1 Speech IBEC CEO conference 2013 Economic and monetary governance in Europe: Getting it right Dublin, 28/02/2013 By Thomas

Leysen, Chairman, KBC Group and Umicore (prepared with the assistance of Edwin De Boeck and Siegfried Top)

Dear President Barosso, Dear Taoiseach, Ladies and gentlemen, It is a real pleasure to share some thoughts today with such a distinguished group of business leaders, and to do it here in Dublin, the capital of a country that has been both a remarkable example of economic dynamism since joining the European Union, as well as a focal point of the Eurozone crisis. Today, the macroeconomic and business environment remains challenging, but, to quote ECB president Mario Draghi, the darkest clouds over the euro area have subsided. In my dual capacity, as an industrialist, and as Chairman of one of the Eurozones largest bank-insurance groups, I share this view. I am among those who see the glass as half full, or more than half full. And the election results in Italy will not change that view. Admittedley, the process that has been followed in adressing the eurozone crisis has not always been a pretty spectacle to behold, but the progress that has been made in aggregate is quite remarkable. The euro is here to stay - a fact which those who, only a year ago, confidently predicted its imminent demise now grudgingly admit. The complicated election results in Italy do not change my view. Also, many countries are further ahead on the road to reform and fiscal consolidation than was thought possible, and much better institutional mechanisms are already in place. Yet, it is equally clear that there are absolutely no grounds for complacency. Much needs to be done to ensure a sustained stability of the Eurozone and a return to sustainable growth. In adressing the topic to hand, let me start by looking at the roots of this crisis, before turning to the steps that have already been initiated, and the further steps that need to be taken to improve the eurozone governance. I will argue that further building on the institutional framework is necessary, but must go hand in hand with pragmatic economic policies to foster growth in Europe.

1. The eurocrisis as an institutional crisis The eurozone crisis has many faces. It occured when the epicenter of the global financial crisis moved from the US to Europe. At first sight it appears as a sovereign debt crisis. But at its core lies a balance of payments crisis, reflected by large current account deficits, excessive debt accumulation by both the public and private sector and loss of competitiveness of some member states.

2 Ultimately, however, it is clear that at its very root also lies an institutional crisis. Sometimes it is said that the euro is a currency without a state. This is only partially true, as clear supranational institutions are in place at the EU level. However, the shortcomings in the process of political integration allowed countries within the common currency to maintain unsound fiscal positions, and impeded a faster correction of unsustainable growth models in some countries. This led to a build-up of macroeconomic imbalances, often heavily depending on intra-eurozone lending, actually facilitated by a strong integration of the European financial markets. The global financial crisis in 2008-2009 brought these major macroeconomic imbalances dramatically to the fore and extreme risk aversion suddenly stopped financial flows between the member states. All of a sudden, the shortcomings of the monetary union became crystal-clear. Its institutional framework was not prepared to deal with this challenge. The outcome was an ever escalating crisis, reinforcing itself through the disintegration of the European financial market. The monetary union itself came under severe stress, with growing fears of eurozone break-up. Many analyses were made at that time predicting that the monetary union would either fall apart, or would have to transform into a completely integrated political and economic union, similar to the United States. I think we can say now that this thinking was overly simplistic .

Clearly, the crisis demonstrated the incomplete character of the Economic and Monetary Union. The existing governance tools failed: the Stability and Growth Pact was ill-equipped, and inadequately enforced. No effective economic coordination or correction mechanism was in place, so that the building up of imbalances was left unattended. The financial sector remained under national supervision. And thus pressing questions arose: what are the minimum conditions to ensure the full viability of the eurozone over time? What does Europe really need? What surely is crucial in a monetary union is the role of a stabilizing central bank. Capitalising on the credibility of the ECB established under Jean-Claude Trichet, his successor initiated bold action when needed. Its formal commitment late September to safeguard the financial stability of the euro with its OMT-programme as well as the LTRO-support earlier in the year were necessary, but no sufficient conditions for assuring the sustainability of the euro in the long run. By doing so, the ECB has built a bridge towards stability, providing a window of opportunity for governments to address the fundamental challenges and complete the eurozones institutional architecture. This depends on three institutional pillars: A fiscal pillar with enforceable rules to restore fiscal capacity and debt sustainability An economic pillar that fosters competitiveness, sustained growth and employment A financial pillar with a single supervisor, re-unifying the banking system

The future prosperity of Europe, its firms and its citizens, hinges on the ability of the European leaders to complement the monetary union with these new pillars. Much has already been achieved, particularly in the last year, but still, much needs to be done. I nevertheless do expect further progress to happen in small, persistent steps towards a closer union (or better: a more efficient union) that creates a solid base for financial stability and a thriving business environment. Let me briefly go into each of these points, summing up achievements and further necessary enhancements of the eurozone.

