Secretary-General

Europe and the United States: Jump-starting the engine of global growth

 

Remarks by Angel Gurría, OECD Secretary-General, delivered at the European Institute Transatlantic Award Dinner


2 December 2013, Washington DC, United States of America


Ms Attinger, Mr Istel, Ambassadors, Ladies and Gentleman,

It is with great pleasure that I accept the European Institute’s Transatlantic Leadership Award. Not only am I personally honoured to follow in the footsteps of many great leaders, but I am also very proud that this award is a recognition of the crucial role that the OECD has played in creating the world’s most successful and prosperous economic partnership, following the Second World War.

Of course, I don’t need to tell you how much and how fast the global economy is changing. The centre of gravity of the world economy is shifting and will continue to do so in the coming decades. Our Long Term Scenarios project that China will become the largest economy in the world in 2017, while the combined GDP of China and India will exceed that of the G7 by 2025, and by 2050 it will be 1½ times larger (on the basis of 2005 PPPs).

But this does not mean that the Transatlantic Partnership has a lesser role to play on the global stage. Far from it! In fact, my main message this evening is that joint European and US leadership and the European and US partnership are today, and will continue to be, crucial to the global strength, stability and inclusiveness of the global economy.

The most immediate challenge is to jump-start the engine of global growth.

Our recent Economic Outlook finds that despite some bright spots – like the euro area finally exiting recession – the global economy is by no means firing on all cylinders.

The crisis left us four legacies: first; low growth: world GDP growth, which averaged about 4 per cent per year in the decade up to the onset of the global crisis, is expected to reach only 2.7% in 2013, the lowest rate since 2009. In Europe, we expect growth to accelerate to only 1% in 2014 and 1.6% by 2015. In the US, we expect annual growth to reach 2.9% in 2014 and 3.4% in 2015.

Second legacy: high unemployment. We expect unemployment to remain high, at 8% this year for the OECD on average, and falling only slightly to 7.5% by 2015. In the euro area, we anticipate that the unemployment rate will only start to fall in mid-2014 and will be barely below 12% by the end of 2015. The situation is especially tough for the young, particularly for those stuck in long term unemployment and the NEETs (neither in employment nor in education or training).

The third legacy from the crisis is an increase in income inequality, which grew more between 2007 and 2010 – the worst years of the crisis – than in the preceding twelve years. In the US, the income gap between rich and poor stands at approximately 16 to 1; in comparison to an OECD average income gap of approximately 9 to 1.

The fourth, and related, legacy on both sides of the Atlantic, is a loss in the public’s trust in our governments and our institutions. Regaining this trust will take a lot of work and must start by cementing a sustained recovery that benefits the most vulnerable.

Systemic weaknesses are preventing faster progress towards such recovery. They result from the four cylinders of the growth engine (it's a European car) being stuck in second gear. First, investment remains weak. Second, credit growth remains subdued. Third, trade growth is sluggish. And finally, growth in emerging-market economies has slowed down. We also see significant downside risks resulting from the incomplete resolution of fiscal (US), financial (Europe) and structural (Japan) challenges in many countries and in the larger emerging economies. Europe and the US have been and remain at the epicentre of this uncertain scenario.

As a result of the collapse of public trust, the crisis has also called into question the very values that these two global players have long upheld and which underpin the work, the philosophy and the raison d'être of the OECD. I am referring to the pursuit of economic growth through open markets, open investment regimes, a free drive for competition and innovation, and a deeply shared commitment to democracy, the rule of law and human rights. These are precious goals, which must continue to be pursued and which must constitute the context in which economic policy is conducted.

Therefore, getting Europe and the US back on their feet is critical not only to improve the prospects of their own people, but also to continue to nurture the hopes of millions around the world that are seeking for a better life and traditionally looked at the US and Europe as the models to follow.

Jump-starting the engine of global growth starts at home.

Both Europe and the US need to show strong leadership and strive for effective governance. This means avoiding policy mistakes that could potentially derail the recovery. Most notably, I am thinking of the dire consequences of a repeat of the recent bout of fiscal brinkmanship in the US, as well as in the uneven pace of the reform process and the slow progress of the financial repair in the case of Europe.

At the same time, given that there is little room left for monetary and fiscal stimulus, both the US and Europe must push harder for bold and courageous structural reforms to achieve, individually and collectively, a stronger, more sustainable and balanced world economy, while addressing the legacies of the crisis.

The Euro area countries most affected by the crisis have already made considerable progress. Greece, Ireland, Italy, Portugal and Spain have all shown strong and courageous determination to legislate and implement politically tough reforms. But rebalancing in the region between core and peripheral countries remains incomplete. 

Reforms to enhance productivity, such as easing restrictions in product markets and making labour markets more flexible and dynamic, will help to improve underlying competitiveness and export performance, unlock new opportunities for growth and support job creation in the peripheral countries. At the same time, measures to generate stronger internal demand and investment in the surplus economies, such as Germany, would help to achieve more balanced growth in the euro area as a whole and reduce the cost of the adjustment for the deficit countries. In fact, most of the countries that have suffered market pressures started the crisis with current account deficits of around 10% of GDP; today, they are all in balance or in a surplus. Massive adjustment. Most of them have also made substantive cuts to their labour costs to regain competitiveness. Meanwhile, Germany’s current account surplus has remained at around 7% of GDP throughout the period.

