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A safer and more prosperous Economic and Monetary Union

Dear Friend,

We look forward to the future and its opportunities; for we are confident that together we will make that future prosperous. And how could we not be confident, since despite an occasionally rocky road, we have created prosperity, stability and a period of peace in Europe by working together over the last 60 years. The Economic and Monetary Union is a significant part of this success. Often, we Europeans do not take enough credit for what we have achieved. It is time to change this and to proudly say: the EU and the Euro are significant global success stories which we must be proud of. Our  strength comes from continuous work to ensure success in making things work better. And we have many ideas on  how to make the Economic and Monetary Union stronger and more prosperous so that everyone can feel  its benefits. As Chancellor Merkel once put it, “The Euro is our common fate, and Europe is our common future.”

It probably goes without saying, but we the EPP  are truly committed to the Euro. It is not only our joint currency, but also the second most important currency in the world. The Euro makes it easier and cheaper to buy and sell products and services to each other. No more standing in queues to exchange money, no  more unstable and high interest rates. The Euro also deepens the Single Market, makes us more competitive and helps to create jobs for European citizens. We must also acknowledge that the last few years have not been easy. But  lessons have been learned and weaknesses corrected. Many things have been done already, but we envision much more to come in the future. This is the difference between the EPP  and the populists: we want to make the EU and the Euro perpetually bet- ter. Populists only want to complain and destroy. Please take your time to read our proposals on  how to make everyone better off. Policies are not formulated in a vacuum. So get in touch and let us know what you think. We would like to hear from you.


We want to change the way our Economic and Monetary Union (EMU)  works. We think it can be made to work better for the benefit of our citizens. We propose multiple reforms as to how to strengthen the EMU. This  begins by better explaining it. Discussion of  the Economic and Monetary Union rarely lands the front page — though it should. After all, how our EMU functions influences the daily life of every citizen and resident in the Euro area. ‘Let’s build EMU 2.0 together — for the benefit of every Euro area citizen! What we are proposing will make everyone’s future both safer and more prosperous. The EPP’s main goals are simple: safety, fairness and prosperity. We have three policy priorities: 1) the relationship between Euro area members and their domestic banks, 2)  the functioning of labour markets and 3) deeper and better functioning Capital Markets. We believe these three issues will deter- mine our future prosperity.

First, we  are  convinced  that  separating  Euro  area members from their domestic banks will  make us  all safer. We, like many others,  find  the current situation untenable in the long term. Links between countries and domestic banks make it easier for trouble to spread from one to the other. This  is a delicate issue; so we must en- act this separation carefully and in  a well-coordinated manner in order to safeguard stability. But  we will not back down from our overall aim  of  ensuring that tax- payers never have to bail out banks.

Second, we moved to the Single Currency in  the first place in  order to increase stability,  reduce costs and boost trade. The Euro has delivered on  all metrics. But in  the absence of  Francs, Marks, Guilders, Liras,  Pesetas and other old  currencies, we need well-functioning labour markets more than ever before. It is crucial that every Member State invest in competitiveness. The flexibility of labour markets is an  important aspect of  both increasing and  retaining competitiveness  because  it makes responding to changes and adjusting to new economic realities so much quicker. Flexible labour markets make creating new jobs easier. Third, technology  is  developing at an  amazing speed, and innovative companies seem to go from founder’s garage to global champions in an instant. But  most new global technology champions have been created in the US — not the EU. We must change that in order to re- main at the cutting edge of development. Boosting the availability of risk financing to companies and entrepreneurs is  the key to becoming the global champion of innovation. These are the three focal points of  our proposals, but they are not the only ones. In  the pages that follow, we lay  out numerous other suggestions for  increasing safety, fairness and prosperity. Let’s build EMU 2.0 together — for the benefit of every Euro area citizen!

What we are proposing will make everyone’s future both safer and more prosperous.

The EPP’s vision

Over the last two decades,  the European Union has taken major steps to create more prosperity for European citizens. The flagship project has been the Economic and Monetary Union (EMU), which culminated in the launch of the Euro currency on  1 January 1999. We have taken long strides towards an  ever stronger Economic and Monetary Union. But  the global financial crisis of 2008 painfully exposed some gaps in the EMU and highlighted our need both to strengthen existing tools and mechanisms as well as to add new ones. We have already strengthened our Economic and Monetary Union in  multiple ways. We have created  the Banking Union  to make sure we are better prepared for financial adversity. We have created the European Stability Mechanism to showcase that we are a continent built on the principles of solidarity and responsibility: when one Member State faces hardship, the ESM is our mechanism for  helping it back on  its  feet. The requesting Member State’s own internal reforms for  overcoming economic distress embody our collective commitment to responsibility. The EMU and the ESM represent real,  sustained progress. We have achieved a lot. But we know there is much more to be done to secure an ever safer and more prosperous future for our citizens.

