The Prime Minister's speech at IIF 2012 Spring Membership Meeting 7 June 2012: “Changing our thinking: Reforming for growth and jobs”

Check against the delivery.

Thank you Eivind Kolding for the introduction.

Dear chairman, distinguished audience.

Thank you very much for the opportunity to speak at today’s IIF Spring Membership Meeting.

This opportunity for dialogue between the international financial sector and policymakers is extremely timely. Robust and solid financial institutions are key instruments in securing stable growth and job-creation.

This year’s agenda is of utmost importance, particularly as we look to handling the crisis in Greece and other economies. The IIF played an important part in the negotiations of the biggest debt restructuring in history - a pre-condition for the second aid package to Greece from the EU and the IMF in March.

This crisis not only challenges financial institutions. It also questions the fundamental economic models we have taken for granted.

However, a crisis also provides new opportunities. As the Danish Nobel laureate, Niels Bohr, said: “Every great and deep difficulty bears in itself its own solution. It forces us to change our thinking in order to find it.”

The current difficulty that we are in is both great and difficult. And there is no doubt that we still need to adapt our thinking to the new realities.

Let me begin with a few words on the broader framework for our economies and the crisis as I see it.

The sovereign debt crisis in Europe and the difficulties of numerous European financial institutions are closely linked and mutually reinforcing. Our challenge is to break this vicious circle.

At the same time, there is an urgent need to improve Europe’s long-term potential for growth and job-creation.

In Europe, a wide range of measures has already been taken to counter the debt crisis. The decisions of the Euro-zone on loan packages and a strengthened firewall are the key elements in the immediate crisis management.

We have also taken decisions aiming at preventing similar crises in the future. We have created a much stronger framework for budget discipline through far-reaching reforms of the Stability and Growth Pact as well as the new Fiscal Compact.

During the Danish EU Presidency, we have strengthened financial regulation. We reached an agreement in the Council on the revised capital requirements directive – the European implementation of the global Basel III rules.

And we have agreed on stronger regulation for credit rating agencies, as well as new regulation for trading in financial derivatives.

Although not a panacea to avoid risks in the financial system, stronger rules are necessary.

In the years leading up to the crisis, financial institutions were generally operating with relatively low capital ratios. And in many financial institutions, the business model was based on less stable funding. To learn from the past few years, we need to take an honest look. In some financial institutions, risk taking was reckless. Let’s be frank about this.

When the crisis struck, losses quickly spread across the financial system, making scores of banks dependant on massive public guarantees.

We have to confront irresponsible risk taking and short-term behaviour in order to avoid similar situations in the future.

The steps EU has taken show that Europe is committed to responsible and sustainable economic policies and a stable financial system.

Europe has acted. But we need a fair balance between European solidarity and national responsibility. At the end of the day, each member state must implement the necessary reforms to secure healthy economies. This is a precondition for growth and jobs.

This is of course easier said than done. European welfare systems and labour market models have been developed through decades. Structural reforms will often affect certain groups negatively in the short run and is often not rewarded.

Adopting the necessary reforms takes political courage. We have to be clear that the goal of these reforms is not to dismantle the European social model but to ensure that it is fit to address the challenges of today and tomorrow.

In handling the current crisis, there has been a lot of focus on Europe – for good reasons. But we must not forget that stronger global economic governance is also key to a more stable world economy. The upcoming G20 Summit is an important opportunity to discuss the global dimensions of achieving economic and financial stabilization.

Let me now turn to the economic situation in Denmark.

Like most other European countries, Denmark faces a range of challenges. Ensuring sound public finances calls for tough decisions.

We need to tackle demographic changes. And we need to speed up growth and job-creation in an era of increased competition - not least from emerging economies.

During the last three decades, Danish governments have pursued stability- and reform-oriented economic policies. And they have consistently followed a fixed-exchange-rate policy vis-a-vis the German Mark and later the Euro.

No doubt this approach has served as a disciplining force.

Our fiscal discipline has provided us with some room for manoeuvre. Actually, Denmark is one of the only European countries that has been able to stimulate its economy this year.

Amid the financial turmoil, Denmark is considered a safe haven by investors. Danish government bonds currently carry the unusual mark of negative interest rates at maturities below five years. This is a token of confidence in Danish assets, the Danish economy and our economic policy.

However, we must not forget that the low interest rates are rooted in a crisis. The positive effects for Danish homeowners and business investments are countered by the negative effects of business and consumer uncertainty.

Benchmark interest rates at this level are an anomaly and a cause for concern. At some point, once the uncertainty abates, safe haven flows are likely to revert.

Confidence in the Danish economy must not lead to complacency. That is why my government has outlined an ambitious reform agenda for the coming decade.

We want to create growth and jobs, not least for our young people who are affected by unemployment.

The reform agenda is based on three goals.

Firstly, we want to ensure more people on the labour market through reforms.

Secondly, we want to secure sound public finances that are sustainable in the long term.

And thirdly, we want to strengthen our productivity and competitiveness in order to speed up growth and job creation.

These objectives are closely interconnected – and so are the means to achieve them.

The first overall goal of my government’s reform agenda is to increase participation on the labour market. We want to encourage people to stay on the labour market a few years longer and to work more hours each week.

To this end, we have recently proposed a tax reform that reduces taxation on labour. This supports a dynamic economy which in turn ensures sufficient funds for education and healthcare in the future.

We have also launched tripartite negotiations between the government, employers and labour unions. We aim at an agreement that increases the overall amount of working hours in Denmark.

It should also result in a package of initiatives strengthening the employment opportunities for our young people and improving health and safety in the workplace.

Secondly, when it comes to Denmark’s public finances, my government is strongly committed to ensuring long-term sustainability. Last month, we presented our so-called “2020 plan” which provides us with a long-term planning tool to secure a balanced structural budget over the next 8 years. It establishes targets for annual expenditure increases and outlines my government’s reform agenda.

