The European Economy: Challenges, Opportunities, Growth


October 6, 2016, 9:45 AM to 11:00 AM EDT
PIIE Webcast, Washington, DC

Valdis Dombrovskis (Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union)

Event Summary

European Commission Vice-President Valdis Dombrovskis discussed the European economy at the Peterson Institute on October 6, 2016.

Since November 2014, Dombrovskis has been Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union. He served as Prime Minister of Latvia from 2009 until 2014. Previously, he was Latvian Minister of Finance from 2002 to 2004 and was a member of the European Parliament for the New Era Party.


Unedited Rush Transcript

Adam Posen: My name is Adam Posen and I'm the President of the Peterson Institute for International Economics. It's our great privilege today to have yet another global leader in economic policy speaking to us ahead of the IMF World Bank annual meetings here at the Institute.

We got a US perspective from Secretary of the Treasury Lew an hour ago. And now, it is my privilege and honor to introduce Valdis Dombrovskis. Please forgive my pronunciation. Everyone knows his name. When I start typing, involve this in Google, Dombrovskis comes right up.

Vice President for the Euro and Social Dialogue at the European Commission who of course since earlier this year is also in charge of financial stability, financial services and Capital Markets Union. He's been commissioned Vice President for the Euro and for Social Dialogue since 2014 and previously was Prime Minister of the Republic of Latvia from 2009 to 2014, guiding that small, but critical democratic free market economy through some very rough seas rather successfully I would add.

He previously served as a member of the European Parliament and at a ridiculously young age back in 2002 to '04 as Minister of Finance to the Republic of Latvia. Like most macroeconomists we love, he started out as an undergraduate Physics major and spent time at the Central Bank. That's the path most of us fail at Physics and move into Economics. He completed his degree.

But nonetheless, it's a welcome background for a leader. A man who's won elections, led a state and is now one of the leaders of the European Union leading the project team of the Euro in Social Dialogue, developing proposals to deepen the economic and monetary union, making decisions on about how to get support in financially struggling Eurozone economies with more democratic legitimacy. This is the professed mission of him and his group at the commission. Ensuring the financial markets are properly regulated and supervised, enhancing the convergence of economic fiscal and labor market policies to EU countries and on and on.

We could not ask for a better European perspective of the world economy and of Europe's future at this critical juncture. Vice President Dombrovskis, the stage is yours. Thank you.

Valdis Dombrovskis: Good morning ladies and gentlemen. It's nice to be back here at Petersons Institute.

Today, I will speak about economic growth in Europe to set out what we are doing to support it over the long term and to explain how our approach to financial services fits into a much broader economic agenda.

The economic recovery in Europe is well underway. We are in our fourth consecutive year of economic growth. EU's economy grew by 2% last year and the euro area grew by 1.7%, its highest rate of expansion since 2010; 27 out of 28 EU economies grew in 2015. Greece was the only exception. All member states are forecast to grow in 2016. And, while still too high, unemployment is continuing to fall.

But, it's no secret that the outlook for global economy is subdued. The UK referendum has created additional uncertainty. In Europe, growth is uneven. Geopolitical situations in our neighborhood remains complicated both in the South and the East.

So now, our focus should be on how to strengthen the recovery. At EU level, this means increasing investment, taking forward structural reforms to strengthen our competitiveness and encouraging responsible fiscal policies.

We have launched an investment plan for Europe to raise at least 315 billion euros of both public and private investment and help our economies remain competitive. 127 billion euros in investments had been raised already across Europe in the first year of operation. Over 290,000 small firms and start-ups across Europe stand to benefit. Building to this success, we plan to extend the investment plan and increase its capacity to 500 billion euros by 2020.

To make this investment sustainable, we are working to improve the broader business environment: to remove barriers to investment in our member states, to create an energy union and digital single market, and to improve access to finance for our companies.

Structural reforms are being introduced in a number of policy areas. We need to find the right balance between flexibility and stability in our labor markets. This flexicurity, as we call it, should work to support long-term jobs creation. Product markets are being opened up to increase competition and choice. Many countries have moved to strengthen the long-term sustainability of their pension and healthcare systems given the ageing population. Public administrations are being modernized.

Meanwhile, work continues to improve the sustainability of EU's public finances. The EU's average government deficit is forecast to continue decreasing this year and next. It is expected to stand at 2.1% of GDP this year compared with 2.4% last year. The EU's average public debt to GPD ratio is forecast to stabilize at around 86% of GDP in the EU this year and start to decline gradually as of 2017.