The EPP’s vision on the future of the EMU  implies taking steps  at both European and national level.

The Five Presidents’ Report  envisions a three-staged plan for  deepening the Economic and Monetary Union. The European People’s Party (EPP) builds on the report’s proposals and timetable in  laying out our vision for  a complete and convergent EMU. While the creation of the EMU represented a major step forward for  the EU as a whole, it should be acknowledged that, like all great political and economic projects, it was not born ready-made. We envision the Euro area to be joined, ultimately,  by the seven Member States currently outside but which have signed up to join  in the future as part of  the 1992

Maastricht Treaty.

We envision a prosperous Euro area, in which differences between  Member States  have been  erased  through convergence and rapid economic growth. Our  unequi- vocal aim  is to complete the Economic and Monetary Union by ensuring the following attributes:

Convergence: This  is our primary goal. We must speed up the process of  convergence through which poorer areas can become more prosperous and catch up with the rest. This  must happen both between and within Member States.

Fairness: Risk  and reward must go hand in  hand. We want to strengthen the Banking Union so that taxpayers’ money need not be used to bail  out those who have made irresponsible and bad decisions.

Resilience: The EMU must be prepared to withstand and manage  economic instabilities, no  matter where they might originate. We must make our Union more resilient. We believe this can be done by systematically working on weakening the negative loop between Member States and their banks. In addition, we must have balanced public budgets and strive towards lower public and private indebtedness.

Flexibility: Our  Union must be flexible in order to swift- ly, and automatically, deal with imbalances. Our  labour markets must be such that they can respond quickly to changing situations and help in quickly regaining competitiveness.

The EPP’s  vision on the future of  the EMU implies ta- king steps at both European and national level. We believe we must reform some of the structures underlying the EMU in  order to make it fairer and more resilient. We believe we must strengthen  market-based  disci- pline and adjustment mechanisms. Therefore, we focus heavily on the relationship between sovereigns and their banks, on  capital markets and the functioning of labour markets. We believe that focusing on  these three aspects will benefit our citizens the most.

First, we want to sever the link between sovereigns and their domestic banking sectors. This  can be done by discouraging excessive levels of sovereign bonds being held by the domestic banking sector: both by establishing a limit on  banks’ exposure to sovereign bonds and by determining risk  weights on  sovereign bonds. We believe these actions would discourage Member-State indebtedness and lead to lower levels of debt.

Second, at EU  level,  we must strengthen the Banking Union. In the medium term, we want to establish a fiscal backstop for  the Single Resolution Fund to ensure it re- mains credible and adequately resourced in dealing with all possible shocks. But  this must happen strictly per the appropriate sequence by reducing risks and banks’ sovereign exposure. The same sequence must be followed with regards to building a European Deposit Insurance Scheme.

Third, we want to guarantee the no-bailout rule  between Member States. We want to do this through two avenues: first,   through clear commitment to the ‘no bailout rule’ as enshrined in the Lisbon Treaty; and second, through policy choices that prevent countries and financial institutions from getting into trouble in the first place.  We also foresee Collective Action Clauses to be part of the toolkit for  dealing with serious trouble in the future.  This   requires tangible progress  on   separating banks and sovereigns. We want to be crystal clear that ‘the  no-bailout rule’ should not be confused with solidarity  for  a Member State facing short term trouble, since in this case offering assistance and support to a fellow Member State and its citizens represents the responsible choice. Fourth, we want the current rules that govern the EMU to be fully  applied, as this is in everyone’s interest. All Members must follow the rules; if breaches occur,  the European Commission, as guardian of the Treaties, must enforce these rules. We want the rules to be followed to avoid negative spillover effects. Ultimately, we think we must look into technical methodologies  underpinning the governing rules with the aim  of increasing transparency, counter-cyclicality and the effectiveness of compliance.

We must speed up the process of convergence through which poorer areas can become more prosperous and catch up with the rest. The EPP’s long-term vision for bolstering the EMU entail reforms to make our EMU more competitive, flexible and convergent. First, we suggest joint actions at both EU and national levels to boost labour mobility, which remains low  in the Euro area.

