Speech by Miroslav Kalousek, Minister of Finance, in the European Parliament on 21 January

Brussels, 21st January 2009

Presentation of the Czech Presidency’s Priorities concerning Financial and Economic Affairs to the European Parliament, Miroslav Kalousek, Minister of Finance

Dear Madam President, Dear Members, Ladies and Gentlemen,

It is a great pleasure for me to appear before you today in order to present to you the priorities and aims of the Czech Presidency in the areas of finance and economy.

To begin with, let me stress that the success of the Czech Presidency will depend on good cooperation with the European Parliament in all areas, and particularly in issues which are governed by the co-decision procedure. As regards the remit of the ECOFIN Council and your committee, the area concerned is the financial services agenda in which a range of important legislative proposals are under way. This means that we are going to work together a lot over the coming months. I strongly believe that we will be able to fulfil the expectations connected with this legislation and finalise the highest possible number of proposals to the benefit of European businesses and citizens.

My November meeting in Prague with a delegation from this committee, which is still fresh in my memory, gave me a range of interesting ideas for my work in my new role of President of the ECOFIN Council. This is why I am very much looking forward to our exchange of views today which, I believe, will be no less enriching. Another opportunity for a wide-ranging discussion will be the ‘troika’ meeting with representatives of your committee which is scheduled for 9 February 2009.

Now I would like to turn to the agenda of the Czech Presidency in the field of financial and economic affairs. I would like to point out that this agenda was prepared in close cooperation with the French Presidency – on the results of which we will be building – and with the Swedish Presidency for whose work I hope we will establish a good foundation.

As you know, economy is one of the three priority areas of the Czech Presidency as a whole, not only of the ECOFIN Council. This is no surprise. The Czech Republic has taken over the Presidency in difficult times, when after years of prosperity the current financial crisis has brought economic slowdown to the whole of Europe and a number of countries are facing serious recession. In cooperation with other countries, the Czech Presidency will give its greatest attention to measures which will help mitigate the impact of the crisis on European businesses and citizens. At the same time, and even more importantly, our aim will be to ensure that the Europe which emerges from this crisis is stronger and more competitive. In other words, we aim to ensure that the steps we take are taken in consideration of the long-term perspective and lay the foundations of sustainable growth and job creation after the crisis has passed. As regards economic themes, the reform of the international financial architecture is high on the Presidency agenda. Another G20 summit will take place in April and to prepare the EU for this summit will be for us a task of paramount importance.

Allow me now to talk in detail about the plans of the Czech Presidency in the three main areas within the remit of the ECOFIN Council, namely:

• economic policy
• financial stability and financial services
• taxation

Economic Policy

As you know, two days ago the European Commission published a new forecast in which it again revised downward its estimate for growth for this year and next year. The Commission’s forecast is known to you and so I will only refer to this text by observing that it makes very unpleasant reading, even though we all had expected the outlook to deteriorate. Personally, I am most concerned about the badly functioning credit market and the expected rise in unemployment.

Understandably, in these circumstances the ECOFIN Council has great responsibilities. Fortunately, already the December European Council responded to the current developments by adopting the European Economic Recovery Plan. The Czech Presidency can therefore concentrate on its implementation.

To implement this Recovery Plan, I believe it is essential - and we had a wide ranging and very lively discussion about this in the Council yesterday – that we continuously evaluate the effectiveness of the measures being taken. We have to keep asking ourselves whether the measures really can or could decelerate the growth of unemployment, support demand and boost economic growth. At this moment I consider this to be of much greater importance than the amount of financial resources which we, as governments, put at the disposal of our economies.

Closely related to this is the question of the functioning of the credit markets. Signs are appearing that some companies are beginning to have serious problems securing accessible finance. We have to ensure that these channels start working well again and that the normal way of financing the real economy by banks is restored. If this does not happen, the effect of the measures to support the financial sector will be zero for companies and citizens and the fiscal expenditure on its own will not save our economies.

