Thank you. And yes, dear family and friends of Matthieu, distinguished attendees. Matthieu may no longer be with us, but his legacy is great. Not only because of the memory of who he was, the Matthieu about whom Marel just spoke so movingly. Not only because of the outstanding work he left us and that influences our thinking about Europe to this day, but also because of the wonderful idea of this lecture series. It is as if he, in a country that has traditionally always had its back turned a bit to Europe, forces us to turn around, to turn ourselves towards it and to talk about Europe. Because we must talk about Europe. The world of today forces us to do so.
Anyone who follows the news a little understands what I am talking about. The post-war world order based on rules, on law, on free trade is disappearing at a rapid pace and making way for a world in which great powers seem to shrink from no means to get their way. The economic integration of the past decades is being used as a weapon in this process. And the speed of these changes almost takes our breath away. So in a world where one certainty after another falls away, we naturally need a safe home. And Europe is our home, but something must be done to that house if we want to weather the storm. And that is what we must talk about tonight. And that is why I am pleased and also honored to be able to give the second Matthieu Segers Lecture tonight. An honor that I feel even more strongly because I no longer represent an organization, but may speak here as a private individual.
Now, although Matthieu and I did not really know each other personally, we met a few times professionally, he has certainly influenced me. I followed his columns in the Financieele Dagblad and found them so interesting that I started reading his books. And through that, I also gained more insight into the revolutionary and exceptional character of European integration. Matthieu shows in his books that European integration was by no means a natural and predestined process. No, it could have gone very differently. In fact, the fact that a group of exhausted and war-torn countries, who had recently been trying to destroy each other, decided to transfer sovereignty over their war industries to a higher European authority borders on the incredible.
Matthieu's books also opened my eyes to the complicated attitude in the Netherlands towards Europe. Because he describes very aptly the Netherlands as a kind of island that was always oriented towards the sea and the countries beyond that sea: England, America, and of course our colonies. But the whole idea that the future of the Netherlands would also lie on the European continent was completely new in those post-war years. And that half-hearted attitude towards Europe, we still see it back in our country from time to time today.
Good, Matthieu was a historian. I am an economist. In the case of Europe, these two disciplines fit together very nicely. Because although the goal of European integration was mainly political, never again war, the means were often economic in nature. The European Coal and Steel Community, the EEC, the European Economic Community, the internal market, the economic and monetary union. Politics was actually hidden behind the economy, but was never far away. Now, as president of the Dutch Central Bank, I stood for 14 years with one leg in Europe and the other leg in the Netherlands. And although my base was Amsterdam, I traveled to Frankfurt once every few weeks to shape European monetary policy together with my fellow board members of the European Central Bank. And there, on the top floor of the ECB building, I would actually like to see a picture by now.
Okay, well, if that works, then there on the top floor of the ECB building, located on the Main, we discussed the state of the European economy, inflation, and what it meant for the interest rate policy of the European Central Bank. And although we all came from different countries, we did not represent them. Our perspective was and is fully European. Really, I dare to say, you won't get much more European than that. But well, perhaps because I spent so much time in that tower, I am sometimes a bit surprised by the debate we have here in the Netherlands about Europe. Or actually, I should say, the debate we do not have in Europe, what we in Netherlands about Europe, and that there are still so many people in Dutch politics who believe that we might be better off with less European cooperation. And I also want to talk about that with you tonight.
And my story will, and you would not expect otherwise from me, mainly have an economic perspective. But remember, economics is about people. The economy is also a means. It is a means to preserve things we truly find important. Think of well-being. Think of freedom. Think of democracy. Think of justice. Many of those things are actually priceless, but as we will see, a stronger economy does help with that.
In those 14 years that I was president of the Dutch Central Bank, I saw the debate about Europe change significantly. My first years were dominated by the euro crisis. Could we keep all countries on board? That was the question at the time, while at the same time not a cent could go to Greece. The future of the euro was at stake. Fortunately, the monetary union has since become much more robust, but we in Europe are now facing new major challenges. I will get to that in a moment, but first I want to look back with you.
Post-war Europe has been called a convergence machine by many economists. It takes in poor countries and helps them become prosperous. In the 1950s and 60s, Western European countries converged rapidly towards the income level of the United States. In the 1970s, Ireland, Denmark, and the United Kingdom benefited from their accession. In the 1980s, it was the turn of Spain, Portugal, and Greece. And in the past 20 years, the Central and Eastern European countries, a large part of which joined the EU in 2004, have also made a significant growth leap. And that mechanism of convergence, you can see it here. You can see it back in this figure for the past 30 years. The green dots are the countries that joined in the last wave in 2004. They had a relatively low income per capita in 1995 compared to the average. But they showed strong growth of well over 3% per capita in the past 30 years, while the growth of the already more prosperous, let's say older EU countries, and those were the red dots in the graph, was quite moderate in this period.