Further mobility should be encouraged  so that  more people can find  employment. Our  approach must be ba- lanced to avoid permanent ‘brain drain’. Second, we insist on  finishing the project to complete all Single Markets under construction. Finishing these projects would add well over a trillion Euros to our annual EU GDP, creating millions of new jobs. Thus, it is crucial that obstacles be removed and joint standards and rules created. We want the EMU to be resilient and well-equipped to deal with economic  and financial instabilities. The Capital Markets Union is  an  especially important Single Market project, since we believe it is one of  the best ways to build market-based risk sharing as a way to weaken asymmetric shocks.

Third, we suggest that Member States reform their la- bour markets to  make them more flexible.  This   will facilitate regaining price competitiveness  and increasing participation rates  by encouraging decentralized wage-setting mechanisms. We believe that more flexible labour markets benefit everyone by creating more jobs and lowering barriers to (re)enter the labour market. Fourth, we want to diversify funding sources for compa- nies and increase the amounts of risk financing available in Europe.  We believe that the form of  financing available is a major determinant of the types of companies we have and the fields in which they operate. We believe we must make Europe a better place for  creating radically  innovative companies. We believe that by building a stronger, cross-border, private-equity sector in the EU, we best facilitate entrepreneurs  creating radically innovative and disruptive new companies, business models and jobs. In order to make the above-mentioned possible, we also suggest clarifying heterogeneous insolvency practices to facilitate more cross-border investments.

Fifth, we want to highlight the European Fund for Strategic Investments (EFSI) as a tool of  the EU in order to faci- litate convergence and support investments, especially for  boosting productivity in less prosperous areas. We insist that it remain a vehicle for  public-private collabo- ration.

1. Resilient and Fair

We want the EMU to be resilient and well-equipped to deal with economic  and financial instabilities. It  must have all the right rules, tools and institutions in place. We want to focus on reforming the relationship between Member States and the banks and to make the sector more resilient. We want to introduce reforms in order to introduce  more market-based  discipline mechanisms, with the aim  of  defending taxpayers’ interests and in- creasing resiliency to shocks.  Over the last two decades,  the European Union has taken major steps to create more prosperity for  European citizens. The flagship project has been the Econo- mic and Monetary Union (EMU), which culminated in the launch of the Euro currency on  1 January 1999.A strong banking sector is needed to support the real economy and to facilitate a prosperous, safe future for all Europeans. At the same time, disentangling sovereigns from their domestic banking sectors is  crucial for systemic stability. This is in the interest of our citizens.

1.1  A strong  Banking Union — to safeguard taxpayer money

We want to build a fully-fledged Banking Union. Crea- ting a complete Banking Union is absolutely crucial in safeguarding taxpayers’ money. We don’t accept using taxpayer funds to bail  out those who have made irres- ponsible or  bad business decisions. Therefore, the new Bank  Restructuring  and  Recovery  Directive (BRRD) must be fully implemented and respected. Sovereigns and their national banking systems are closely linked through a range of  both direct and indirect channels. These include banks’ claims on  countries, se- mi-automatic links  between countries and bank credit ratings,  public  fiscal backstops,  collateral  in  banking operations and the effects of fiscal distress on the whole economy — and therefore also the quality of bank loans.

Due  to these close interlinkages, problems arising in the banking sector can trigger downward spirals in  which increased country risk,  banking system difficulties and the deteriorating economic situation spill over and rein- force each other. Throughout history, we have witnessed many cases in  which a banking crisis — triggered by the bursting of  a real  estate bubble — has caused serious difficulties for  countries. A similar spiral can also be activated by problems originating from a particular country’s actions. ‘A‘strong banking sector is  needed to support the real economy and to facilitate a prosperous, safe future for all  Europeans.  At the same time, disentangling soverei- gns from their domestic banking sectors is crucial for systemic stability.


1.2 A strong Banking Union — Exposure limits and sovereign debt risk

Second, we must establish exposure limits and change the rules considering Member States’ debt risk  weigh- tings within the Basel global regulatory framework. It is important that a solution be found within the Basel framework; this would allow us  to proceed in  tandem with our international partners. Additionally, it is of crucial  importance to carefully manage the process and to have a long transitional period to ensure financial stability. We must also bear in mind the particularities of the Economic and Monetary Union in order to find  bespoke solutions that suit our specific needs.

For  the time being, sovereign bonds are excluded from rules considering banks’ exposure to a single asset class. This has led  to a situation in which bank exposure to domestic sovereign debt in the Euro area averaged 118% of banks’ own funds at the end of 2013. This  means that in case of  sovereign default, many banks would be completely wiped out and bankrupted. We must take action to deal with this situation in order to safeguard the well- being of our citizens and the stability of our economies in the long term. In comparison, US banks are exposed at only 14% of their own funds to US treasury bonds. Without question, the process must be carefully managed over an extended period of time to avoid disturbances.

Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR) make it possible for sovereign debt to have a zero-risk weighting, which means that debt issued in Euros by Euro area Member States is considered completely risk-free in the EU. Therefore, banks do not need to hold any capital against their sovereign debt holdings. This  has led  to banks’ holding large quantities of  sovereign debt in their books; it has also dropped the interest rates for  sovereign debt, making it easier for  EU Member States to issue more debt than they could if sovereign debt carried higher risk weighting. In addition to large exposure rules on  domestic sovereign bonds, we would like to change CRD IV and CRR regarding risk weights.


Having large exposure  rules in  place would automati- cally   stop developments towards unsustainable levels of exposure. However, since the current average level is 118% of own funds, it will take an extended period of time to bring this level  under the current rule  of Large Expo- sure, capping the limit  at 25%  of  own funds. Therefore, we should use risk weights as an interim solution, as this would introduce a necessary incentive for banks to start reducing their exposure.

1.3 A strong Banking Union — Risk  reduction and a fiscal backstop to the Banking Union

In order to address this problem of  ‘banks and countries deadly embrace’, certain policies have to be enacted. We must establish a fiscal backstop for  the Single Resolution Fund. This needs to be done in order to ensure that the Banking Union can function in all possible situations. This is important because studies by the European Parliamentary Research Service (EPRS) indicate that even when the Single Resolu- tion Fund will be fully capitalized in 2023, the funds would remain insufficient for dealing with another crisis like that 2008. Bearing in mind the high costs in terms of lost GDP and unemployment resulting from financial and banking crises, the capacity for swift resolution to any crisis beco- mes crucial. This is why we need to strengthen the Banking Union.

We believe that  we must keep upholding   and   defending   the no-bailout  rule  as  obliged  by the Lisbon Treaty.  One Member State’s debt cannot become a liability for the others. However,  risk  reduction and lessening banks’ sovereign exposure are as important as strengthening the available supervision tools and the Banking Union itself. Therefore, we must proceed strictly per the appropriate sequence to keep the right balance and to avoid moral  hazard. A fiscal backstop must thus be preceded by commitment and actions by Member States in order to reduce risk in the banking sector, including the risk associiated with high stocks of Non-Performing Loans, and to reduce banks’ exposure to their own respective sovereign.  In the longer term, the ESM is a potential option as a fiscal backstop, but it is not the only one; further work is required to establish the best possible model.

Measures to make sovereign bonds more risk-sensitive (and the ‘no-bail-out clause’ more credible) in the Euro area would reduce the supply of  safe financial assets, which sovereign bonds typically are. Safe assets are essential to the good functioning of modern financial systems and to the preservation of financial stability, as they are used to price other financial assets and to provide safe and liquid investment options. To preserve sufficient availability, and at the same time promote a diversification of  risk  by banks, a new common safe asset could be introduced by bundling national sovereign issuances and identifying part of  this bundle as being senior, and hence very safe — without the mutualisation of risk, and without joint liability. The specific model needs further reflection and will benefit from ongoing work in academia  and in official institutions (e.g. in the ESRB).

1.4 European Deposit Insurance Scheme (EDIS)

A European Deposit Insurance Scheme is the third pillar of the Banking Union. It is extremely important that this be designed in the years to come in such a way as to further weaken the feedback loop between Member States and their banks. This  will make the European banking sector more resilient. The process  of  implementing EDIS  must be carefully crafted, since we insist on  risk  reduction as a condition for risk sharing. Furthermore, it is crucial that EDIS incentivise responsible behavior and remain strictly conditional upon following established EU rules.

1.5 Debt restructuring — The ‘no-bailout rule’

We believe that we must keep upholding and defending the no-bailout rule  as obliged by the Lisbon Treaty. One Member State’s debt  cannot  become  a liability for  the others. It is crucial, though, that the ‘no-bailout rule’ not be confused with solidarity between Member States and their citizens whenever a Member State faces trouble. It was right to assist the Member States facing economic crisis in  recent years and to help them in  overcoming these crises. Offering assistance, support and loans was the right policy for  avoiding an  even deeper economic, social and political global crisis. But  we also believe that if a particular situation is beyond reasonable hope of sal- vation, orderly default and debt restructuring must be an option. Collective Action Clauses  (CAC) were  introduced  as part of the European Stability Mechanism Treaty. Howe- ver, the use of  CAC  is severely hampered by the close connection between those countries issuing debt and their domestic banks. A  fiscal backstop  must thus be preceded by commitment and ac- tions by Member States in  order to reduce risk  in the banking sec- tor,  including the risk  associated with high stocks  of  Non-Performing Loans, and to reduce banks’ exposure to their own respective sovereign.

