was not matched by increased supply. As we have seen, they have continued to rise since Russia’s invasion. Businesses and households are seeing this first hand in their utility bills. It is already hurting the economy.
High energy prices harm business competitiveness and impact low income households most severely. The European Central Bank estimated that the energy price shocks would reduce GDP growth by around 0.5 percentage points in 2022 – but this was before the invasion.
With the new REPowerEU plan we are now looking at ways to protect the economy, such as a new temporary State aid framework that we will deliver tomorrow. We have made clear that in the current context no option should be off the table, including setting regulated prices, which we are discussing.
[Security of supply]
Energy prices follow the laws of supply and demand, and part of their recent rise is due to uncertainty over future supplies from Russia. So enhancing our security of supply is key to reducing dependencies and keeping prices affordable.
Even in case of full disruption of supplies from Russia, our current gas supplies are sufficient for this winter heating season. However, we need to ensure the refilling of storage ahead of the next winter heating season.
Gas storage usually supplies 25-30% of EU gas consumed in winter. We will put forward a legislative proposal to achieve higher gas storage levels. It will establish a 90% filling target by 1October of each year, which will make us better prepared for the winters.
We are also looking to diversify our gas supplies, via higher Liquefied Natural Gas and pipeline imports from non-Russian suppliers.
In recent months, the Commission began to engage with a range of partners around the world, such as the US, Norway, Algeria and Qatar, which are already among our main suppliers, as well as others, like Egypt, Korea, Japan, Nigeria, Turkey, Israel. These discussions have intensified in recent weeks.
[Accelerating the green transition]
Boosting imports from other suppliers is one way to secure alternatives to Russian gas in the short-term. But make no mistake: the best way to ensure we can meet our energy needs is to diversify our energy sources and reduce our dependency on fossil fuels altogether.
This brings me to the last key objective of the REPowerEU plan, which is to accelerate the green transition.
The case for a rapid clean energy transition has never been stronger and clearer. The EU is already a global leader in this respect. The European Green Deal sets a target for climate neutrality by 2050 and a 55% reduction of CO2 emissions by 2030.
And last year we presented concrete measures to achieve these goals – the so-called Fit for 55 package.
Given the current situation, we need to do more, and we need to do it faster. It would be a mistake to put on hold the green transition while we face this crisis and we must avoid doing that.
The EU’s new strategy to reduce our reliance on Russian energy is clearly an ambitious one. Meeting our goals will not be easy, but our analysis shows it can be done.
If we succeed, we will have addressed a key source of vulnerability, kept prices in check, secured alternative supplies and provided a decisive push to meeting our climate targets, all the while depriving the Kremlin of a significant source of revenue.
[Defence]
The war in Ukraine also marks a turning point for Europe’s defence policy and for the transatlantic relationship. The German Chancellor referred to it as a Zeitenwende, a turn in the times.
Positions that were held for decades have shifted in a matter of days.
Countries like Germany, with traditionally low defence spending and a long-standing policy of blocking weapons from being sent into conflict zones, announced a radical increase of the defence budget, a special fund of €100bn and the delivery of anti-tank weapons to Kyiv.
In others like Finland or Sweden, historically neutral and very cautious about joining NATO, polls have shown for the first time a majority of the population in favour of NATO membership.
Meanwhile, the EU unanimously agreed a €1bn fund to deliver arms and other equipment to a country that is under attack – this is also a first in our history.
At the recent summit in Versailles, EU leaders committed to bolster our defence capabilities, pledging to: substantially increase defence expenditure; develop joint projects and joint procurement of defence capabilities within the EU; increase investments in technologies and innovation for security and defence; and further develop our defence industry.
Russia’s invasion of a country bordering NATO has also strengthened the transatlantic alliance, after a few rocky years.
The Versailles Declaration stresses that the EU’s efforts in this field are complementary to NATO, which remains the foundation of collective defence for its members.
Indeed, where would we be now if the Baltic states or Poland were not in NATO? NATO’s eastward expansion has actually put us in a better place to deal with Putin’s history of aggressing Russia’s neighbours.
Boosting our defence capabilities will require significant investments in our industrial and technological base.
The new defence investment needs come on top of those to deliver on the green transition, for which we will have to mobilise an estimated additional 520 billion each year – of course mostly private investment.
Such investments are crucial to increase our autonomy in these strategic sectors. German Finance Minister Christian Lindner has called them “investments in our freedom”.
Financing them will require a more supportive framework of fiscal rules and potentially new tools at the European level.
[Conclusion]
Two years after the start of the pandemic, we are again at a historic crossroads, for both Europe and the world, and our transatlantic alliance.
After the dissolution of the Soviet Union, Francis Fukuyama famously wrote that humanity had reached “the end of history”, which he defined as “the universalization of Western liberal democracy as the final form of human government”.
For years now, Putin’s regime has sought to sow divisions within our societies and undermine our model of Western liberal democracy. The invasion of the Ukraine is the biggest threat yet. As President Zelensky said, Russia is seeking to build a wall in eastern Europe between freedom and bondage.
And the autocratic model – this is not only Russia – is challenging our model of societies based on liberty and democracy.
But Putin miscalculated. It turned out that the Ukrainians were determined to fight for their freedom, and the West did not stand idly by.
His plans have badly backfired: the EU is as united as ever. Together with our allies, we have agreed on unprecedented sanctions that are crippling Russia’s economy. And countries that Moscow considers within its orbit – Ukraine first of all, but also Georgia and Moldova too – have applied for EU membership.
We will continue to support Ukraine to prevent this new wall from being raised and build a bridge for those countries that share our values and want to join the European family.
At the same time, this crisis is an opportunity to shape the EU’s future direction.
If we maintain the same unity and ambition that we have shown during the pandemic, I am confident that a new Europe can be born out of this crisis. A stronger, more secure and more sustainable Europe. A quiet superpower that lives up to the aspirations of its citizens and especially of its youth.
Thank you.