Take for example a country like Poland, one of those green dots. Poland was one of the poorest countries in Europe in the 1990s. But in the past 30 years, income per capita has more than tripled, much faster than the European average. And with that, Poland has actually largely caught up economically with countries like France, Italy, but also the Netherlands. That was not only due to integration into the European Union, but it was certainly an important, if not decisive factor. The opening of the European export market for Polish products and services, the influx of European funds and investments, and the economic reforms partly forced by Europe have strongly contributed to this success story.
Now, although Poland stands out, it is of course just a model for the rest. New members became much wealthier as a result of their membership of the European Union. The years around the euro crisis seemed to dent that image a bit. A number of countries, after initial great economic success, derailed quite badly, followed by a painful adjustment process. That had multiple causes. A complex story that I will not go into further tonight, but it has led to a series of reforms of the economic and monetary union that have clearly made our monetary union, or the euro area, stronger and more stable. And Greece, well, that is now one of the fastest-growing economies in the EU. The debt ratio is falling like a brick and unemployment has dropped significantly.
Europe as a convergence machine, with the engine being the removal of barriers to goods, services, personnel, and capital, and the gradual expansion of the Union with new member states. But that is of course far from the whole story. Economic growth in Europe was also supported by the continuous growth of the labor force. Through immigration, but also through increased labor participation of women and later also the elderly. And the outside world was also quite favorable to Europe. World trade flourished under a system of multilateral rules. The Americans provided a large part of our defense, which allowed us to spend money on other priorities. Yes. And in such a geopolitically stable world, it was not such a problem to be economically dependent on countries we considered our friends.
In retrospect, you could say that the period from roughly 1950 to 2020 was the European Golden Age. Because now, ladies and gentlemen, that Golden Age is over. The convergence machine is sputtering. We have made little progress in the past 10 years in modernizing and integrating our economies. The expansion of the EU is gradually approaching its natural limits. We have lost an important member state, and the European economy continues to lag behind other major economic blocs, particularly the United States and China. In the past 20 years, the American economy grew almost twice as fast as the euro area. And you can see that here. For an important part, that is indeed the result of demographic developments. Yes, our population just grows a bit slower and ages faster. If we only look at GDP per hour worked, which we also call labor productivity, then those growth differences are a bit smaller. But even then, it is a difference of just over half a percent per year. And year after year, that adds up.
As you can also see here, labor productivity growth is really important. It is a kind of holy grail in economics. High growth in labor productivity means that you can produce more goods and services with the same number of people. The economist and Nobel Prize winner Paul Krugman rightly stated: Productivity isn't everything, but in the long run, it is almost everything. It makes almost everything in economic life easier. But the opposite is unfortunately also true. Lagging productivity growth ensures that you are structurally fighting against the wind economically and financially. With stagnant population growth, productivity growth becomes even more important. Calculations by the Dutch Central Bank show that labor productivity will have to grow two to three times as fast to prevent our economic growth from slowing down further. And the report by Peter Wiengärtner concludes that economic growth of around 1.5% is needed to at least maintain purchasing power without the national debt increasing significantly.
Now, there are quite a few nuances to be made in the comparisons with the US and China. Because it seems to me clear that we should not want to copy everything from these countries. The recent political and economic developments in the US are not necessarily something to be jealous of. And the same applies to the Chinese political and social model. And Europe is certainly not doing badly economically, but it could do much better. And is that important? Does it have to be so much better? Well, the answer to that question is definitely: Yes, we need higher economic growth. Not to become like the Chinese or the Americans, but to preserve and defend what we in Europe find important. Think of our healthcare. Think of our social provisions, our ambitions to become a sustainable economy, and perhaps even the democratic rule of law itself.
Europe as the cradle of the Enlightenment. We also see that reflected when you look at the UN ranking for the Sustainable Development Goals, of which the top 10 is entirely European. In this map you can see how countries score in terms of broad prosperity. And the score shows how far countries are from achieving all these 17 goals in the field of sustainable development, from poverty reduction via good education to health, equality, and climate. Where 100 means that all goals have been achieved. As you can see, Europe is the only region in the world that is colored dark blue. And that is the highest possible score. That is, in my view, the broad prosperity that we want to preserve. That is what makes Europe Europe for me. Those are the things we will have to defend. Defend in a world where things are certainly not going our way.
