Ladies and gentlemen,
First of all, let me thank the College of Europe, and in particular my former colleague, Federica Mogherini, for inviting me to speak here today.
After this introduction, I will maybe be obliged at some moment to come back to some of the points raised concerning how we were dealing with the financial and economic crisis in Latvia.
First of all, let me say that is my privilege to interact with you – the next generation of European leaders, opinion-makers and public servants.
I am sure you have heard it before – but let me say it anyway:
The European Union is depending on you to take our shared project forward.
The knowledge and skills you accumulate here in Bruges, or in Natolin, will serve you well, whether you decide to stay in the EU institutions or work back in your home countries.
Several members of my team are College of Europe alumni, and also some of our stagiaires. And I am always impressed by their ability and commitment.
Europe will also need your ability and commitment, now more than ever.
When I first received this invitation to speak here, I was looking forward to talk about emerging from the crisis caused by the pandemic.
But in a matter of weeks, the European continent has been plunged into its greatest crisis for many generations. And these are dark and troubling times.
The Russian aggression against Ukraine is an existential threat not only to Ukraine, it is a threat to all of Europe. It is about the entire European security architecture.
Because Putin is clearly now in aggressive militaristic mode.
The EU response has to be robust, and swift.
We are determined to provide every support necessary for Ukraine. And we are resolute in our commitment to cripple Putin’s capacity to finance his illegal and barbaric war.
Because it is clear that if we do not show strength now, there is every possibility that this war will spread, that Putin will invade other neighbouring countries, or even challenge NATO in the Baltic States or Poland.
We must therefore do everything we can to stop Russia.
So far, Europe and our allies have shown very good coordination.
In the EU, since the beginning of the war, we have already imposed four sanctions packages.
These sanctions are biting hard. Russia’s financial markets are close to collapse and Russia is close to default.
Each new round of sanctions puts additional pressure on Putin and his cronies.
But of course there is another side of the coin – because putting these sanctions in place, and implementing them, is complex and costly.
But it will cost Europe less than rebuilding Ukraine from ruins and from the consequences of spreading war.
Our continent and our values are at stake here.
Ukraine believes in a European destiny for its people.
They have made this very clear ever since the Maidan Revolution in 2014.
On 28 February, while under Russian attacks, the President of Ukraine submitted a formal application to become a member of European Union.
The European Council has acted swiftly and the European Commission is now preparing an opinion on this application, on which we will proceed without delay.
Ukraine belongs to the European family and its future is in the EU.
This war will clearly have an economic impact on Europe.
We will see higher prices – not least for energy and food –and we will be exposed to supply chain disruptions and market volatility.
But this is the price we have to pay, and need to pay, to defend our values and freedom.
And we must not forget one crucially important fact:
It is exactly in such difficult times that the European Union finds its voice, and finds unity, and finds new ways to get results.
As you know, the idea of continental union was forged from the wreckage of World War Two.
In every major crisis moment since then, EU leaders have tried to put differences aside, and fought for the common good, together.
In such moments, often things that were considered impossible before become possible.
In 2020, at the height of the Covid crisis, EU countries came together, agreeing a common European response in a spirit of solidarity.
This was financed by common EU borrowing on a large scale – for the first time.
In such moments, the capacity for huge, positive change becomes reality.
For example, our substantial EU-wide recovery programme, NextGenerationEU, was created in just a few months.
It is now a landmark tool – with 810 billion euros to strengthen our economies and propel us into a green and digital future.
The origin of the word “crisis” has a unique European flavor. It is derived from the Latinized form of a Greek word, meaning “turning point in a disease.”
In other words, it is a moment when the person with the disease can get better or worse.
Europe also stands at such a turning point.
And there is no doubt we are dealing with the same disease we have faced many times in our history. The disease of chauvinism, authoritarianism and autocracy.
Because of this disease, war has returned to Europe.
Russia’s invasion of Ukraine is the latest proof of raw power politics making a comeback.
Geopolitical shifts are accelerating.
A clash of values is taking place in our neighbourhood, and also on the global stage.
On one side stand those who believe in democracy, the right of self-determination, rule of law, and respect for international agreements.
On the other side stand those who believe in brute force.
In this world, we have to stand up for our values. Not just talk about them.
We now have to think hard about our place in the world. Our alliances. Our dependencies. Our defence capabilities.