3 2. Completing EMU: a fiscal pillar On the fiscal front, important reforms were put in place both at the national and the European level. As of September last year, a permanent European Stability Mechanism (the ESM) is established. It provides a solid safety net and mutualizes fiscal capacity in support of member states if needed, at least for smaller countries. The new tools of this ES were a prerequisite for the ECBs support through the OMT-programme, which proved to be a game-changer in the euro crisis. As such, the ESM is a first step towards a (limited) mutualization of debt. On the other hand, one should not forget that real solutions to foster economic growth in Europe cannot come from ever more government debt. From that perspective, it is very encouraging that over the last two years, countries have renewed their commitment to fiscal reforms. At the center of this are the Fiscal Compact and new European legislation, such as the Six Pack and the Two Pack. The Fiscal Compact treaty became effective since the start of this year, applying new, more enforceable rules to strengthen oversight of government budgets, including a balanced budget rule and an institutional debt brake. The Compact strengthens the sustainability and credibility of fiscal policies. Here, in Ireland, it was adopted after a referendum that showed the willingness of the Irish people to stay in the euro and adhere to the principles of this strengthened governance, sending a strong positive signal to the rest of the eurozone, and the world. I see now that public finances are gradually improving, as is markets confidence in governments actions. To further strengthen this confidence, fiscal consolidation not only needs to credibly contain public debt ratios, but also avoid a major short-term contraction of real economic activity. This calls for a differentiated approach to consolidation, that, on top of the general debt and deficit rules defined in the Compact, allows to take into account country-specific economic conditions. If growth unexpectedly deteriorates or a country-specific shock occurs, it should be given extra time to correct its excessive deficit, in order to avoid the vicious spiral of negative growth and deteriorating public finances. In that respect, the creation within the fiscal pillar of a new supranational mechanism to absorb temporary, country-specific shocks, is an essential further step. The introduction of reform contracts, as proposed by EU-President Van Rompuy as a convergence and competitiveness instrument is a good idea, though not (yet) accepted by the European Council. Such country-specific contracts are conditional and imply only temporary fiscal support. By limiting the financial support in time it is avoided that the eurozone turns into a permanent transfer union. Moreover, the contracts target structural reforms, and are thus growth enhancing. 3. Completing EMU: an economic pillar This brings me to my next point: the economic pillar. The crisis has indeed shown that not only government finances should be the focus of further integration, but also economic policy. Coordinated economic policies are essential to complement the monetary union. To this goal, the Commission started its Macroeconomic Imbalances Procedure, aiming to prevent the buildup of new, and enforce the correction of existing imbalances. These are, among others, the large current account deficits (and surpluses), excessive debt accumulation by the private sector, housing bubbles and loss of competitiveness. Correcting these imbalances is a difficult and painful process, but is essential for future and sustainable economic growth. Let me focus here on one key policy concern, the restoration of competitiveness.

4 Europes future prosperity requires member countries to be competitive, meaning that their institutional and macroeconomic conditions should allow productive firms to thrive globally. To that, Ireland is a bright example of restoring competitiveness, with relative unit labour costs having fallen by almost 20% since its pre-crisis peak. Prices, costs and wages are important factors for firms to develop, but there are also other considerations, specifically for advanced economies. Europes comparative advantages at a global level are its specialization in highvalue products and innovative technologies. Since the start of the euro, exports in high-tech and research-intensive products have increased faster than in other, more traditional sectors. Being competitive in a broad sense is also taking full advantage of a well-educated labour force and innovation potential. A central challenge for policymakers is thus to set conditions that allow the skills and capabilities of the labour force, especially the younger people, to be welldeveloped and valuably employed by competitive firms, or in the new enterprises that these young people will establish and develop. A flourishing, business-friendly environment should support entrepreneurs in crucial phases of the business life-cycle. To this end, a lighter regulatory burden, the seizing of the opportunities of the digital age and the green economy, and, of course, adequate access to finance, are crucial. Supplementary to that, there is a vital role for the banking sector. 4. Completing EMU: a banking union This brings me to the third pillar, the banking union, which should again integrate the European financial system and restore sustainable lending to the real economy. The decision to create such a union was perhaps the most important response to the eurocrisis in 2012, and this for two reasons. First, the strong interconnectedness between banks and sovereigns in Europe, and second, the role of banks in financing the real economy, and especially the many SMEs in Europe. Let me be more precise on that. The strong link between the eurozone banking system and its sovereigns, and their respective mutual risks, has played in both directions. Banks facing problems during the global financial crisis had to be supported by their government. At the same time, European banks balance sheets are loaded with sovereign debt. Since the start of the crisis, the strong integration between banks and sovereigns has thus threatened to create a vicious spiral of deteriorating public finances and a financial sector balance sheet crisis. Combine this with the important intermediary role of the financial sector in Europe, and the risk of a credit crunch pushing the real economy into a severe recession became very real. Much however has in the meantime been done by European banks to improve their solidity.Much more, actually, then many people are aware of. By increasing their CT-1 capital by 25% (or already 190 bn) and reducing their RWAs by 2%, major banks have improved their CT-1 from 8.9% end 2009 to 11.4% in Q3 2012. Most of this improvement comes from bank recapitalizations following European-wide stress-tests. My own institution, KBC, raised its CT 1 ratio from 9,2 % to 12,5 % in three years time, despite repaying 4.2 bn in state aid + interests over the same period. It did this by a combination of a capital increase, retention of earnings, reducing risk weighted assets in investment banking and divestments of non-core assets. In the same period, lending to private persons and companies in our core countries actually grew, defying conventional wisdom. More generally, investors' confidence in European banks strengthened in recent months, as witnessed by improved funding conditions and the recovery of banks' share prices. The first results of regained trust in the banking system have also become visible in lending rates to the real economy, that started to re-align.