At the same time, when economic cycle is taken into account, the fiscal stance in the EU is considered to be slightly expansionary. The right balance between keeping public finances healthy while also recognizing the subdued economic context. The European Commission remains focused on encouraging more productive public investment and coordinating budgets that are balanced over the economic cycles.

In the euro area, much work has been done to make our economic and monetary union more resilient.

We have upgraded our macroeconomic governance framework to improve our fiscal rules and tighten the economic policy coordination among member states. We now have an annual cycle of member states' fiscal and economic policy supervision at the European Semester. A macroeconomic imbalances procedure is in place to detect and correct economic imbalances early. A powerful backstop now exists to ensure financial stability and provide fiscal support for euro area countries in difficulty, the European Stability Mechanism.

We have put in place a single rulebook for all financial actors in the European Union. At its cores are stronger prudential requirements for banks, improved depositor protection and rules for managing failing banks. In the euro area where deeper financial integration is necessary, the Banking Union is now up and running. This makes the European Central Bank the single supervisory--mechanism, the central prudential supervisor of financial institutions in the Euro area. And, should a bank fail despite stronger supervision, a Single Resolution Mechanism is now there to manage the resolution effectively.

The European Central Bank has been ready to use its monetary policy tools. It was Mario Draghi's famous “whatever it takes”, which helped to calm financial turmoil in Euro area several years ago. This commitment to buy member states' bonds in the secondary market in unlimited quantity if necessary was crucial. And the ECB's accommodative monetary policy is supporting recovery.

All these reforms have made the Euro area considerably stronger. And actually, the resilience of Euro area was tested during the crisis in Greece a year and half ago. Despite very turbulent developments in Greece and even the speculation about a Grexit, the impact on other Euro area countries was very limited. The stability of the Euro area as a whole was not in question.

But while stability may have been secured, economic convergence has not. It is essential if we were to make Europe's economic and monetary policy sustainable. This is not about uniformity. It's about creating the economic structures that are resilient and able to adapt to change. And creating the right conditions for countries to capitalize on their comparative advantages and converge towards the top.

On our work in the financial services sector, this work fits into broader economic agenda. We are working to deepen and integrate our capital markets and build a Capital Markets Union. To diversify funding of sources for businesses, knock down barriers to cross-border investment and help increase options for savers and institutional investors.

We want to do this because Europe's economy is a similar size to that of the US, but our equity markets are only half of the size and our debt markets are less than a third. At a time when we are working to encourage investment, the depths of US capital markets is a good indication on European markets potential to grow.

Over the past year, the European Commission has moved fast to propose the first set of actions. We have amended our prudential regime for insurers to make it cheaper for them to invest in infrastructure projects. We want to extend this to the investments in infrastructure companies. To make it easier for companies to tap public markets, we have proposed an overhaul to make Europe's prospectus regime simpler, faster and cheaper. We have put forward a balanced proposal to restart securitization markets in Europe by defining simple, transparent and standardized securitization and reducing associated capital requirements. And, we have published proposals to strengthen Europe's venture capital markets and support socially minded investment. All this should be agreed by the end of the year, so we can move on to new priorities.

We want to switch our focus to dismantling some longstanding barriers to the free flow of capital.

We will be focusing on the different insolvency regimes across Europe and working on ways to reform regimes to support the wider economy. In the coming weeks, we'll present a proposal for effective arrangements for restructuring viable business debt in EU member states.

We want to encourage the reform on tax regimes to make them more equity and investment-friendly. The process for reclaiming withholding taxes on cross-border investments when these are subject to double taxation needs to be improved. Tax regimes' debt-equity bias also needs to be addressed.

And we want the Capital Markets Union to provide more options for people who want to save for their retirement. And, see whether we can create a competitive and simple personal pensions product.

The European Commission also wants to go further in a number of areas. Let me mention just two.

First, we need to be bolder when it comes to supporting sustainable finance and encourage institutional investors to have more sustainable investment policies. And also, see how we can support the transition to a low-carbon economy in the financial sector. The EU has just ratified the Paris agreement to combat climate change. Work is underway to develop a comprehensive European strategy on green finance and to increase the availability of green funds. And, we want 40% of your European Fund for strategic investment I was talking before to support projects contributing to sustainable growth.

Second, the Capital Markets Union must also deliver a genuine single market for retail financial services in a single market. In the coming months, we will come forward with a set of actions to improve the single market in insurance, pensions, loans and current or savings accounts. Fintech and digital innovation will be central to this work.

