São Paulo: "The Euro Crisis and its Consequences"

Ladies and Gentlemen,

It is a great honour for me, as the Mayor of the Free and Hanseatic City of Hamburg, to speak to you here at the Fundação [Fundasao] Getulio [dschetulio] Vargas São Paulo.

The image many Europeans once had of Brazil was that of the "Land of the Future," as described by Stefan Zweig, the well-known Austrian author who lived in exile in Brazil. In view of the unresolved political, economic and social issues of that era, this was, of course, said somewhat tongue-in-cheek, rather than simply as a compliment. 

Today, a good 70 years later, here in São Paulo, I have been able to prove to myself with my own eyes that Brazil’s future has long since begun. This vibrant mega metropolis is the heart of Brazilian business and sets the rhythm for the economy of the entire country. And that heart you can feel it everywhere is beating very fast indeed. 

Stefan Zweig’s ode to Brazil contains a beautiful sentence one without a trace of irony which I can fully endorse. Let me quote him: "The first impression of this country is one of bewildering abundance." [Originalzitat!] 

I was already fascinated as the plane descended and approached the city. Below me was a land full of contrasts, offering a multitude of facets, colours and variety, an impression that has been confirmed since our arrival such as yesterday evening at the reception at the port. 

With its natural wonders and the many colourful influences of European, African and indigenous cultures, this country has been the dream of a great number of Germans for centuries. Just under four percent of the population are of German ancestry one of the many reasons why our countries have been bound for so long by an intensive friendship on many levels. 

Brazil is the only country in Latin America with which Germany cultivates a "strategic partnership." The "Germany + Brazil 2013-2014" year, which begins next month, will further deepen our political, cultural, scientific and economic relations. The motto "Where ideas unite" has a long tradition and involves multiple levels.

First, ideas on the cultural level unite as is the case at the Frankfurt Book Fair, which selected Brazil to be its Guest of Honour in 2013, as well as at the Rio Book Fair, where Germany will be a Guest Country. 

Second, they unite on the scientific and technological level, such as in German-Brazilian scientific and technological collaborations, which primarily centre around questions relating to ecology and sustainability. 

Third, ideas on the economic level unite. Today Brazil is already Germany’s most important economic partner in South America. In 2011 alone, German exports to Brazil and Germany’s imports from Brazil each amounted to approximately eleven billion [=11 Mrd.] euros. 

Hamburg also profits from this collaboration, thanks to its port, which has the most modern container terminal in the world. Your country is one of the most important trade partners of the Port of Hamburg in regard to container traffic and held 9th place in the overall ranking in 2010. Coffee, copper ores and oleaginous [oli-édginous] fruits are the most important commodities Hamburg receives from Brazil. In the other direction, Hamburg primarily ships fertilizer, aircraft and petroleum products to Brazil. 

Trade with Brazil is conducted by 564 Hamburg companies. In fact, 144 renowned Hamburg companies, such as Helm AG, Jungheinrich, and Kühne + Nagel, have their own subsidiaries in Brazil.

The economic significance of our metropolitan region, with its population of five million, would not be possible without its modern port. It is what makes Hamburg into an extremely fast-growing international commercial metropolis, built on traditional trade relations cultivated over the course of centuries. And in an especially varied mixture of sectors.

Today Hamburg is one of the most powerful industrial cities in Europe, its strengths lying especially in logistics, aviation and renewable energies, life sciences, the maritime industry, the creative sector, and the health sector. More than 100,000 are employed in the media and IT fields alone. The aviation industry, centring around Airbus, employs almost 40,000 people. And the wind power industry, which has its headquarters as well as many companies in Hamburg, is a new sector that profits from the know-how of the traditional maritime industry and aviation companies.

An agreement between the Hanseatic City and Rio de Janeiro signed in 2007 was designed specifically to strengthen our collaboration in certain of these sectors, including aviation, logistics, renewable energy, and urban and port development.

In line with this, a few days ago (on 9th April), Hamburg was selected as the host for the German-Brazilian Economic Meeting 2014. The Meeting, which takes place in alternating years in Brazil and Germany, is the most important bilateral economic conference there is, and it is attended by as many as a thousand high-ranking representatives from the realms of business and politics.

