REIGNING IN EUROPE´S DEFICITS IS FIRST STEP / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Reining in Europe’s deficits is first step

By David Cameron and Fredrik Reinfeldt

Published: Last updated: June 16 2010 23:08

We first met in Stockholm three years ago. Our discussions were all about issues such as education and climate change. The economy barely came up. But then the world was shaken by an economic catastrophe that toppled banks, destroyed businesses and ruined countless livelihoods. The wreckage is clear in Europe today: unemployment has risen by more than 7m; almost €150bn has been wiped off European Union output; average EU debt levels have risen to almost 80 per cent of gross domestic product. By any measure, these are shocking statistics.

So when we meet in Brussels on Thursday, the economy will dominate discussions. We are agreed there are four clear steps we need to take to ensure that Europe thrives and prospers.

First we need to get a grip on our debts. Because Sweden has been living within its means it is one of the member states that has weathered the crisis best. In Britain, on the other hand, the new coalition government has inherited the largest budget deficit of any EU country. Next week George Osborne, the chancellor, will set out a comprehensive plan to tackle the UK’s deficit in an emergency Budget. There are difficult decisions to make but it is essential governments cut back on unnecessary spending. We have to accept there are things we can no longer afford. Both of us are determined to work with other leaders to achieve a consistent approach across the EU.

But it is not enough to rein in the deficits in reaction to what has happened. Countries across Europe need fundamentally to change the way they deal with public finances so that debt crises of this magnitude can never happen again. That means that the stability pact must be taken seriously. There must be better safeguards against member states spending and borrowing too much and an early-warning system to identify problems before they get out of hand.

Second, we need to fix our financial sector. We both think that it is time for banks to be more open about what they do and to hold more money back in the good years so they do not need taxpayers to bail them out when things get tough. The EU should also lead the way in driving international movement towards a new levy on financial institutions, similar to that which Sweden has put in place.

The third step is creating the conditions for growth. Europe has huge advantages – some of the world’s most skilled workers, centres of technological brilliance and the world’s largest single market. But we have deep structural problems. Productivity is shrinking. Our average growth rate is lower than the US, India and China. And we are sitting on a time bomb – with ageing populations and too many people out of work.

So it is clear, we need deep-seated reform and we need it now. There is one area in particular where we both believe there is a need for urgent change. It is shocking that in many parts of Europe women still do not have equal rights in the workplace. This is not just unfair; it makes no sense – because it deprives our economies of their full potential as workers and consumers. That is why in Brussels on Thursday we will be pushing this issue in discussions on Europe’s next strategy for growth and employment.

The fourth step to a prosperous Europe is to fight protectionism . History demonstrates that in difficult times there is a temptation to turn inwards – ultimately a destructive response. We are both agreed that we must protect the single market – the cornerstone of Europe’s economic success – by holding to the rules on state subsidies and competition policy.

As well as promoting free markets within the EU, we will make sure the EU promotes them around the world too. This is not just because the free market has been shown to be the greatest wealth creator there is – it is also a hard-headed reality. The EU is the world’s largest exporter. It thrives and survives on open markets. So we will be working with our key partners to complete the WTO round and to conclude ambitious trade agreements, in particular with Canada and India.

The time has come for the EU to stop talking and start taking action – on debt, on fixing the banks, on creating the conditions for growth, on promoting free trade. Both of us are convinced of the strengths and potential of this union. Now we need to make use of them.

David Cameron is the UK prime minister and Fredrik Reinfeldt is the Swedish prime minister
Copyright The Financial Times Limited 2010.