That the geopolitical climate outside Europe has become considerably rougher is by now an understatement. Russia is waging a barbaric and ruthless war of aggression against Ukraine and may perhaps be after more. And it is becoming clearer by the day how much we can still rely on the America of Donald Trump. And that means that we will have to defend ourselves. Literally. But creating the budgetary room for more defense spending will hurt elsewhere in the budget. Then there are the trade tariffs that the US is imposing on our businesses. Trade tariffs of a height we have not seen since the 1930s. And I can assure you, trade tariffs make us all poorer.
While we have to deal with this new geopolitical situation, we also have to deal with the ever-worsening climate crisis. And the more our climate goals fall out of sight, the higher the costs will be. The energy transition requires a consistent and persistent policy. It requires innovation, but it also requires money. Yes, and to make the evening even more pleasant, I will conclude with aging. Europe is aging. I think, I don't see very much with these lights, but I suspect it is also invisible in the audience. The CBS reported last year that for the first time we have more people over 65 than under 20 in the Netherlands. And that difference will only increase in the coming years. Not only in the Netherlands, but in large parts of Europe. And that means that the costs of healthcare and old-age provisions will increase. And that while from 2040 the European labor force is projected to decrease by 2 million people per year. More labor migration towards Europe could counteract this trend. But well, that does not seem to be able to count on broad societal support and that also brings new challenges. But the alternative is that a shrinking labor force will have to bear the costs of aging. So Europe risks stagnating and being overtaken left and right.
And in doing so, a bit of the image emerges of a Europe as depicted in what is, in my opinion, the incomparable novel Grand Hotel Europa by Ilja Leonard Pfeijffer. My favorite book by one of my favorite writers. Europe is portrayed there as a continent of the past. A museum, an attraction for tourists. Overwhelmed by hordes of American and Asian tourists who want to know how people used to live. A useful mirror, I think. But the good news is that we do know what needs to be done. The authoritative reports by Mario Draghi and Enrico Letta on the future of the European economy are very clear about that. And for the Netherlands, we can now also add the report by Peter Wiengärtner to that. In fact, it comes down to three things. The first thing that needs to be done is to further deepen the European internal market. Especially in times of uncertainty, our internal market functions as a kind of first line of defense against shocks from outside. By reducing our dependence on other regions, we can better absorb the impact of trade disruptions. And in that area, ladies and gentlemen, there is still significant progress to be made. Despite the fact that Europe no longer has internal trade tariffs, there are still considerable barriers to the trade of goods and services.
A recent analysis by the European Central Bank estimates that the scale of this is comparable to a trade tariff of 67% on goods and 95% on services. Compare that to the percentages Mr. Trump is bothering us with. That is probably an overestimate, as the study itself indicates. But I think we can state that these remaining barriers on the internal market are severely limiting the growth potential of our economy. And the same study also shows that a modest step towards further integration of the internal market would fully compensate for the impact of American trade tariffs in the long run.
Good, the European Commission has now announced plans to tackle the Terrible 10 in this context. The 10 biggest barriers within our European internal market. And that often involves very practical matters. Think of different national requirements regarding supermarket labels, waste disposal, or tenders, or complicated administrative procedures to temporarily deploy employees of a company in another country. Differences in laws and regulations that all stem from good intentions, but which add up to an often insurmountable hurdle for companies that want to be active across the border.
In addition to goods and services, we also need an internal market for capital. Europe's financial markets are still strongly fragmented. And that is also mainly due to differences in laws and regulations. For example, we still have 27 different bankruptcy regimes in Europe, to name just one example. And that makes it incredibly difficult in practice for capital providers in one member state to invest in a company in another member state, let alone an investor from outside the EU. If they wanted to create a portfolio of investments, they would have to familiarize themselves with 27 different types of bankruptcy law. And that is why it can happen that in Europe, our households have 10 trillion, and just for clarity, that is 10,000 billion euros, in savings, but on bank deposits at a very, very low interest rate. While at the same time there is a huge lack of risk capital. Risk capital that is desperately needed to allow our innovative start-ups, which we do have in Europe, to grow. Because that is something they can do much better in the US. And that is why many of those innovative companies eventually move to the United States as they grow larger.