Ladies and Gentlemen,

Relations between Germany and Brazil have a long tradition, and they are continuing to grow. The relatively young EU-Latin America-Caribbean Foundation (EU-LAC), with headquarters in Hamburg, will continue in the future to expand the economic commitment that exists between the German government and Latin American countries and to further develop relationships that already exist. 

Most of all, the one with Brazil. Within only a few decades, this country has left a dictatorship, oppressive poverty and hyperinflation behind it and has risen to become one of the world’s most important economic powers. 

According to globalisation export Nicholas Lemann, Brazil has thus accomplished something which is practically impossible. Let me quote him: "Among the world’s major economic powers, Brazil has achieved a rare trifecta [trye-fécta = Dreikampf]: high growth, political freedom, and falling inequality." 

Ladies and Gentlemen, 

This is a development that not only impresses the rest of the world, but inspires it. Even if Brazil’s economy is suffering under a recession and is growing less than in past years, it has succeeded in freeing millions of people from poverty, in creating a middle class which encompasses almost 60 percent of its approximately 200 million inhabitants, and in lowering unemployment figures to the lowest level in Brazilian history. 

And next year they may even succeed in achieving a fourth wonder: winning the football World Cup in their own country. I’d wish them success in achieving this from the bottom of my heart if our own national team didn’t have an old score to settle from 2002. 

No matter how this competition ends I am more than happy to be in the Land of Miracles, because there are so many people in the heavily indebted countries in Europe who are hoping for a little miracle at this very moment. The way I see it, admittedly, they don’t actually need any magic. The course of a country can indeed be altered, as was done here in Brazil, through structural changes, budgetary reforms, and active growth policy. 

Today our country is described as the growth driver of Europe. With a far-reaching reform package, the then SPD government passed the so-called Agenda 2010. In a process that was not exactly simple, social systems were restructured, ancillary [-ssílary] wage costs lowered, the labour market made more flexible, state finances consolidated, and thus our competitive position strengthened. 

And that is what is key in the final analysis the competitiveness that can be regained if a country makes up its mind to take decisive [dee-ssáisive] reforms. 

Instead of energetically working to implement structural changes, however, certain countries in the Eurozone have made use of the advantages of low interest rates and encumbered themselves with additional debt. And the banks have profited from these transactions, disregarding all of the associated risks.

As a result, the debt crisis has been keeping Europe in suspense for three years now. Five of the 17 Eurozone countries have had to be supported with assistance loans. Following Greece, Ireland, Portugal and Spain, Cyprus is now also availing itself of aid. 

A look at Latin America might help in finding solutions to some of the problems that exist. After all, in the 1990s, Latin America was faced with similar problems, with economic crises, bank failures, and the results of waste and overextension. 

Today the continent consists of many strong countries that have a good grasp on their public finances and have regulated their banking system. Unlike Europe, they were thus able to overcome the global crisis practically without damage.

To understand the complexity of the problems in some of the countries in Europe, it is important to recall the origins of the European common currency. The constructors of the monetary union intended the euro to be a symbol that would weld Europe together and promote European integration in line with the thesis of the founding fathers of the European Union, that political integration would follow economic collaboration. 

With the Maastricht Treaty or the Treaty on European Union (TEU) of 1992, the Economic and Monetary Union was also agreed, that was to lead to the introduction of the euro.

To adopt the common currency, the member nations are obligated to fulfil certain criteria, the so-called convergence [2.Silbe] criteria. These are: stable prices, stable exchange rates, low long-term interest rates, and sound national finances. The idea was to guarantee the greatest possible stability for the new currency zone. 

National finances were unquestionably among the most important of the convérgence criteria. The total debt of the nation was not to exceed 60 percent of the gross domestic product (GDP), and annual new debt, that is, budget deficit, three percent of the gross domestic product. These two criteria were laid down in the Stability and Growth Pact beyond the scope of the euro’s introduction, a pact that all have vowed to abide by.

The euro was then adopted on 1 January 2002. Today, more than ten years later, 27 EU countries now use the euro for monetary transactions. In the Vatican City State, too, as well as in San Marino, Andorra and Monaco, it has been the official currency for some time now. 