We are rethinking how we power our economies and homes. How we can drive forward the green transition. How we can bring our institutions and societies fully in line with the digital revolution.
A new Europe will emerge as a result.
And your generation will be in the driving seat to take it forward.
Let me describe some elements of this change.
We have talked for decades about improving European energy resilience. Now, in the space of a few weeks, this urgency of real change has accelerated to top speed.
Because we depend far too much on Russia for gas, oil and coal.
Last year, Russia provided around 45% of our total gas imports. For crude oil, Russia is also the largest supplier.
But we cannot rely on a supplier who explicitly threatens us. We have to move away from Russia.
The Commission has therefore presented a strategy to make our energy supplies more affordable, more secure and more sustainable. It aims to reduce our dependence on Russian gas by two thirds by the end of this year.
It aims to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition.
This change is overdue, and very much welcome.
We are seeing other new chapters being written. The fact that EU leaders agreed to provide €500 million for arms and other aid to the Ukrainian military.
This is the first time that the EU has financed the purchase and delivery of weapons and other equipment to a country under attack.
This acknowledges that we have to rethink our security and military cooperation. And we will do so, in complementarity with NATO.
The Ukraine crisis is bringing us closer to our allies around the world.
The transatlantic relationship is bouncing back with renewed energy and shared focus.
This applies to not only our relations with the U.S., but also with other like-minded partners.
Talking about the U.S., you may be aware that last year we founded a new forum for cooperation, the Trade and Technology Council. There we are working together on issues like setting standards and rules for the 21st century.
But we also need to cooperate in other areas like cyber security, fighting disinformation and building trustworthy supply chains.
With renewed transatlantic energy, and with strong global coalitions based on shared values, big achievements are possible.
We need to defend the rules-based multilateral trading system from these growing threats.
We need to reinforce open, fair and resilient global supply chains.
And we need to ensure that our European values are at the core of everything we do.
Because the current Ukraine situation shows us that the alternative is much, much worse.
If you want to understand how the EU approaches the renewal of global institutions, I encourage you to read our proposal on reforming the World Trade Organisation.
We published this 12 months ago, and we are working hard with our partners around the world to find allies in support of this approach.
This is how the EU gets things done. We do not impose our will on others. We do not believe in “might is right”.
Instead, we work with our global partners. This includes countries who are already like-minded.
But equally, it includes countries who may diverge from us, but want to be constructive and cooperate.
As a strong economic bloc, we have the means to promote our values and exercise our global influence.
Unquestionably, the Ukraine situation makes our economic outlook more uncertain.
Our sanctions and Russian counter-sanctions mean that there are many unknowns. Growth will be hit. Confidence will be knocked.
We are seeing a severe impact on energy prices. Supply chains will suffer, including for raw materials.
There will also be fiscal and social costs.
The overall impact on inflation is significant: we are likely to remain in a high price environment longer than we originally thought. So yes, we will have an economic price to pay.
But we are in a good starting position, with strong fundamentals.
We are the world’s most integrated trading bloc.
With the euro, we have the world’s second most traded currency and second reserve currency.
These are powerful and valuable assets on which we can rely in a time of crisis.
And we are learning from previous experience.
We gained some valuable lessons in 2008, when the global financial and economic crisis brought widespread disruption.
That crisis showed us – quite painfully – the direct link between our macro-economic stability, the resilience of the financial system, and people’s well-being.
It demonstrated that the financial system is inherently international, and that we cannot achieve financial stability solely within national borders.
So, we set up strong firewalls against economic instability and reinforced our rules for fiscal and economic coordination.
We put stricter requirements for the financial sector and created a Banking Union.
We benefitted from this framework during the COVID-19 pandemic. We have not seen market stress and this time, our banks were part of the solution – not part of the problem.
Member States were able to borrow at a large scale to support the economy – and this has substantially alleviated the economic downturn.
I believe our efforts to get it right during the Covid crisis – with a quick, coordinated and unified reaction – have paid off.
This was a great example of European solidarity when it mattered.
Because it is absolutely crucial that Europe is strong at home in order to be a relevant player on the global stage.
We need to implement the reforms and investments to ensure our competitiveness in tomorrow’s world.