At the same time, work continues to complete the framework for Europe's banking sector. As was confirmed by the recent stress tests, overall, Europe's banking sector is much stronger and better capitalized than before the crisis. The average capital ratio of the major banks in the EU stands at a very robust 13.2%, an increase from 11.1% in 2013. And, the average capital ratio is expected to strengthen further and reach 13.9% by the end of 2018.

But the uncertainty created by the UK referendum result has added itself to the challenges for European banks to develop sustainable business models during the protracted period of very low interest rates while also contending with fast-paced technological change.

These are challenges which Europe's banking sector is working hard to meet. The European Commission strives to provide the right framework for them to do so. This includes work towards the deeper integration of our banking system. In the Euro area, this means completing of the Banking Union and implementing risk reduction measures. We also encourage EU member states to tackle nonperforming loans. Meaningful and coordinated action to clean up nonperforming loans is a priority.

Before the end of the year, we'll come forward with a revision of Europe's banking prudential framework, the capital requirements regulation and its sister directive. Our aim is legislation that supports financial stability, but allows banks to lend and support investment in the wider economy. This also shapes our approach to the Basel measures under discussion.

The European Commission is committed to implementing agreed international standards directed at global systematically important banks. We will soon propose legislation to implement the Total Loss Absorbing Capacity requirement and ensure it can fit intelligently with Europe's existing minimum requirement for own funds and eligible liabilities so called MREL. We know that this work is also ongoing in the US to apply the TLAC and we hope this can be done in a way which takes into account the situation of foreign banks operating in United States. It is important to maintain a level playing field across both jurisdictions.

Across the board, we will continue for a push for a coherent supervision and regulation. The Call for Evidence on financial services legislation is part of this push. We launched it to check whether legislation passed during the crisis works as intended and to see whether it is as growth-friendly as possible. We will set out our way forward in more detail by the end of the year. But the main thrust of our analysis is clear. We need to consider adjustments to increase funding to the wider economy. We need to look at whether we can make legislation more proportionate and to see whether the compliance burden can be reduced for businesses.

We understand there is a lot of interest in the upcoming negotiations about United Kingdom's future relationship with the EU. We know these are concerns well beyond the EU including for US businesses. We will work to maintain market stability throughout the process and to avoid any disruption to transatlantic relations.

I should nevertheless emphasize the ball is in the UK's court. The referendum result was clear. As well as providing its formal indication of its intention to leave, the UK needs to clarify its ambition for its future relationship with the EU. Only then we can put an end to uncertainty as the referendum result has created.

To help minimize uncertainty, we are pleased we were able to improve our regulatory dialogue and set up a joint EU-US financial regulatory forum. I'm looking forward to the forum's annual meetings and the increased contacts between officials. These will help us to strengthen the trust we need to continue supporting trade and investment between our economies.

Ladies and gentlemen, all this work makes up an ambitious agenda. I know the US faces some of the same challenges as Europe and we reform our economies in a low growth environment. To face these challenges, we are stronger together. We share the same interest in increasing competitiveness and productivity, and the desire to see financial services play their full part in supporting sustainable growth. The constructive, open and pragmatic relationship as EU shares with the US will be central to our joint success.

Thank you very much.

Adam Posen: Well, thank you very much Vice President Dombrovskis. It's great to have good news on the growth front even if as you noted partly other people slowing down less the good news of you all speeding up. But can I just ask you to expand a little bit on your macro outlook? The statement which echoes something Secretary Lew said earlier, which I think is a very important message from the G20, which is that none of the major economies are in recession. Well, they may not be growing as fast as we like, none of them are in recession.

So, that's great news. But on the other hand, it would seem that potential growth is down quite a bit. The productivity growth is slowed, our friends, Fed Vice Chair Stan Fischer just said that the low interest rates may be indicative of an ongoing low-growth period. Unless I misheard, we didn't hear you in your speech talking all about potential growth in Europe. Is Europe doing as well as it could be for the time being? Are output gaps, leaving aside Greece, largely gone? How realistic is it to raise potential growth beyond the usual it would be nice to have structure reform? How do you see that set of issues?

Valdis Dombrovskis: Well, indeed. So, first, as regards to economic growth in Europe, the growth in the real economy, it's ongoing. So, I was mentioning last year we had 2% growth. This year, we expect 1.8% growth and then further strengthening next year.