But the euro is more than just a currency. It is and remains a success story despite all the criticism of this single currency and all of its current challenges.

For citizens, companies and member nations, it offers immense advantages, particularly for Germany and its focus on exports. With inflation rates of less than three percent, the euro has been extremely stable for a decade, also in relation to the dollar and the most important currencies of the aspiring emerging nations.

Among the obvious advantages of the common currency is the end of currency exchange and exchange rate fluctuations. 

Member nations, companies and European citizens are guaranteed low interest rates for loans by the euro, whether for bonds, for private loans, or for loans to companies. In addition to these interest advantages in the shared currency zone, companies, in particular, also profit from increased trade among the member nations and from the fact that the cost for currency exchange is eliminated and there is no need for protection against exchange rate risks. 

To put it briefly: The decision to create a common currency was and remains correct! After all, it is not the euro that is facing a crisis, but the confidence of investors and financial markets, who question whether the over-indebted countries are going to be able to rehabilitate their finances again. 

Regaining this confidence is fundamental for the further development of the Eurozone and the Economic and Monetary Union. Prudence is therefore called for both in the selection of instruments for crisis management and in the type of communication. This is the only way we can prevent a crisis of confidence from becoming a euro crisis, and thus an EU crisis. 

In so doing, we need to admit our errors and weaknesses and correct our mistakes. There is no doubt that the monetary union is suffering particularly because of errors in its design. What exactly was overseen in the way it was planned?

Since the euro countries cannot devalue their currency in order to reduce their debts and to make their exports cheaper, the euro nations have to pursue a joint economic and financial policy. This is a situation that was not taken that seriously when the euro was introduced. 

A comprehensive set of fiscal instruments was not created along with the euro. This means that the debt ceiling that was agreed in the so-called Stability Pact could be broken repeatedly. Even by Germany and France who were the first to violate this rule. 

In general, the criteria for admission to the Eurozone were applied too laxly. It is common knowledge that countries were also accepted that from the very beginning did not fulfil the convergence criteria.

In the Economic and Monetary Union, there should have been effective fiscal controls from the outset that would have been able to enforce greater competitiveness and stricter debt ceilings. 

As things were, however, certain countries were able to amass high debt. Now and again, their liabilities surpassed their own economic output. As members of the monetary union, they were able to obtain low-cost loans.

This went well for quite some time, until, as a result of the Lehmann crash in September 2008, the financial crisis, and the recession that followed, the debt situation spiralled [spý-] out of control and the structural differences between the countries became evident. The result: Many countries had to spend huge amounts of money, in order to rescue banks and to boost the economy through stimulus [stímjulous] packages sometimes with more, sometimes with less success. For these measures were financed by accumulating even more debt. 

In Germany, a stimulus package of more than 50 billion euros, and thus 1.6 percent of the gross domestic product, helped the economy to recover quickly. In several other countries, however, this additional overextension unfortunately had the opposite effect. 

There is no doubt that it was the exploding national debt of individual euro countries, and not the euro itself, that became the focus of the financial markets and thus also the sustainability of public finances. 

But Europe would not be Europe if it did not grasp the fact that this crisis is an opportunity. An opportunity to correct its path, not only to help the countries that are affected to master the current crisis, but at the same time to promote political and economic union. 

Also true is the fact that, when we take a closer look, we can see that Europe has become stronger. It has become clear that the European Union is not only a union of member nations, but also a group built on solidarity. And it is evident that Europe has every intention of defending the Eurozone with all the means it has at its disposal. 

Measures that even a short time ago seemed unthinkable are being used in the short or long term:

• Greece received loans amounting to 110 billion euros, linked to stringent requirements. 
• In addition, a temporary euro rescue fund with a volume of 440 billion euros was provided for countries like Ireland, Portugal, Greece, Spain and Cyprus.  

To stabilize the euro long-term, farther-reaching steps were taken as well. 