Here, it is critical that we are at the forefront of the green and digital transitions and make sure that we are more resilient and adaptable in the face of unexpected developments.
For the green transition alone, extra investment needs amount to 520 billion euros per year for the next decade. For the digital transition we need to add another 130 billion euros.
Our private sector will have to finance the bulk of that. To help achieve this, we need to improve the functioning of our capital markets and financial sector.
But public funds will also need to play their part. Public investment will need to increase.
This means making choices.
The pockets of governments are not endless and, whether we borrow more at national or EU level, we all know that we eventually will need to repay that debt.
If we truly care about our next generations, we should avoid putting the bill for those critical investments in your hands.
We need to make those investments now. This is clear.
But we also need to keep budget deficits and debt under control.
This is what we owe the next generation: a strong Europe. A sustainable economy.
This is probably the part where I wanted to come back to questions related to the global financial and economic crisis, and the experience of Latvia at that time.
I became Prime Minister of Latvia in March 2009 when the financial crisis was already fully raging, when Latvia was already in an IMF programme and expecting double-digit recession in that year.
We needed to make very painful adjustments to regain financial stability, and with this financial stability to return to economic growth. And that is what we did in a front-ordered way – because it was clear that financial stability is a pre-condition for economic growth.
We needed to make this adjustment, the bulk of it already in 2009.
But with this, we managed to restore confidence, we managed to restore access to market funding, we managed to create the basis for economic growth.
In the second half of 2010, we were able to return to quarter-on-quarter growth, pretty soon becoming among the fastest-growing EU economies
Even so, it must be said that there is a certain relativity for what counts as austerity and what counts as fiscal stimulus, because it turns out that a lot depends on your starting position.
It was clear that Latvia entered the financial and economic crisis with very major economic imbalances. Even after the very strict fiscal adjustment measures, in 2009 we had a budget deficit of almost 10% of GDP, with all the fiscal adjustment measures that we needed to make.
In 2020, after the substantial fiscal stimulus that the current Latvian government did, the budget deficit was around 7 to 8% of GDP.
It makes sense to have sound fiscal and macro-economic policies during the good economic times because then we have more room to manoeuvre when you enter the crisis.
This was unfortunately not the case in Latvia in 2005, 2006 and 2007 when the economy got badly overheated and Latvia entered the crisis with major problems.
Luckily, this was not the case in the years 2017, 2018 and 2019 – so there is a good starting position to deal with this crisis.
That was one of the lessons we also learned at EU level and that’s why we introduced this framework for coordinating fiscal and macroeconomic policies at EU level much closer.
Coming back to my speech, it’s clear that there will always be bumps in the road. There will be differences of opinion.
With 27 countries, it would be strange if this was not the case. It will also be the case now. But what is essential is that Europe remains a place of solidarity.
Finally, I wanted to say a few words about strengthening the resilience of our economy.
Before the war in Ukraine, and even before Covid, there was a debate taking place in the EU about how to reduce our dependencies, notably for certain raw materials which are essential for our economic future.
Here, I think it is a good approach to differentiate between positive and negative dependencies.
Positive dependencies offer opportunities to diversify our sources of supply. To build new, mutually beneficial business and trade relationships, underpinned by rules and values.
In the end, as we all know, trade creates welfare. We all remember the theory of comparative advantages.
So if we try to provide for all our needs by ourselves, if we close down trade channels, we end up having fewer and worse paid jobs, less choice and more expensive goods and services.
In fact, this is what we see now with the exclusion of Russia from global trade, where we immediately see those negative effects. We therefore remain convinced that openness to trade must remain a central element of Europe’s economic strategy.
However, negative dependencies, such as energy, cannot continue.
We cannot be at the mercy of players who not only oppose our values, but actively undermine them.
What is important for Europe is to be prepared for all eventualities, to be strong in all scenarios, and without compromising on what made us strong in the first place.
To conclude, ladies and gentlemen, I hope I have outlined some elements of the world you will face as College of Europe graduates.
There are many challenges ahead. But there are also many opportunities.
Above all, you should take strength and resolve from our unique European club of nations.
It has been, and will remain, one of the greatest forces for peace and prosperity that the world has ever seen.
But we cannot take it for granted. It requires constant work and improvement.
So if you choose to pursue your career at the heart of the European Union, you will have the chance to make a real difference.
Thank you very much.