However, now, there are some new elements, which we need to consider. First is the impact of Brexit. So, our preliminary assessment is that the impact to the EU's economy is somewhere between 02% and 04% by the end of the next year. The impact of UK's economy itself is much more serious between 1 and 2.75 percentage points. But also the first indicative figures will come with a more detailed country by country forecast in November.

So then, as regards potential growth, indeed, this is an issue because [inaudible 00:22:07] gaps are narrowing in a number of countries to actually see countries [inaudible 00:22:17] gaps all are going to be basically closed. So, we cannot rely so much on cyclical developments. And, this [inaudible 00:22:30] discussion is also very obvious in our fiscal developments. So, I was saying that our nominal budget deficit on average continues to go down. At the same time, we consider we already have a likely expansion in the fiscal stance, which means that the structural budget deficit this year is already increasing.

So, indeed, the challenge now is on raising growth potential. And, for us though, the answer is still on structural reform and investment. Structural reform actually is something, which has been also very much emphasized in the G20 framework, also from EU's side they are promoting this very much on the global stage because we think that not only Europe needs structural reforms, but indeed it's important not only to talk about them, but also to implement them. That is what will matter.

And from Europe's perspective, I'll say we indeed have a quite ambitious structural reform agenda and we have quite a strong supervision, what is going in member states and how to encourage member states to do the necessary reforms. So, I was mentioning some areas like labor market reforms like sustainability of the social systems like removing some remaining barriers within EU single market like on taxation for example, shifting away tax burden from labor to asset tax basis, which are less detrimental to growth, opening up close professions and so on and so forth.

So, it's quite an ambitious structural reforms agenda we are pursuing. And, of course, we need investment because investment is on one hand--one can say is it has a short term positive impact on the economy but it's also about increasing potential output in the future. So, to introduce potential growth, you'll need to invest in your economy and that's the main idea behind our investment plan for Europe, which as I said, we are now actually already expanding. We are well on track to meet our 315 billion euros target and we are expanding it to 2020 to raise at least half a trillion of euros of investment.

Adam Posen: Okay. Now, I just want to push you a little bit on this last point and on the fiscal point. So, the G20 with full participation of European Union members has called for a shift from monetary stimulus to fiscal. You have acknowledged very directly the idea that infrastructure investment could be beneficial and you didn't mention, but I think we all take as [inaudible 00:25:35] very low interest rate in environment is a conducive environment for doing such things.

Yet, the numbers that you're talking about are actually still relatively small. I mean, when you talk about the structure on deficits expanding, I think we're talking 0.1%, 0.2% of GDP. The 350 or the half a trillion even of investment you were talking about is to be spread over several years. There are people out there making the case very much larger fiscal impetus at this point, not from an output gap point of view but from taking advantage of the situation point of view. Could you just expand on why you're comfortable with the current scale as opposed to that larger scale.

Valdis Dombrovskis: Well, when I was mentioning Europe's economic policy priorities, we just came back to two priorities, which was investment and structural reforms and we have also that third priority, which is responsible fiscal policies. And it's important to remember that background from which EU's economy is coming. EU's economy is coming from a situation where several EU and Euro area member states. So, years ago, we basically walked out of the financial markets and Greece is still a program country.

So, what it indicates basically is that there are some very varying market appetite to finance deficit and debt in different EU member states. And, there are countries were like in US, you can have a public deficit level over 100% of GDP and markets are perfectly fine to finance. Or in Japan, public deficit is well over 230% of GDP. In Europe, we actually saw a different picture. So, markets are not ready to finance those deficits and debts, so we need to be more prudent. Certainly, we do not want to return to that kind of confidence crisis, which we had several years ago.

So, when we are discussing our fiscal stance, it's worth noting that it's actually uneven. There are still countries in excess of deficits, which needs to continue their adjustment effort. That's very clear and that's what we're monitoring when member states will be submitting their draft budgetary plans by mid-October. But there are member states, which actually have fiscal space and which could and should use this fiscal space to stimulate the economy especially investment.

So, when you are talking about Europe, it really needs to be remembered that you need to do country by country analysis because each country is actually in a very different fiscal situation and very different position with their financial markets.

Adam Posen: Thank you for the clarification. In terms of specific countries, we are all glad for the sake of Europe and for the sake of the Greek people that Greece is no longer the headline that it was deservedly. But that remains the issue of outstanding Greek debt and many people have raised the basic idea that the current debt is unsustainable and therefore it gets worst if one does not restructure it.