We envision a Union in  which solidarity prevails and other Member States  are supported  when they face unexpected hardship. But  we want this support to be conditional on the implementation, by the Member State in question, of remedial actions and reforms. The support granted by EU Member States or institutions must have the status of  senior creditor — and be secured against ‘haircuts’ since our intention is not to support bailouts. If the situation under consideration is  deemed unsus- tainable, the ‘no-bailout rule’  must be enforced and the CAC  used to return the Member State in question to a sustainable path. We believe this path of  action would not destabilise sovereign bond markets but rather make them more rigorous. At the same time, we believe that using CACs would render adjustments  swift and allow the Member State in question to implement the reforms and remedial actions needed in order to quickly return to stability.

1.6  European  Semester  —  Strong  commitment  to structural reforms

Nineteen countries together form the Euro area. We are all in this together  as partners. Some national policies have spillover effects on  other Member States. Reforms can cause positive spillovers in other countries, whereas irresponsible policies in one country can have a negative influence. Therefore, we must have rules in place which govern the Monetary Union. This  is also why we must implement reforms when they are due. We envision a Union in which solidarity prevails and other Member States are supported when they face unexpected hardship.

In  a globalised world with international supply chains, competitiveness and structural reforms to increase pro- ductivity are the keys to prosperity. In modern times, there are no  longer shortcuts through exchange rate manipulation. Structural reforms are integral in  always striving towards the most efficient public services, and towards political and economic structures that support growth, employment, quality social services and investment.

We have a process called the European Semester for encouraging reforms. Yet only part of the Semester re- commendations are being carried out. At the same time, it is evident that willingness to reform is at its  highest when countries are facing severe hardship. We must strive towards implementing reforms during economically good times instead of only waiting until delay is no longer possible. Implementing reforms cannot be made compulsory. However, it is still crucial that more recommendations be implemented. So  we must encourage more national ownership over reform recommendations. One way to do this is to involve independent national productivity councils and nationally  respected  think tanks and universities in formulating recommendations.

Preparing legislation and effectively implementing reforms is no easy task. The effects of reforms may take time to materialise. But  the more they are delayed, the longer economies will grow below their potential. Some reforms may bear budgetary costs; others may be technically complex. Adequate administrative and institutional capacity is crucial to success. To help EU Member States address the challenge of implementation, the European Commission has set up the Struc- tural Reform Support Service (SRSS) and proposed a dedicated EU Structural Reform Support Programme (SRSP). Under the SRSP, Member States can request technical sup- port, in particular in the context of the European Semester. We encourage all Member States to make the best use of the support available.

1.7 Rules governing the EMU

All Member States and EU institutions must respect the rules that govern our Monetary Union. Due to the possibility of spillover effects, we must have rules that are fit-for-purpose. Re- cent years have shown that decisions by one country can have far-reaching impact on  other Member States. Therefore, we must have rules to restrict these risks, rules which apply equally for all Member Countries. The Commission, as guardian of the Treaties, must enforce these rules in case of breach. We emphasise that we must respect the rules and parameters which such rules establish for Member States.


First, the application of our common fiscal rules relies to a great extent on  potential output and output-gap esti- mates. Given some well-known challenges related to the calculation of these variables, the methodologies under- pinning the application of our rules are being improved, with a greater focus to be given to an  expenditure indicator along with indications of structural balance, which currently serves as the main parameter of  fiscal policy under the SGP. The expenditure indicator has the advantage of relying mostly on  observable metrics, being less subject to revision than structural balance and being directly under the control of government, thus increasing overall predictability and transparency. Second, besides fiscal rules, a major lesson of  the cri- sis is that imbalances in the private sector can be highly destabilising and must be prevented or, if they do occur, promptly corrected. Effective implementation of  structural reforms is crucial for the correction of macroeconomic  imbalances, which were allowed to grow unchecked prior to the crisis, leaving many countries vulnerable to shocks. All the instruments available under the Macroeconomic Imbalances Procedure, including the Excessive Imbalances Procedure,  should be deployed to support Member States in  their adjustment efforts in  order to bring their economies onto a path of sustainable growth and job  creation. This  is a precondition for  a successful convergence process.