In the US, long-run growth prospects are becoming a source of concern, as reflected for instance by the relative weakening of US students’ performance in maths, reading and science scores and in the US adults’ skills for the workplace. Long-term growth could be strengthened by enhancing education, innovation, improving regulation and strengthening infrastructure investment, particularly in transport and energy.

Better education and training, the “up-skilling” of the labour force would facilitate a better match with the new needs of the economy while also helping to reverse high and rising income inequality. Last month I presented the results of our first ever PIAAC Report (Programme for the International Assessment of Adult Competencies); it’s about adult skills! Tomorrow, I will present the results of our 5th tri-annual PISA Report (Programme for International Student Assessment), along with Secretary Duncan. It’s about skills of the 15 year-olds. Both studies confirm that the US is lagging behind and that there is much work to be done to ensure that US skills and education are fit for the 21st Century global economy.

But we can only reach top gear if we also act together at a global level.

Effective global governance has never been so important. The highly complex and interconnected nature of the world’s economy requires us to work together to establish standards that will oil the wheels of the global economy and allow it to flourish. The United States and Europe have a pivotal role to play in making global economic governance work, and recent events prove that this statement applies equally to non-economic challenges.

Much has already been achieved through the G8 and the G20. For example, besides avoiding a total collapse of the world economy, thanks to decisive support from the United States and Europe, in the G8 and the G20, the fight against tax evasion and tax avoidance is one area where strong global standards are emerging from the ashes of the crisis.

Aggressive tax avoidance by multinational companies and offshore tax evasion by individuals undermine the integrity of tax systems across the world, profoundly distorting economic competition, reducing available revenues to meet citizens’ and business demands, and denting trust. But with the support of the OECD, and with decisive leadership from Europe and the US, G20 countries have come together to agree an OECD/G20 Action Plan against Base Erosion and Profit Shifting that sets forth 15 ambitious programmes that will collectively result in the most fundamental change to the international tax rules since the 1920s! This is something we could only have dreamed of a decade or even 5 years ago.

At the same time, there are other areas of global governance where progress is slow and painful. I am thinking of areas such as trade and climate change, where progress is vital in the coming years if we are to set our post-crisis global growth engine back on a strong and sustainable path.

Trade is one area where the EU and the US must demonstrate genuine global leadership.

There is no doubt that the multilateral trading system is going through a rough patch. Twelve years on there is still no conclusion to the Doha Round and the signals from the lead-up to Bali on a possible Trade Facilitation Agreement are not promising.

However, regardless of these setbacks (or perhaps because of these setbacks), the level of ambition for regional and mega-regional trade and investment agreements must remain high. The Trans-Atlantic Trade and Investment Partnership (TTIP) between the US and the EU, has vast potential. If successfully concluded, this Partnership will be the most significant bilateral agreement ever reached, covering about 50% of global output, 30% of world merchandise trade and 20% of global foreign direct investment. Our analyses estimate that the benefits could be in the range of 3-5% of global GDP. OECD’s latest work on Global Value Chains (GVCs) and Trade in Value Added (TiVA) show that, when measured in value added, trade of Europe with the USA is larger than nominal figures would suggest. So, integration is already happening.

Most of these benefits would come from easing the border impediments to trade and investment. But what does all this mean for the multilateral trading system? Can these important regional and bilateral agreements underpin a more functional multilateral trading system? My belief is that they can and they should.

An ambitious US-EU trade agreement could become the gold standard for deep and comprehensive global trade and investment integration. If these two major economies can tackle a wider range of sensitive issues than has been possible at the WTO, the results could then serve as an important building block for future multilateral initiatives. By the way, both Mexico and Canada already have FTAs with Europe. And remember they are NAFTA partners. Just a thought.

Indeed, I urge the two parties to bear this in mind as negotiations unfold – leave the door open for other participants willing and able to join! A successful Trans-Atlantic Trade and Investment Partnership has the potential to boost growth and employment far beyond the Trans-Atlantic region and would be a huge confidence booster.

We are all in this together.


The OECD was born transatlantic since its very origins as the Organisation for European Economic Cooperation in 1948, established in the immediate post-war period to manage and distribute Marshall Plan aid to reconstruct Europe.

It then became the OECD in 1961, with a more global, public policy agenda for economic and social convergence. Today the OECD is a profoundly different organisation, which continues to evolve. Our expanded membership, and the extensive work programme that we undertake with member and non-member countries on issues from trade and development through to structural reforms, education, climate and inclusive growth, governance, anti-corruption, etc., makes us a truly global organisation.

The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. We work with the US and European countries to understand what reforms are required to drive economic, social and environmental change and implement them. We measure productivity and global flows of trade and investment. We analyse and compare data to predict future trends. And perhaps most importantly, we set international standards in a wide range of areas, from agriculture and tax to the safety of chemicals.

Ladies and Gentlemen,

My message to you this evening is simple. Although no longer the only “power house” of the global economy, the transatlantic partnership that initially spawned the OECD 53 years ago, and our Development Center 51 years ago, and our International Energy Agency nearly 40 years ago, and our Nuclear Energy Agency 41 years ago, has the potential to jump-start the engine of global growth and put it on a strong and sustainable path. This requires both players to lead by example at home and on the global stage.

The OECD will continue to work with the US and the EU every step of the way until we hear that growth engine firing on all four cylinders!

Thank you once again for this prestigious award.

 

 

 

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