Obviously, this is an issue you've dealt with repeatedly but where--do you see the Greek current debt as sustainable or do you see it as you disagree with the basic analysis that an unsustainable debt is likely to get worse or how do you see this going forward?

Valdis Dombrovskis: Okay. As regards the situation in Greece, first, it's worth noting that the Greek program is broadly on track. Greece economy is actually now returning to the economic growth. And, we are now--so to say finalizing our work towards disbursement of a second tranche and preparing of a second review. But still, some work remains to be done on Greek side in terms of implementation of milestones for current sub-tranche and for completion of second review.

And, I would say this is a very important element when we talk about Greek economic recovery, that program remains on track that financial stability is ensured.

Then, coming to the question of Greek debt indeed as our concerns about sustainability, which had been raised also by EU institutions. The question is obviously the scale of this concern and then we seem to have somewhat different analysis from IMF, which seems to be taking a much more pessimistic view on Greek debt. But it comes from much more pessimistic view on Greek economic and fiscal performance. And I would say if we look at the outcomes of last year, Greece substantially over-performed in terms of its fiscal positions, this year, it's on track to meet its fiscal targets. So, we think that so much pessimism as IMF is putting it in its analysis is actually not warranted. And basically, the European Commission analysis seems to be if you look retroactively much closer to the actual outcomes that IMF forecasts.

But, nevertheless, as this debt issue is still there, debt is well over 180% of GDP and that's why Euro groups, so Eurozone finance ministers agreed to look at this issue still in 2012 and then came back to this question repeatedly. Last time, it was in May and agreed on short, medium and long term measures to improve the sustainability of Greek debt while excluding nominal haircut. And, well, Eurozone finance ministers are ready to follow-up on these measures, which were indicated in May.

Adam Posen: Good. Let me now ask you about with your financial market hat on. You've spoken not just here, but here as well about the need to complete and fully implement Banking Union, Credit Market Union. Obviously, at the moment, we've had in two of the largest European economies major bank problems including one at the moment, which is quite pressing on markets. In both these cases, these were institutions and systems that we're seeing as uncompetitive and flagged as such many months before anything else happened.

I'm not asking you to comment on specific institutions, although if you want to, you of course can. What is the way forward from here? What is it as the champion of banking union being properly implemented and enforced you would like to see in Italy and Germany in the next year having to do with their banking systems?

Valdis Dombrovskis: Okay. Well, first, indeed, as European Commission, we are not commenting on individual bank cases and we are also not a bank supervisor for that single supervisory mechanism and national supervisor, of the member states.

But then, to look at the situation in banking sector as a whole, as I said, the situation has substantially improved in terms of capital ratios, in terms of liquidity ratio, so one can say is that indeed European banking system overall is in much better shape than before.

But obviously, some pockets of weakness remain. There are issues related with nonperforming loans in countries including Italy, which you mentioned. And, we are working very closely with those countries to deal with the nonperforming loans. In some countries, have taken more energetic steps like Spain for example. Some countries are still working on this. In case of Italy, several steps had been already taken including the creation of state guaranteed scheme of securitization of nonperforming loans, and setting up a private fund for nonperforming loans, so-called Atlante fund. So, this work is ongoing in Italy and during the next year, we will certainly continue to concentrate on these nonperforming loans issue.

In the case of Germany, it's really not so much a systemic issue in the German banking systems. There may be questions of around one certain bank, which then needs to be addressed. But once again, I cannot comment on individual bank issues.

Adam Posen: But just to be clear, so in your view, the system is working and the member states are adhering to the banking union goals.

Valdis Dombrovskis: Well, that's certainly our view and that we see as overall developments in a banking sector in Europe, they seemed to be heading in the right direction.

Adam Posen: Thank you. Let me open it up now to our distinguished audience. The Vice President has graciously agreed to take questions on the record. We have a traveling mic in Jessica's hands. We do not seem to have a standing mic this morning. I apologize. Please raise your hand to be recognized. When recognized, please identify yourself and make your question brief so that other people can get in.

Do you want to go back there, Jessica, to that gentleman?

Lee Price: Lee Price with the FDIC here in the US. So, I want to follow-up with the question. You mentioned earlier in your speech that it's been four years of growth and one would have hoped by now that the banks in Italy and the Deutsche Bank would have gotten better capital positions, and the Italians wouldn't be scrambling to improve their capital on some of their largest banks, and that Deutsche Bank by now would have gotten better capital. Why has it taken so long for this to come to a head? Why is it four years in the growth that it's still an issue? And, are you worried that the failure to have dealt when the capital at those important institutions might affect your growth prospects in the next year or two?