At the same time, we must also emphasise that no matter what set of  rules we have, no  rules will be effective unless Member States  follow and respect  them. The main principle must be that no reform or change in the EMU’s institutional framework create new imbalances or sources from which new imbalances could emerge. The key aims of the Stability and Growth Pact must be kept at the centre of all reforms: namely, that fiscal policies re- main responsible and that Member States work towards lowering their debt levels to under 60% of GDP. All Member States and EU institutions must respect the rules that govern our Monetary Union.

2.2. Flexible, Competitive and Converging

Our  vision puts our citizens’ wellbeing and prosperity at the centre. We want our EMU to have adequate capacity in dealing with imbalances between regions or  countries, to be competitive vis-à-vis other parts of  the world and converging towards the highest social standards, such that the least affluent areas can develop and become as prosperous as the most. We should not understand competitiveness only in terms of price competitiveness. Long-lasting competitiveness gains rely  on  the efficient allocation of resources and on  steady improvements in  productivity. This  requires high-quality education, R&D and innovation which are effectively trans- lated into competitive products and services. One of the most important factors is creating an  environment in which innovative companies can flourish. This  re- quires attracting more private equity into Europe, building deeper Single Markets but also looking at our insolvency practices. Our  EMU must also be able to adjust to changing external and internal conditions. Labour markets must thus provi- de flexibility to respond quickly to changes and facilitate a more efficient process whereby employees find  open vacancies. More flexible labour markets  also help us  to address skills  mismatches; for  this,  labour mobility within the Euro area is vitally important. To achieve this vision of a converging EMU, we must take action at both the EMU, but also at the national, level.

The main principle must be that no reform or change in the EMU’s institutional   framework    create new imbalances or sources from which new imbalances could emerge.


2.1 High  social standards for everyone

The Social Market Economy, foundation of  the EPP  and the EU, is based on  the commitment to ensuring high social  standards and to supporting everyone who wants to contribute to society. Social policy is a Member-State competence, but we would like more to be done to ensure that Member States converge towards the best policies among their peers. We believe that learning from other Member States’ experiences will help in finding the right policy mix for  the future.

Technological development is ever more rapid. How we make products, the skills  we need to enter labour markets and the way we work are all changing with techno- logy. This  development already poses major challenges to our education, social and employment systems and will become more challenging in the years and decades to come. We must strike a right balance between more flexible labour markets and a confidence in  tomorrow which citizens understandably  ask  for.  We believe that demanding more flexibility from citizens must be reciprocated by Member States’ making their social security systems more flexible as well,  and better fit for  a future labour market more fragmented than the one we experience today. Increasing labour market flexibility must be reciprocated  by providing high social standards and a sustainable work-life balance.

Our vision puts our citizens’ well- being and prosperity at the centre.

Skills  needed to enter and remain in the labour market are changing quicker than ever before. Automation, ar- tificial  intelligence and digitalisation are disrupting exis- ting industries. We want every citizen to benefit from technological advancement. Hence, we must offer op- portunities for  everyone to learn the new skills  needed for the future. We must invest more in our citizens, even as private-sector involvement will also play a crucial role in  ensuring the right skills  are acquired. We must pay special attention in trying to activate more citizens’ en- trance into the labour force and in providing quality edu- cation and training opportunities throughout a person’s life. We must turn life-long learning from a policy mantra into a reality. There is a lot we can learn from each other and share as far  as best practices go in upholding high employment levels and in making sure no  section of so- ciety is left  behind.

2.2  Increasing labour  mobility — European Labour Market Union

We must encourage  further labour mobility within the Euro area. This is crucial for the long-term stability of the  Euro area and for lowering unemployment levels. We believe that demanding more flexibility from citizens  must  be reciprocated  by Member States’ making their social security systems  more flexible as well,   and better fit for a future labour market  more  fragmented  than  the one we experience today.

Labour mobility is also a way to address the problem of skills  mismatch. In 2013, only 4% of the EU’s working age population (20-64 years old) was working in a different Member State from the one where they were born. Add to that an  estimated 1.1  million  people who work cross-border, without residing in the country of their employment, plus the estimated 1.9 million  workers posted in another Member State on  temporary contracts, and the total share rises to about 5%. This  is very low  com- pared to the US, where 30%  of  the population work in a state other than the one they were born in. We must accept change as a constant feature of  our lives.  We must encourage and support citizens’ moving in pursuit of new employment opportunities. At the same time, we must make sure that encouraging labour mobility does not lead to permanent ‘brain drain’, since this would undermine the principle of convergence.