Good, the recent approval by the European Commission of a strategy for what is now called the Savings and Investments Union, formerly the Capital Markets Union, is absolutely a step in the right direction. But it should actually be followed by concrete steps. If you really want something with each other, you make a roadmap and you agree on concrete deliverables, concrete deadlines. If we want to increase the growth potential of the European economy, we will have to tackle this problem seriously. A way to bring the integration of European markets a step closer is, for example, the introduction of the so-called 28th regime proposed in the report by Enrico Letta. And that would be a separate set of European rules in the areas of business establishment, bankruptcy, and labor law. So just for emphasis, no extra rules, but an alternative to the current 27 different national sets of regulations. And companies could then optionally choose this regime. And especially for smaller companies, like start-ups and scale-ups, for whom differences in regulations are difficult to bridge, such a regime might offer a way out.
Commission President Ursula von der Leyen has already announced that she will come up with proposals for this in the short term. But the road to the finish line here is presumably littered with political and practical hurdles. And that is why it seems to me a good idea if the Commission also sets a concrete deadline for this 28th regime.
Good, in addition to deepening the internal market, in addition to removing barriers on the European capital market, we must also invest more in what we call European public goods. Public goods, that is a bit of economist jargon, but those are things that only the government can provide. And European public goods are then government tasks that can be delivered better or more efficiently at the European level than at the national level. Things that, for example, benefit the entire European economy, but which are perhaps too expensive and complex for a single member state to tackle alone. Such as, for example, trade policy with third countries. Such as, for example, a European high-speed rail network. Such as, for example, a better-functioning European electricity grid where shortages and surpluses can be better balanced. Well, and the most current example today is of course defense. That requires not only a lot of investments, but it also requires a lot of coordination and cooperation to do it well. We waste a tremendous amount of money in Europe because we do not cooperate in the purchase and production of large items, whether it is trains or battle tanks. Mario Draghi made a very big point of this in his report and he is absolutely right.
But from my background, I want to focus a bit more on the question of how we are all going to pay for this. Because that can also be done in different ways. More room can be found within the current EU budget by setting different priorities and modernizing that budget. The current EU budget is still focused on the economy of the past rather than on providing public goods necessary for the economy of the future. Agricultural subsidies and cohesion funds together make up about two-thirds of the EU budget. While spending on research, climate, defense, and cross-border infrastructure remains very, very low. And that must of course change. But the question is whether that is enough. The current EU budget is about 1% of European GDP. Compare that to the federal American budget of around 23% of US GDP. And you just see that the EU budget lacks clout. According to the Draghi report, a doubling of the EU budget would be needed in the short term to cope with our challenges. And then we are talking about 2% of our GDP.
Good, where should that money come from? Besides, let's say, spending the money on other things, member states could of course increase their contributions to Europe. If a club you are a member of simply does more, a higher contribution can certainly be justified. Unfortunately, I still see that in the Netherlands the priority seems to be mainly to minimize our contribution. Another option is for the EU itself to generate more revenue. And there are some initiatives, but let's be honest, a European tax still seems far away. Yes. And as a last option, new European investments could of course also be financed with common European debt. And that can be justified because, in this case, or at least for some of these investments, it will largely be a catch-up from which future generations will also benefit. And that is why I am also really pleased that the incoming cabinet also clearly writes in its coalition agreement that it stands constructively behind this.
Taking on common European debt is ultimately a choice for the member states, because they are of course also jointly responsible for the repayment of this. With that, we must consider that national debts in many European member states are already quite high. And any potential new debt at the European level, yes, will of course have to be borne by those same European taxpayers who also have to bear debts at the national level. In exchange for higher debts at the European level, for more public goods at the European level, there should then also be lower debts at the national level because fewer public goods would then be offered at the national level. And for this, it is important that the European budgetary rules are also better complied with.
It also goes without saying that higher growth would help limit the total debt burden. Good, in addition to more integration of our common market and sufficient investments at the European level, member states themselves can of course also take more steps to increase growth, by investing and by reforming their economy. As mentioned earlier, the recent report by Peter Wiengärtner...
The report by Peter Wenning contains concrete recommendations for the Netherlands. Unfortunately, we see that national reforms, just like European policy measures, are implemented only haltingly. For example, during the coronavirus pandemic, the Recovery and Resilience Fund released an impulse of €650 billion in low-interest loans and grants. Member states can benefit from this if they implement a set of agreed reforms and investments. Unfortunately, after five years, only half has been implemented while the fund is almost expiring. In short, not only Europe, but also the individual member states need to step up their efforts.