Valdis Dombrovskis: Well, on this, first on growth versus [inaudible 00:37:57] in banking sector. I would say that capital [inaudible 00:38:03] right now is not much of an issue in a banking sector of Europe as a whole. I was mentioning that our [inaudible 00:38:11] capital ratio in Europe right now stands at 13.2%, which is I would say quite a healthy capital ratio.

So, what is more of an issue is nonperforming loans issue, but this is if you want a legacy from the financial and economical crisis and maybe through somewhat, some developments before the crisis. So then, financial markets who are maybe not assessing risks [inaudible 00:38:56] when going into those loans. And those kind of legacy assets certainly take time to be sorted out. And also, their growth has been relatively uneven among countries. There have been some countries, which had been providing--so to say more strong incentives for the bank to deal with these nonperforming loans to move them out of the bank balance sheets.

So, we are continuing to work with those countries where NPLs still remain an issue. And also, we need to look at some other elements, which are hampering the work on nonperforming loans including insolvency frameworks. Something that I mentioned, we are also currently working, on one hand, creating a system for restructuring of viable business loans so-called second chance as a hand benchmarking national insolvents frameworks to see which are working well and were some reforms may be beneficial.

Thank you.

Adam Posen: Thank you very much. Before I turn to my colleagues, yes please, the lady there, let our guests speak first.

Female Speaker: I'm [inaudible 00:40:17]. We see a lot of turbulence in the Chinese stock market in the past 12 months. What do you think is the spillover impact on the EU region? My second question is about the political issue. Political uncertainty is growing bigger nowadays. What do you think its impact on the financial market in the EU?

Valdis Dombrovskis: Sorry, what is the problem [inaudible 00:40:41]?

Adam Posen: The second question, if I understood correctly, is about growing political uncertainty by which I assume she means the rise of smaller parties, uncertainty about electoral outcomes in Europe, as well as elsewhere and how does that affect financial markets and growth in Europe, is that correct? Thank you.

Valdis Dombrovskis: Okay. Well, first on China. Clearly, one of the issues which global economy needs to adjust now is slow down of Chinese economy. Of course, slow down of Chinese economy also should be taken within relative terms. We're still talking about growth rates well over 6%. And in Europe and in US, we would wish to help that kind of growth rates.

So, this slow down is also a bit relative and there are some developments in Chinese economy, which we think need to be followed up like the increase of levels of debt especially to state-owned enterprises, the mortgage debt and more generally how to shift China's economy from investment-based economy into more domestic consumption-driven economy. Because this translation is gradually happening, but of course, it needs to be carefully managed. And, certainly, there is some uncertainty surrounding these developments, which may be reflected also in some volatility in stock markets.

Then, on the situation in Europe and political uncertainty, well, we believe that economic developments and political developments are somehow linked. And, if Europe has been through substantial financial and economical crisis, if many European countries have been implementing ambitious but not always popular structural reform agendas, if many countries had to do with fiscal adjustment, certainly it's reflected in some political sentiments across Europe.

So what we need to do there is basically to concentrate on showing Europe's value added to the citizens. Actually, to show citizens that these initiatives we are undertaking in Europe at the end of the day, citizens of all countries are better off than if we were trying to solve them separately in 28 countries.

Then, as an impact of the financial markets, one can say of uncertainty as there was probably one impact, which was quite pronounced which was after the British referendum, when indeed you saw quite a volatility in financial markets. But we also saw that actually this whole volatility slow come down quite quickly. And currently, we are not seeing much of the volatility in our financial markets. But nevertheless, our main concern economically now is how to strengthen the recovery, how to make recovery more sustainable.

Adam Posen: Thank you. I guess, Nicolas, please.

Nicolas Véron: Thank you very much Mr. Vice President for your very comprehensive remarks.

Adam Posen: [Inaudible 00:44:53].

Nicolas Véron: I was going to say, yes. Nicolas Véron here at the Institute and also at Bruegel in Brussels. My question is about financial standards and you mentioned the commitment to implement global financial standards on the Loss Absorbing Capacity and other measures to increase the resilience of globally systematically important banks.