• Greater powers of enforcement were provided for the Stability and Growth Pact. Sanctions can be imposed on nations that violate the stability rules through excessive debt.
• In the fiscal pact, in addition, the euro countries have pledged to introduce national debt limits and to reduce debt. 
• Furthermore, with the "Euro-Plus Pact," national economic policies are to be coordinated to a greater extent than has been the case up to now, in order to increase the competitiveness of the entire euro region. 
• With the European Stability Mechanism (ESM), an additional permanent rescue parachute was created which can provide loans to nations in financial difficulty, if strict requirements are met. 
• A strong European Central Bank can step into the breach to stabilize the financial markets if necessary. 
• And, not least, there will be a European banking supervisory authority for credit institutions that operate internationally. 

Ladies and Gentlemen,

Obviously, there is no easy way out of this crisis. You could say that the time from 2009 to the present has been filled with experiments and attempts to save the countries that are in crisis. Not all of these have been successful. 

But we have learned as we went along. The EU has corrected its errors. With each new case, it has further improved the instruments that are available for dealing with crises [-sees]. 

Thanks to all of these measures, confidence in the Eurozone has gradually been growing again. Emergency loans and reforms, some of which have been painful, are beginning to bear fruit, and the markets are reacting much more calmly as can be seen in Cyprus at the moment. True, Europe is still in recession, but it seems to be recovering from its lowest point. 

An important insight gained from the financial crisis is undoubtedly the fact that in the final analysis someone always has to pay. I am firmly convinced that any one who has prófited from speculation in recent years must also make a contribution toward solving this crisis. 

Further progress in banking regulation would certainly be desirable. After all, it is not acceptable that it is the taxpayers who always have to step in when banks overextend themselves, while shareholders and creditors are spared. How is one to explain to taxpayers and the general population, with a clear conscience, that they have to accept the necessary cuts? 

However, to effectively fight against the causes of the crisis, the euro countries have no choice other than finally making the necessary domestic changes and reforms, and doing so as quickly as possible. 

How, when and where they carry out these reforms, must be decided democratically by the individual countries themselves. The countries’ individual responsibility in designing their reform packages is important. After all, the population in the crisis countries must accept the fact that these reforms are to their own advantage and will ensure the viability of their own future.  

There are many ways to achieve a healthy budget, through higher taxes paired with additional spending, or through lower taxes and lower spending. Each country can judge best which reforms can be carried out and will be effective. 

And this must be communicated, of course. What we need is a consensus on the fact that we stand behind the idea of Europe, and that Europe is based on the idea of reciprocity (ressipróssity). One could say that give and take, like solidarity and responsibility, are two sides of the euro. After all, creditors and debtors do not oppose one another in the Eurozone, but stand close to one another as a group with a common interest. 

We also need a consensus throughout all of the countries, that we must defend Europe and its currency, that the union needs not only financial stability and solid budgets, but also more growth and employment and competitiveness. 

Ladies and Gentlemen,

We must not live at the cost of future generations, and we do not want to do so. It is not tolerable for millions of well-educated men and women to be unable to find work. The situation is particularly dramatic in Southern European countries like Spain, where almost every second young adult now cannot find a job. We must do what is necessary to make sure that "Europe’s future" does not lag behind. And to do so, we must not only take concrete steps, but these steps must be checked from time to time to see whether they are effective, so that our actions go beyond good intentions.  

What we do not need, however, is exaggerated scepticism regarding Europe, regarding the euro, and regarding the individual countries that feel that they are being subjected to massive prejudice, whether as the country that is receiving aid or the one that is providing it. 

Despite this widespread attitude, I am confident that the debt crisis of the euro countries that are involved can be solved if Europe sticks together and mobilizes its collective strength. 

We may not forget that the euro is the basis of prosperity of all European nations. The closely interlinked economies in Europe are dependent on one another, prosper in the long term only if they do so jointly, and suffer collectively if a single country steps out of line. 

In the current crisis situation, everyone is paying: some with their taxes, others through a reduction in benefits. This is the reality. In a globalised world, a united Europe is not only more competitive, but in every way also more capable of acting and of maintaining a democracy, than the individual member nations would be individually. 

In the final analysis, all euro countries profit from the advantages offered by the union. This is why we need the EU, why we need the euro to keep us from sinking into political and economic mediocrity. 

The spoken word applies.