Personally, I believe it is vital that the fiscal measures adopted are timely, short-term and temporary and that there is a rapid return to budgetary discipline and valid medium-term targets once the crisis is over. The current economic crisis was caused by a crisis of confidence in the financial markets. I believe that we should not increase the uncertainty of economic entities through irresponsible fiscal policies. After all, there have already been some warning signals from the treasury securities market where there have recently been several unsuccessful issues. This is a new phenomenon in the current crisis and we will have to closely monitor developments on these markets.

As regards budget discipline, a lot has been written about its future in the EU over the last few months and some have advocated the abandonment of the Stability and Growth Pact. I would like to say here that the Czech Presidency considers the Stability and Growth Pact to be the cornerstone of our budget policies which must not be questioned. After the reform of 2005, the pact now offers a framework for bad as well as good economic times. We obviously cannot expect, either this year or next year, to be able to achieve equally good budget results as in a period of economic growth. When evaluating the stabilisation and convergence programmes we will abide by the rules of the Pact, including the flexibility which it allows. Recommendations on these programmes will follow the same goal as before, i.e. a return to sustainable budget figures. In cases where the conditions of the Treaty and the Pact have been met, the Council will instigate the excessive deficit procedure. Understandably we must be realistic and take into consideration the time scale of the economic recession, but the rules will be applied as they stand.

This year’s evaluation of progress with the Lisbon Strategy will be influenced by the economic crisis. I believe that the long-term priorities for the direction of structural reforms were well chosen and remain valid. While preparing recommendations for each country we will, in cooperation with the Commission, endeavour to take into account current proposals and the optimal integration of the Recovery Plan. Nevertheless it is a fact that the problems linked with the ageing population or the pressure of globalisation, for example, have not diminished with the financial crisis and we must continue to identify measures which strengthen our economies in the long term.

The Czech Presidency will emphasise the continuing process of structural reform. It is necessary to strengthen the development of competitive industrial sectors, support measures to achieve a suitably qualified workforce, and implement further policies which will enable the unemployed to return to the labour market as soon as the crisis is over.

Our main task will be to prepare the spring session of the European Council in cooperation with other Council bodies. I would like this year’s Key Issues Paper (KIP) of the ECOFIN Council for the spring session of the European Council to genuinely focus on current issues. It will be concerned above all with the renewal of growth, employment and the pressing questions of financial stability, including international aspects. Further, apart from a report on the Lisbon Strategy, the ECOFIN Council will prepare contributions concerning the easing of the administrative burden on companies, the revision of the internal market and international financing of the fight against climate change.

As I mentioned earlier, even in the current difficult situation we should not lose sight of the long-term aspects of public finance. We will discuss the effects of the ageing population and the possible implications for our budget targets. We will also pay attention to the quality of public finance – especially trends in the structure of public expenditure.

One specific contribution of the Czech Presidency will be a discussion about the economic costs and benefits of the enlargement in 2004, which we have planned for the occasion of the 5th anniversary of this enlargement. On 2 March a conference will take place in Prague on that topic. Conference participants will evaluate the implications of enlargement in three areas – macroeconomic stability, the labour market and competitiveness. Their findings will serve as a starting point for discussions among ministers at several informal meetings, including the ECOFIN Council.

Financial Services

As I said earlier, the Czech Presidency will pay great attention to the situation on the financial markets and to improving the conditions in which the markets operate, not only in Europe but worldwide.

First of all I would like to mention the continuing work within the framework of the G20 group. The EU is represented in this group by the President of the Council and our Presidency is determined to do everything necessary to ensure high quality and a coordinated preparation of the common position of the EU in meetings at all levels and, particularly, for the G20 summit which will be held on 2 April in London. In this matter we are working in cooperation with the Commission and colleagues from the Council, so the interests of all 27 Member States of the EU are fully represented.

At the last G20 summit in Washington, an ambitious action plan was laid out with a number of measures to strengthen transparency and accountability, improve regulations, support the integrity of the financial markets and strengthen international cooperation. This plan includes a whole range of questions which are currently being resolved within the EU, some of them as part of the road maps adopted by the ECOFIN Council in 2007.