But if you look at the Basel Accord and specifically Basel III, the European Union had been found in a comprehensive process to be the least compliant jurisdiction around the world with Basel III materially noncompliant in the jargon of the Basel Committee. And you have made a very public position that the currently discussed agenda to complete Basel III is not in line with your objectives and that you don't want to see an overall increase in capital requirements or buffer requirements for European banks.

Now, this raises two questions. One is about the content of the accord and certainly, the recent developments at Deutsche Bank I think are reminders that it has been a good idea generally to increase capital requirements after the crisis and thanks God, Deutsche Bank had a number of buffers in recent days and weeks.

The second is more holistic in a way, do you still see it as Europe's interest to comply with global financial standards because, I think, increasingly people are asking themselves questions about this matter. So, I'd like to have your views on those two things. Is the position that overall requirement shouldn't increase still valid after what we've seen recently in the markets? And is Europe still committed to global financial standards? Thank you very much.

Valdis Dombrovskis: Well, first, as regards to the question on global financial standards, clearly as I indicated in the introductory remarks, Europe is committed in implementing them and Europe was part of this push actually to ensure their stronger capital and overall prudential requirements for the financial sector. I think this is one of the lessons, which we learned from the crisis and from the buildup of the crisis.

So, then, to come to the question of implementation of Basel, I was mentioning in my introductory remarks that will by the year end will come is a proposal on a review of capital requirement regulation and direct to exactly to implement number of elements, which had been agreed at Basel including on leverage ratio and the next stable funding ration, on trading book and some other elements.

And also, on TLAC, we are now--by the end of the year, we'll come with the proposals of how to implement TLAC for Europe's globally systemic important banks. And, in case of TLAC, we'll need to see how to fit ways our existing requirements, which are all [inaudible 00:48:00], which we actually are already applying and not only to globally systematically important banks, but to all banks.

And, we'll be coming with some [inaudible 00:48:16] proposals for example of central counterparties resolution recovery. Then, as regards--a completion of the Basel III, basically, what Europe is saying is that we need to stick with what we have agreed and we have all agreed internationally that the completion of the Basel III should not lead to the overall substantial increases in the capital requirements. That's all that we are saying.

Adam Posen: Okay. Thank you. Jacob and then Jessica, then the gentleman over here.

Jacob Kirkegaard: Jacob Kirkegaard from the Peterson Institute. Mr. Vice President, you mentioned in your remarks that the European Union has strengthened the Stability and Growth Pacts since the crisis. And, I guess I would say that yes, you've certainly changed it, but it doesn't seem to me that it has really been strengthened. I mean, you are a part of a political commission and recently, you took the political decision not to start the corrective procedures against Spain and Portugal.

So, my first question to you is, will you ever and under what conceivable circumstances will the political will in a political commission be found to do so? Second question is, what is -- I go to this relationship between structural reform and fiscal policy? Because part of the changes that has been made to the stability in growth, at least as I understand it is that you do now have the flexibility and the rules to basically shall we say horse trade structural reform for more lenient interpretation of fiscal space available to a country. But despite the fact that many countries have a very long list of structural reforms pending, that procedure seems to have been very used very little. Why is that? Is that because the procedure is too narrow? Is it because it only really refers to pension reforms or what should be done?

Adam Posen: Thank you.

Valdis Dombrovskis: Okay. So, first on strengthening of our fiscal rules. Indeed, if you look at the situation after the crisis, a number of new initiatives had been put forward including so-called fiscal compact including what we call six-pack and two-pack EU legislation to strengthen our supervision of framework. So we now have this annual cycle of fiscal supervision, European Semester. And, we are not only looking at the countries with excessive deficits, meaning deficits exceeding 3% of GDP but we also now have a preventive arm of the Stability and Growth Pact where all countries are committed to the medium term budgetary objectives, which are typically set at a structural deficit being at the 0.5% of GDP. But it may vary from country to country. In some countries with higher debt levels, it may be lower. In some countries with lower debt levels, it may be higher but not exceed a structural deficit of 1% of GDP.

So, all this framework is there. So member states' fiscal performance is being tightly monitored and we see that the overall tendency is actually for budget deficits to go down. I was giving those figures, so we now expect our budget deficit in EU to be at 2.1% of GDP this year.

Then, specifically on the questions of Spain and Portugal, indeed a decision has been taken to cancel the fine, which may be applicable to Spain and Portugal. But indeed, with instability and [inaudible 00:52:31] this possibility is explicitly foreseen. And, given the fact that both countries come from severe crisis, both countries have gone through major fiscal adjustment, major structural reform programs.