Encouraging labour mobility must also mean removing all obstacles to mobility. We must make sure that rules regarding mobile labour are applied equally to all employees and that policies — for  example, on  pensions — treat them fairly.  Pensions are a national competence, but solutions must be found in tandem to address the various remaining issues and to reduce red tape. Equally important are rules considering posted workers, who should have the same rights and obligations as all other employees working in a particular Member State.

2.3 Encouraging a decentralized wage-setting mecha nism to foster more flexibility and a higher labour par ticipation rate

In the Euro area, as in any other monetary union, real interest rate-inflation dynamics function as a pro-cyclical mechanism which enhances the effects of economic growth and, vice versa, economic downturn. Before the crisis, we saw this mechanism in practice in several Southern European Member States. Rapid growth, the influx  of capital and ensuing inflation lowered the real  interest rate,  which further propelled the cycle. Catch-up growth is needed; but when rapid growth suddenly ends, we must have the means to re- balance, regain price competitiveness, if necessary, and retain flexibility such that jobs can be protected in cyclical downturns.We must offer opportunities for everyone to learn the new skills needed for the future.

In a monetary union, flexibility must follow from adjusting prices, and thus through  wage flexibility if necessary. It is essential for  Member States to encourage a move towards decentralized wage setting, or at the very least to have clauses in collective bargaining agreements which allow di- version away from collective bargaining agreements in case of downturn. It is important to bring flexibility to the labour market since rigid contracts  in times of  crisis only cause deeper unemployment than necessary. In Spain, real  wages continued to increase right up until  the beginning of 2012, even though at the end of 2011 unemployment was already at 21.4%. This  highlights how inflexible labour markets can be when rules remain rigid.

We must also remember that in 2012, 92.7% of all companies in the EU were micro-companies employing less than 10 per- sons. Small and Medium-Sized Enterprises (SME)  employ more than two-thirds of all employees in Europe. Providing flexibility is extremely important for small companies so that they can remain in business when unexpected hardships strike. We do not want to reduce employees’ rights, nor do we want to downgrade their protections. When wages are set at the company level, employees must have transparent access to information regarding the state of the company in question. What we want to introduce is more flexibility so that we can stop jobs’  being destroyed unnecessarily due to rigidities. Secondly, we want to achieve an additional mechanism which will enable a more rapid recovery of competitiveness and facilitate higher labour participation rates.


2.4  More equity financing — More innovative companies

Europe,  by and large,  is running behind the US  as a birthplace  for   disruptive,   radically  innovative  companies. We must understand  that this follows partly from structural factors in  our continent compared to our partners on  the other side of  the Atlantic. Venture  Capital Funds in the EU are on  average small. We need to support creating Funds of  Funds, and  we must  look into existing regulations to  make sure that  investing into private equity funds is not discouraged by regulations and capital rules. One defining factor of  European economies is our reliance on credit financing compared to equity investments. The form of  finance plays an  important role in defining how quickly companies can grow and what kind of sectors they operate in. This  is a problem we cannot solve with public money, since studies show that public money crowds out venture capitalists. We need to make the legislative and tax framework in Europe such that it encourages investors to put their capital in European growth companies and convinces the brightest European entrepreneurs to stay in Europe. This  ties together why we need to build the Single Markets, so that new,  innovative companies can scale up as quickly and as easily as possible. This  is one of  the advantages of  a big  Single Market which fosters innovation.

We need to support creating Funds of Funds, and we must look into existing regulations to make sure  that  investing into private equity funds is  not discouraged by regulations and capital rules. Companies which offer radically innovative services or products, without much to offer a bank, are especially in need of equity financing. It is better for the overall stability of our economic and financial system that banks credit-finance companies, which already have assets and steady cash flows. Companies which are riskier and radically innovative or  disruptive require equity financing. This  is not a binary question; we need both kinds. We must have a strong banking sector complemented by a strong private equity sector. Building the Capital Markets Union is also crucial because it will build more market-based  risk  sharing among the Euro area Member States, since cross-border ownership of assets spreads risks and makes shocks less asymmetric.  By building the CMU, we do not only boost the Euro area’s convergence and competitiveness, but we also make it more resilient to shocks, both external and internal. In terms of the Capital Markets Union, it is important that it pay sufficient attention to private equity and not only to credit markets. The EFSI,  by boosting investments, increases productivity and facilitates  both   incremental  as well  as radical innovation.

We want to see a well-functioning Capital Markets Union in terms of safe securitisation and deep and liquid corporate bond markets. But equally important for us is that cross-border equity investment be encouraged and obstacles tackled to support innovation and entrepreneurship.