I therefore believe that the Union is in a good initial position to decisively influence the future shape of the global financial system, and the Czech Presidency will do its best to ensure that the EU retains its leading position at G20 sessions and contributes to the fulfilment of the adopted action plan.

The focal point of the work of our Presidency will be above all to strengthen the financial stability of the EU, which is an essential prerequisite for our economies to function properly. Therefore, we will continue to implement and update the road maps adopted in response to the financial turbulence. At the same time we will monitor developments in the financial markets and, if necessary, coordinate additional measures at European level.

Nevertheless, the main target remains drawing conclusions from our recent experience and preventing a similar financial crisis developing in the future. One very important lesson from the crisis of last autumn is that coordination between Member States is of key importance. We must avoid situations in which neighbours can harm each other. I am convinced that despite some initial difficulties we have managed to achieve that.

The basis of financial stability is effective supervision of the financial markets. To prepare proposals to strengthen the European supervision regime, the Commission recently established a group of specialists with Jacques de Larosière as president. The results of the work of this group, which are expected at the end of February, will be used by our Presidency in discussions relating to reforms of the supervision of financial markets in the EU at our informal ECOFIN session in Prague in April.

We will endeavour to ensure that proposals regarding possible changes to the supervision of cross-border financial groups are supported by appropriate risk analyses of the suggested system, not only from the point of view of the country of origin but also of the host country. I am aware of the fact that your committee has already been working intensively on this key question for some time and I very much appreciate all of your contributions on this topic.

There are also several legislative proposals connected with strengthening the stability of European financial institutions. Finalising them has become a task for the Czech Presidency. Completing this task is a high priority for us, especially as far as the proposals connected with the revision of the protection framework in banking and insurance are concerned – in other words the directives on capital requirements (CRD) and Solvency II.

This brings us to an area where, above all, intensive cooperation with the European Parliament and in particular with your committee will be of key importance for us. We have a lot of work ahead of us which we will have to complete together in a relatively short time.

Significant progress has been made in the Council and also in the European Parliament on the proposals I have already mentioned and on the recently proposed regulation on credit-rating agencies. Approval of the proposals will require a constructive approach and willingness to compromise on both sides. I strongly believe that our joint negotiations will be held in this spirit.

Another area of our common legislative work will be payment services. Here the Czech Presidency will concentrate on amendments to the regulation on cross-border payments in euros and the e-money directive, which we consider an important tool for the further development of this sector in the EU with clear benefits for its citizens. As regards these two proposals, I also hope we can find a compromise with the European Parliament by April 2009 at the latest.

Taxes

Our main priority in the area of taxes will be the fight against tax evasion and the avoidance of tax obligations. In connection with these priorities steps are necessary to improve the efficiency of the tax administration of the Member States and their cooperation. I believe it is a goal shared by all Member States and that we will also be able to make progress in this area.

As regards indirect taxation, the Czech Presidency will focus primarily on the draft VAT directive put before the Commission in December 2008. This draft regulates the import of tax-free goods and the joint and several liability of companies or individuals in the case of unpaid tax when goods are delivered to another Member State. At the same time we will be working on a proposal for a directive concerning reciprocal assistance between Member States in the recovery of unpaid taxes.

In the case of direct taxes we will continue to work on the revision of the directive on taxable interest on savings. This directive should remove loopholes in the current legislation. We will also support the European Commission when negotiating treaties concerning the exchange of information with third countries about income from savings.

The second aim of the Czech Presidency in the field of taxation connected with our priority of removing barriers in the internal market is the modernisation and simplification of tax rules. In that respect we will strongly support the approval of the amendment to the directive governing consumer tax applied to tobacco products. We will also continue our work on proposals regulating VAT issues in the area of financial and insurance services.

Further concerning VAT, the Presidency will put all its efforts into completing the task imposed in December by the European Council to solve, by March 2009, the question of applying lower rates in some sectors. We will resolve this question in the context of the European Economic Recovery Plan. We are planning in-depth discussions on the matter at the February ECOFIN Council session. The Presidency will strive to find a solution, although we cannot deny that it is a complicated task.

Ladies and Gentlemen Thank you for your attention and I look forward to your questions.