5 Nevertheless, banks continue to operate in a challenging environment, as e.g. illustrated by high nonperforming loans and weak profitability at banks in Ireland. European banks' resilience will be further enhanced by the current regulatory overhaul provided by new Basel solvency and liquidity rules. Against the background of weak and fragile economic growth I would argue that banks, like countries, should be given enough time by regulators to comply with the new rules and targets. In that respect I welcome the recent easing of the new liquidity coverage ratio (LCR) by the Basel Committee. On top of these regulatory measures, institutional reforms towards a European banking union were necessary to counter the unravelling of the single financial market, disentangle banks from their sovereigns, restore monetary policy transmission and fix the credit channel to restart growth. Over the last six months, European leaders have decided on a single supervisor, and by doing so showed their capability to reach agreements on deepening the eurozone. Also this decision contributed to the return of trust in the banking system. However, to establish a fullyfledged banking union, it is imperative to continue to match the integrated supervision with a single resolution mechanism, a credible fiscal backstop and, eventually, a single deposit guarantee scheme. This again involves a greater solidarity and sharing of sovereignty between the member states. But is indispensible if we want to really establish a level playing field between eurozone banks and avoid the resurgence of the vicious cycle the next time a crisis hits.

Conclusion Let me now draw to a more political conclusion. Over the past two years substantial steps have been taken by European politicians to address the institutional shortcomings that were at the heart of the eurocrisis, including a new fiscal and economic framework, a permanent stability mechanism, and an area-wide banking supervisor. On the country level, budgetary and structural economic reforms have been implemented, leading to first successes. In Ireland, competitiveness has been restored, economic growth is improving, the structural deficit has been lowered significantly and a full return to the financial markets is underway. European banks have made significant progress in building strong capital buffers and further regained credibility through recent reforms. These steps, together with the ECBs commitment to safeguard the euro, have stabilized the eurozone and reverted the looming disintegration. All this constitues a necessary precondition for the recovery of sustainable economic growth. Essential to all this was the clear willingness of European leaders to continue the political project, a willingness which has often been underestimated by commentators and financial markets. Today, new EU member states, such as Poland and Lithuania, again consider joining the euro in the near future. I have the personal belief that ultimately membership of the Eurozone and membership of the European Union will have to converge. This obviously would require a fundamental choice in some countries, especially by our British friends. The British promarket instincts have often in the past provided a very welcome counterweight in the EU against more statist tendencies. Therefore a continued British membership is highly desirable but this will require acceptance by the British people that the European Union is more than a European Free Trade Association. Those in Britain who are tempted by the vision of become some sort of a European Singapore outside the EU, should in my mind be aware of the danger of ending up instead as a greater Monte Carlo, but one surrounded not by the Cte dAzur but by an industrial wasteland.

6 Whilst the agenda of European integration should not be driven by the internal political constraints in the UK, I personally feel that the debate about the shape and efficiency of the European Union is one that we should not avoid now. It is a healthy and useful debate- but should not drag on for five years. In this respect, it has often been repeated that the European Union lacks political legitimacy. This view seems to forget that there is actually a European parliament, which is very powerful in a number of areas, including the approval of the budget and the nomination of commissioners. Therefore, it seems to me that the run-up to the European elections in 2014 should be an excellent time for raising the awareness of thin democratic tool. It should be the moment for the pan-European parties to articulate their visions and submit them to the European people.

Whatever the outcome of these debates and elections, the European Union will not, in the forseeable future, become a federal state like the US. Instead, Europe will continue to grow a model of its own, seeking a right balance between a certain mutualization of risks, increase of responsibility of individual member states and some further sharing of budgetary sovereignty, on top of ensuring a strong single market. To find this model, to achieve a stronger and better Europe is the urgent mandate of this generation. The sustained prosperity and the continued relevance of Europe in the 21st century depend on it.

Thank You very much

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