2.5  European Fund for Strategic Investments (EFSI) — Tool for addressing market failure and for strengthening international competitiveness

Convergence does not happen overnight. It is a long process in which investments in productive capacity and infrastructure play a major role. Countries which are less prosperous also tend to have more expensive credit, and fewer equity investments, available,  which creates obstacles for becoming more competitive. The EFSI must remain a body which supports investments that may not otherwise materialise.

If a country is facing problems with its price competitiveness, increasing productivity can also be used to bring down relative unit-labour costs. This requires the EFSI to strictly follow its own viability criteria and to only facilitate projects in cases where the private sector is a large contributor. In other words, the EFSI cannot become a re distributive mechanism. It must remain market-orientated and a tool offering guarantees to economically viable projects in which the private sector is willing to invest.

We should not forget  our international competitiveness either. The EFSI, by boosting investments, increases productivity and facilitates both incremental as well as radical innovation. Citizens of the European Union are getting older, and the old-age dependency ratio is worsening. Therefore, it is crucial that we increase investments in Europe in order to remain competitive internationally, become more productive and spearhead technological development and innovation.

We can build on our experience with the European Fund for Strategic Investments. If a country is experiencing a major economic shock, we could envisage a financial mechanism providing loans, under favourable conditions, to support in- vestment activity. While this shall not lead to any permanent transfers between countries, nor undermine incentives for sound fiscal policy making at the national level,  such sup- port could be taken into account in the assessment of compliance with fiscal rules.

2.6 More Single Markets

The Euro area requires a well-functioning Single Market. We already have this for goods, but there is still a long way to go regarding services, capital and digital. We are adamant on the need to finish building these Single Markets as soon as possible. Not only do we need to focus on finishing those still under construction, but we must also focus on making sure that existing rules are fully implemented and respected. We need all three pending Single Markets in order to help create new jobs, economic growth and opportunities. But  they are also needed to support convergence and cross-border risk sharing. It is estimated that finishing all  Single Market projects  currently under  construction would increase the EU’s GDP  by well  over a trillion Euros, creating millions of jobs. We must seize the opportunity to deliver new opportunities for our citizens.

In principle, we want to move forward from the mentality of  building Single Markets sector by sector. We envision a future in which we consider all sectors, in all Member States, as part of the European Single Market.It  is  estimated  that  finishing all Single  Market  projects  current- ly  under construction  would in- crease the EU’s GDP  by well  over a trillion Euros, creating  millions of jobs.

2.7 Insolvency practices

Europe  still suffers  from an   overhang of  private debt. There are vast numbers of  Non-Performing Loans (NPL) currently on  banks’ books, and debt levels for households and companies remain high. This  holds economic growth back and will have long-term effects if we do not solve the problem.

Insolvency legislation in many countries is such that entrepreneurs experiencing bankruptcy will need years to get back on  their feet. This  is also part of the reason why we envision the future EMU’s  promoting more equity financing. Establishing certain common insolvency principles could address this problem and encourage entrepreneurs to try  again. Problems with insolvency regimes also ham- per cross-border investment and lending, since investors find it cumbersome and risky to deal with several insolvency frameworks, while for banks it poses a regulatory risk. In essence,  there are two options for  how to proceed. First, we can establish certain minimum standards considering the most important aspects of  corporate insolvency. This would mean finding common understanding on  special protection for  new financing for  a company in distress, such that it can continue to operate while still going through a restructuring. Equally important in this scenario would be the establishment of  common rules regarding chapter-11-type stay-of-proceedings against a viable company attempting to restructure.

Another alternative, however, would be to create a voluntary 29th  regime  which investors  and  companies could opt into. This  29th regime would be the most effective way, since investors could be absolutely certain how insolvency proceedings  work throughout  Europe. Insolvency regimes must be such that they enable restructuring for viable companies and allow entrepreneurs to recover quickly. Insolvency practices cannot be ways to punish bankrupt entrepreneurs, but rather the mechanism allowing creditors to recoup what is possible from a bankrupt company. Increasing labour market flexibility must be reciprocated by providing high social standards and a sustainable work-life balance.


  1. 3. Conclusion

We believe in our Economic and Monetary Union. It has delivered great benefits to many European citizens in the past, and we are convinced our Union will remain a source of prosperity and stability in the future. We the EPP,  as a political family, envision a converging EMU that is complete. A complete EMU to us means one that is fair, resilient, flexible, competitive and convergent. An Economic and Monetary Union that makes Europe ever more prosperous for  all of its citizens. This  is our vision. These are the steps we need to take in order to make that vision a reality.