But anyway, the bottom line of my story is that we need more Europe. And fortunately, the public understands this. The most recent Eurobarometer, an annual survey conducted by the European Commission in the euro area member states, shows that the majority of Europeans are in favor of more European integration. More, not less. And it may surprise you, but this is also the case in the Netherlands. I see virtually no difference between the sentiment in the Netherlands and that in Europe. Over 60% of the Dutch agree, to a greater or lesser extent, with the statement that more decisions should be taken at the EU level.
And contrary to what is sometimes claimed, most Europeans, and certainly most Dutch people, are positive about more European cooperation. Jacques Delors, the former President of the European Commission, described the problem of public opinion with the words: 'No one falls in love with the internal market.' Then I say as an economist: 'Why not actually? Who wouldn't fall in love with the idea that you can go and stand wherever you want?' Our Joost would have understood that much better.
[Music] Welcome to Europe. Stay here until I die. Europe. Pa, Europe. Fortunately, I don't need a visa to be with you. So take the bus to Poland or the train to Berlin. I have no money.
Good, let me try to summarize the foregoing for you. The benefits of Europe are clear. There is public support for further European cooperation. And it is also quite clear what needs to be done for that. At least in the economic and financial field.
And yet it is still very difficult to make real progress. Many of those breakthroughs in European cooperation only came about in response to crises, such as the banking union and a mechanism for mutual financial support after the euro crisis, and the Next Generation EU recovery fund during the coronavirus pandemic. Why do we make such slow progress in Europe? Do we really need a crisis every time to make progress?
Well, the reason why it is so difficult in Europe is not so much financial and economic in nature. Europe as a continent is rich enough. But the reasons are mainly political. First, further integration inevitably means that national powers are surrendered. And that is, I don't need to tell you here, a sensitive subject in this house.
And although the expansion of the EU has strengthened its role as a global trading bloc, it has not made the decision-making process any easier. And on top of that, for some policy areas, such as the EU budget and foreign policy, decision-making is also based on unanimity. Making progress in Europe has never been an easy process, and it never will be.
And I want to add something to that regarding the Netherlands. Because what the work of Matthieu actually shows very nicely is that the Netherlands' attitude towards the EU has always been a bit ambivalent. Matthieu says, for example, that the Dutch saw European integration primarily as a technocracy in the service of free trade. And even today, many still see Europe primarily as something you can make a lot of money from. But then they look a bit sour when it comes to transferring sovereignty or paying our contribution.
Understand me well, as an economist, there is absolutely nothing wrong with making a lot of money. And that went perfectly well in the European Golden Age. But in the new era we are now in, we can no longer afford that limited view of Europe. Europe is no longer a profit region. Europe is our survival. If we do not cooperate, we will eventually be in trouble. And I quote Benjamin Franklin during the American War of Independence: 'We must all hang together, or assuredly we shall all hang separately.'
The Draghi report makes it plausible that without further integration, Europe will gradually slide into irrelevance. And in international geopolitics, there is also that well-known saying that when you are no longer at the table, sooner or later you end up on the menu. Effective cooperation in a union of 27 member states inevitably means that we will share sovereignty with each other. We will have to share our national sovereignty in order to preserve our European sovereignty.
And to think about this for a moment, what does national sovereignty actually mean for a small and open trading nation like the Netherlands? From the trade in our own Golden Age to the pegging of the guilder to the Deutsche Mark, has our fate not always been inextricably linked to what happened outside our borders and how people looked at us? Let us not be naive. Sharing sovereignty is not popular. It also requires political courage. But perhaps that is exactly what we need most right now. The courage to do the unexpected, the revolutionary, the incredible.
As our political ancestors did after the war. And let us build on our strength. Because Europe has a lot to offer. The EU, with 450 million consumers, forms the largest trading bloc and the second-largest economy in the world. We have the countries with the highest broad prosperity in the world, and we also score very strongly on our well-being. Think again of the chart with the Sustainable Development Goals. We are bursting with innovative ideas and creativity. And we have relatively a lot of free time. Europe is a lifestyle superpower.
And in a world where everything seems uncertain, the law of the jungle prevails, and money seems to be able to buy everything, we still have strong institutions and a strong rule of law. And that certainty is not only nice for our citizens, it is also extremely attractive for businesses. All of this gives us a strength that should not be underestimated. That gives us potential, great economic and also political power. We can realize that potential. If we join forces and if we hurry up a bit. Thank you for your attention. [Applause]
