I know it has been a busy couple of weeks in Cyprus, handling the challenges of forest fires as well as the virus which continues to impact our lives in so many ways.
We are still working hard to overcome the effects of the pandemic, but events like today’s really bring home to me how much progress we have made.
I would like to say a few short words from my perspective as President of the Eurogroup, a role I have held now for just over a year.
What has most impressed me to date at Eurogroup is our shared solidarity in the fight against COVID-19. This has been underpinned by high levels of coordination and consensus.
Cyprus, like my own country Ireland, also has previous experience from dealing with and responding to severe shocks.
We have both faced many challenges and at times the adjustments such as those undertaken in response to the financial crisis were difficult.
However, Cyprus has bounced back and it has so much potential to grow and prosper.
Even last month at Eurogroup we saw a very positive post-programme surveillance report for Cyprus.
Our experiences have shown us the value of and strength of Europe acting together.
In fact, many of the measures and safeguards that we put in place over the past decade were crucial in tackling the economic crisis caused by COVID-19.
Europe has responded strongly and swiftly and the euro itself is positioned as a symbol of our resilience and strength.
In the next few minutes, I would like to give you a flavour of our work at Eurogroup, highlighting some of the things we have done over the past year. I will also touch on economic prospects for the Euro Area and give you all a sense of our priorities through to the turn of the year.
Economy and Eurogroup in 2021
Firstly, on the economy, the latest Commission forecasts show that the Euro Area is recovering with a growth rate of 4.8 per cent anticipated for this year and 4.5 per cent in 2022.
For Cyprus, prospects also look much improved with a growth rate of 4.3 per cent this year and 3.8 per cent in 2022.
While risks persist, particularly around the virus and its variants, the economic tide is turning, helped in no small way by the impressive roll-out of vaccines.
Europe is now the world’s most vaccinated continent, with 500 million doses delivered to the EU and nearly two-thirds of our adult population having received at least one dose of the vaccine. This is occurring at the same time as we continue to export half of our production.
A key priority for Eurogroup will now be to ensure that the current rebound translates into a fully-fledged recovery.
Policy will need to remain supportive and agile into 2022.
All euro-area finance ministers agreed on the importance of avoiding any premature withdrawal of fiscal support.
This was the central message in our Eurogroup statement in March.
While we are now in the early stages of recovery, it is important not to lose sight of what has already been done on the economic policy front. In simple terms, the response has been extraordinary.
There are a number of areas that I can highlight.
- unprecedented national budgetary policy measures including automatic stabilisers as well as new discretionary measures;
- the early decisions to activate the general escape clause (March 2020) and to relax state-aid rules; and
- wider European supports.
All of these measures meant that crisis related funding was able to flow in a more efficient and effective manner.
To touch on just one, the SURE programme has supported millions of jobs in Europe. Cyprus has received €604 million from this programme and it has helped to cushion the labour market from the pandemic.
Aside from SURE, other EU wide safety including the ESM’s Pandemic Crisis Support and the EIB’s pan-European guarantee fund (agreed by Eurogroup to the value of €540 billion) were all important in signalling a real sense of shared ownership in Europe.
They showed that we are stronger acting together, rather than as a collection of individual countries.
On top of this, we also of course have Next Generation EU.
This investment and reform package will channel €750 billion of investment to where it is needed most to reinforce the Single Market, intensify cooperation and equip our economies to drive the green and digital transitions.
The Cypriot plan (€1 billion in grants and €230 million in loans) has been very well received and is set to be approved by Finance Ministers next week.
Your plan, amounting to about 5.6% of GDP, is a great opportunity to deliver stronger economic growth.
It addresses a range of areas with a key focus on climate [41% of the total envelope] and the digital transition [23% of the total envelope].
It addresses many structural challenges and it promotes social and territorial cohesion with wide ranging reforms for health and long-term care, social infrastructure, as well as measures to strengthen employment.
It has the potential to increase GDP by between 1.1% and 1.8% until 2026.
This is positive for Cyprus and it is important that the plan is implemented in full.
While the deployment of the Recovery and Resilience Fund will be an undeniable booster for the economies most affected by the pandemic, there is still a lot of uncertainty. We are very conscious of the uneven impacts of this pandemic and the risk of long-term economic scarring.
Over the summer months, we will be closely watching how the re-opening of our economies goes and what needs to be done to ensure a long-lasting recovery.
On the budgetary policy side, there is unanimity on the need for a supportive stance in 2022.
As the recovery gathers momentum, we will also need to move from broad-based supports to more targeted measures. This will need careful management and clear communication.
Eurogroup also needs to make further progress on banking union to facilitate the economic recovery.
Much of my recent work has centred on drawing up a work plan to complete all the elements of the banking union. While we have made progress, we are still not quite there in terms of a consensus that we need for an ambitious plan. Over the remainder of this year, I will continue this work to reach agreement.
Of course that agreement is founded on the commitment of countries, including Cyprus, to reduce risks in their banking sectors. This was critical to our last agreement on a common safety net in November 2020.
Cyprus has implemented an NPL strategy and non-performing loans continue to decline.
Indeed, in 2021, banks in Cyprus made significant progress in reducing the stock of NPLs: the NPL ratio declined by 10 percentage points throughout 2020 (reaching 17.7% at the end of the year), due to both asset sales and write-offs.
This is a welcome development and it is very important to protect the tools that have allowed this impressive progress.
Still, challenges remain. We need to carefully prepare for the impact of unwinding moratoria and public supports.
The resilience of our financial systems has so far managed to mitigate rather than amplify the shock of COVID-19. We must now prepare for the next phase of recovery.
If I could summarise it succinctly, we need a stronger banking sector that:
- ensures access to stable funding for all
- promotes competitiveness
- helps to absorb shocks across the euro area, and one that
- protects depositors and taxpayers.
The other main area of work at Eurogroup centres on the international role of euro. This incorporates discussions on digital currencies and green financing – both issues presenting opportunities as well as challenges.
The project of creating a digital euro has the potential to reshape the way we approach and use our currency.
That is why I very much welcome the fact that just last week, the ECB decided to proceed with the investigation phase of this project.
Eurogroup is fully engaged in this process, which has important political dimensions. We will need to consider these carefully, while respecting the independence of the different institutions involved.
The other area where I see so much potential is in the area of green financing and the leading role already played by Europe in this field. It is both a priority and an enormous challenge.
There is an increasing need to address climate change, as events such as the devastating forest fires here in Cyprus or the floods in Germany and Belgium continue to demonstrate.
We can already see this from the emphasis given to climate in the NGEU and in national recovery and resilience plans.
So that brings me to the end of my brief remarks and a whistle-stop tour of our work and priorities at Eurogroup.
We have achieved so much over the past year and I would again like to thank Constantinos for his excellent work and cooperation over these challenging times.
While COVID related risks persist, our economic prospects are improving.
The foundations are in place for a recovery. This has been helped by many of the decisions and actions we have taken, from the fiscal rules, to income and liquidity supports, to wider EU schemes.
Many of these decisions would have been unimaginable a year or so ago.
But with collective imagination and political determination to succeed, I have no doubt that Cyprus and Europe will continue to act collectively to meet the challenges of the future.