Our decision was not to apply fine to those countries, but discussion is still ongoing on the suspension of commitments for European structural and investment funds, which are available to those countries. Because when you talk about sanctions for breaching Stability and Growth Pact, there are two ways of sanctions. There is a fine, but there is also suspension of the funds.

And in case of fines, indeed, it's true. There is not a single precedent when fine would have been applied to any country ever since the creation of SGP. There is a precedent, however, of suspension of the funds in case of Hungary and it has a forward-looking element because then if the country takes necessary measures to correct the excessive deficit, complies with the council decision, then the suspension of the funds can be lifted. And that's exactly the case in Hungary. Hungary took necessary measures. Suspension was lifted. Hungary at the end of day, didn't lose any of the EU funds, which were available to them.

Then, to come to the second question of structural reforms and fiscal space, in a Stability and Growth Pact, there are several clauses: structural reforms clause, investment clause, some other clauses. And, at the beginning of last year, European Commission came with a communication of best use of flexibility was in existing rules of Stability and Growth Pact where we're explaining how we will interpret those clauses.

And indeed, if initially the structural reform clause is mainly for systemic pensions reforms in member states. Now, member states can use it also for other structural reforms and member states are actually using it. For example, Italy by now has used up pretty much all the flexibility, which was there in structural reforms and investment clauses. But it is also worth noting that this allows for a temporary deviation from adjustment paths towards medium term budgetary objective and later, a country must correct its fiscal path.

Adam Posen: Thank you. Over here, please.

Carlos Egea: Hi, I'm Carlos Egea from Morgan Stanley in London. I like to go back again to the fiscal point. As you know, there's a lot of moving parts. It is very difficult, I think, for markets and investors to basically back into the overall fiscal stance in Europe. Do I get from your statement that basically the fiscal impulse in Europe in 2017 will basically be flat on what it was in 2016 or do you expect there will be some further--an increase in the fiscal impulse benefits rather timid?

I just wanted to know what your expectations are on the net impulse because going through all of these things, it is very difficult for us to anticipate whether the net effect is basically -- the delta is flat or basically you have a slight improvement. Thank you.

Valdis Dombrovskis: Well, at this stage, I would not come with a detailed assessment of potential structural balance. Our kind of prediction is that overall, the nominal budget deficit will continue to go down. On the structural bonds, we still need to see because how those fiscal rules function in the EU member states by the 15th of October and in here, we talk about primarily Euro area member states must submit their draft budgetary plans to the European Commission. And only when those draft budgetary plans are submitted, European Commission can make a more detailed analysis.

So we'll be coming back to this in November when we'll have an updated macroeconomic forecast, which we'll be able to assess the structural balance because that's what determines whether it's expansionary or non-expansionary fiscal stance. And then, we'll see the actual member states their budgetary plans.

So, there I would say we need to wait until November when the European Commission will have all this analysis.

Adam Posen: Great. You've been very generous with your time. You've taken us through most of the key issues facing the European economies and helped educate all of us. I would be re-miss, Mr. Vice President, if I didn't give you the chance ahead of the formal IMF World Bank meetings to say something about what you would like to see from your partners? What would you like to see from the US? What would you like to see as the outcome of the meetings? If the G20 or G7 is to issue a statement, what would you like to see in there? You're obviously a big voice in that as well. So, how do you see that?

Valdis Dombrovskis: Okay. Thank you. So, for the IMF meetings and what we would like to say. Actually, there are a number of things we need to work together on the global stage. I was mentioning already is from EU's side, we had been very intensively promoting the global structural reforms agenda because we believe that many problems of our economy are of structural nature, so you cannot solve them with monetary policy to a loan. Something that for example Mario Draghi is also often emphasizing that is, with monetary policy, you cannot solve structural problems, you can buy time for countries to actually deal with the structural problems in their economies.

So, this would be a one important element and then of course, we must see how this can be accompanied by monetary policy, what can be done in the fiscal side and so on.

And, as an element, we are also intensively promoting this global fight against tax avoidance and evasion, a follow-up on OECD initiative to fight against Base Erosion and Profit Shifting so-called BEPS initiative where Europe is already moving forward and implementing it and a number of areas actually moving behind what is requested in BEPS. But certainly think that also progress is needed on global stage [inaudible 00:59:55].

Adam Posen: Great. Thank you very much. Please join me in thanking Vice President Dombrovskis of the European Commission.