We will now reform the disability and subsidised employment schemes. And we are aiming at getting students through the education system at an earlier age.

These reforms improve public finances by reducing spending and ensure increased participation on the labour market.

In addition, indexation of the retirement age to life expectancy is a salient feature of the retirement scheme in Denmark. It is an important contribution to sustainable public finances.

One of the lessons over the past years has been that we must do more to ensure that budget discipline is carried out in practice. That is why the Danish Parliament recently adopted a budget law that introduces legally binding ceilings on public expenditure.

The budget law also ensures that Denmark implements its obligations under the Fiscal Compact. Although Denmark is not a member of the Euro-zone, we have already ratified the Fiscal Compact.

And we are actually the only country which has signed up to all provisions open to non-Euro-countries. We have done this to ensure maximum credibility for the Danish economy.

The third goal of our reform effort is to increase Denmark’s productivity and competitiveness. During the last decade, our competitiveness has weakened due to high wage growth and low productivity growth compared to other countries.

Productivity is a key driver of economic growth and prosperity in the long-term. It is a complex issue involving the interaction of, for instance, education, mobility and competition.

My government has already taken some steps that we know are crucial to improving our productivity. In the 2020 plan, a central element is investments in education as well as a number of initiatives to increase the performance of Danish students. Vocational education and life-long learning are focus areas. In addition to this three-pronged reform agenda, restoring financial stability is a key part of my government’s economic policy.

As in most countries, Danish financial institutions have faced serious difficulties during the crisis. That is why we have adopted a number of measures to safeguard the stability of financial institutions.

Today, Danish banks are generally well-capitalized. However, we need to continuously improve regulation and supervision.

With the recent bank packages introduced in Denmark, we have been at the forefront of bank resolution schemes.

In the resolution of distressed banks, it has been important to protect public finances and tax payers. We have created incentives for private solutions and for lower risk-taking in the future.

In this context, the creation of a level playing-field on resolution of European credit institutions is extremely important.

For that reason I welcome the European Commission’s proposal for a directive to establish a European framework for the recovery and resolution of credit institutions. In many ways, this proposal follows the principles of the Danish resolution scheme.

There is no doubt that the challenge of financial stability calls for internationally coordinated measures, including measures at the EU level.

Allow me to turn to Denmark’s EU Presidency which we have held for the last five months. With 27 – soon to be 28 – countries in the EU, this is an opportunity that does not come along very often. We have been determined to make the most of it.

From the outset, we have opposed the simplistic view that Europe is faced with a choice between consolidation on the one hand and growth on the other.

Our strategy has been one of combining the necessary consolidation efforts with growth-enhancing reforms and initiatives - both at the national level and at the EU-level. These are two sides of the same coin.

I have already outlined some of the initiatives taken in the EU to strengthen economic governance. So I will now focus on the other side of the coin: how to promote growth.

At the informal EU summit two weeks ago, a mandate was given to work towards a Growth Package that can be presented at the next EU summit with EU leaders towards the end of June.

Let me highlight some of the elements that could be part of such a growth package:

Firstly, in June, the EU will conclude the European Semester for economic governance by adopting country-specific recommendations.

Credible implementation of the Semester is an essential part of achieving economic stability, increasing competitiveness and identifying national reforms.

The Semester could and should point member states in the right direction.

Secondly, we have to reform the Single Market and the Digital Single Market. Both have untapped potential and are important drivers for growth and competitiveness in the EU.

I am well aware that this is a mantra often mentioned. And too often it has not been backed with the necessary political will to reach compromises on actual proposals that we know will create growth.

The Danish Presidency is firmly committed to demonstrate that the EU is serious about the Single Market.

For instance, our goal is to reach agreement on half of the 12 initiatives in the Single Market act. And we are also pushing for agreement on a European Patent which has been negotiated for 30 years!

Thirdly, the Multiannual Financial Framework is one of the most important instruments at the EU-level to promote growth and employment.

We should have the courage to redeploy funds to the policies that can improve Europe’s productivity and competitiveness such as research.

Furthermore, in a time of scarce resources, we must ensure that we maximise the value of each Euro spent.

Fourthly, the Presidency is working to take full advantage of the EU’s external trade relations through new agreements with strategic partners, like for instance Japan.

Finally, we are looking into how to improve access to finance especially for small and medium sized enterprises. For instance by improving the use of structural funds and the mobilization of the European Investment Bank.

This is an area where we have already reached agreement on a pilot phase for project bonds that will improve funding for infrastructure projects.

The Danish Presidency will do its utmost to reach agreement on a growth package to supplement the ongoing consolidation efforts in the EU.

However, there are no quick fixes that will bring growth back over-night. We are in this for the long run and EU initiatives cannot – and should not - be a substitute for implementing reforms in individual member states.

Let me conclude.

I am a great believer in the European social model and the way we have organized our societies in Europe. Historically, Europe has been able to simultaneously promote sustainable economic growth and social cohesion.

The experience from the Nordic countries shows that sound public finances can be combined with prosperity and solidarity. This has created societies based on equal opportunities where all citizens have access to core welfare such as education, healthcare and robust pension systems.

Therefore the answer to the current economic crisis is not to abandon this model but to ensure its ability to adapt.

In Denmark, we are facing this challenge head on by pursuing an ambitious reform agenda to foster new growth and jobs.

After all it rests on the strongest advocates of this social model to lead the way in reforming it so that we can exit the crisis with our values intact.

I hope that your discussions at this Spring Meeting will take us a little step closer to the change in thinking that Niels Bohr encouraged us to look for when faced with difficulties that are great and deep.

Thank you for your attention!