Remarks by Angel Gurría, OECD Secretary-General
OECD, Paris, 3rd November 2010
As our Chief Economist Pier Carlo has made clear, the recovery is broadly on track although risks and uncertainties persist. The immediate priority for economic policy now is to return to normality while consolidating the recovery. Looking forward, policies should create the conditions for balanced and sustained economic growth, fiscal sustainability and financial stability across the globe.
Let me start with the short term policy requirements and highlight three issues.
First, as fiscal stimulus is withdrawn, governments should credibly commit to consolidate their budgets. This will help address concerns in financial markets about sovereign debt and thus reduce funding costs for both governments and private sectors. To give an idea of the size of the challenge, simply stabilising debt relative to GDP calls for unprecedented consolidation efforts of up to 6 to 9% of GDP. But in fact more would be needed to bring debt back to sustainable levels. This effort should be paced in each country, to take account of the respective size of the challenge, the strength of the recovery, prevailing market conditions and political realities. Employing fiscal rules can help to improve credibility, as would the creation of independent fiscal watchdogs.
Second, the immediate challenge for the monetary authorities is to get the timing of the exit from exceptional stimulus right. In our most recent projections, the normalisation of monetary policy should only proceed in earnest from the first half of 2012 in the United States and the euro area. However, it should be further delayed if growth turns out weaker than projected – possibly accompanied by renewed quantitative easing. In Japan, should deflation persist, normalisation would not be considered in the two years ahead, and further quantitative easing may be necessary.
Third, the continued easy stance of monetary policy in most advanced OECD countries triggers capital flows towards emerging countries, which creates upward pressure on their real estate and stock markets as well as on their currencies. Since such emerging economies enjoy a better economic outlook some appreciation of their currencies is expected and indeed is a necessary condition for global rebalancing. Where such “natural” adjustment is resisted, aside from inflating official reserve positions, it adversely affects the competitiveness of other trading partners. This risks prompting countervailing interventions and protectionist responses, and underscores the importance of international co-ordination.
Looking beyond the projection period in our forthcoming Economic Outlook, ending in 2012, the role of economic policy is bound to shift from crisis management and resolution to crisis prevention, in order to stem the risk of further imbalances of all kinds. All strands of economic policy – fiscal, monetary, financial and structural – must contribute.
While government continue to consolidate their budgets, these should become more growth friendly. Indeed, governments should cut their least productive expenditure programmes while preserving, and possibly enhancing expenditures on education, health care, innovation and infrastructure development. Any scope to shift taxation from labour income to consumption, property and pollution should be used.
The role of structural reform –such as enhancing competition in product markets- in shaping longer-term prospects, has become even more prominent than before. It is needed to recover the output losses associated with the crisis and thus to help put public finances back on a sustainable track.
In many OECD countries the crisis leaves a legacy of unacceptably high unemployment, which risks becoming structural as the jobless stay on the dole longer. This is the result of skill erosion and growing skill mismatches as economies are transformed. Structural reforms, such as the reduction of marginal taxes on labour, strengthening work incentives built into social benefit systems and improving job counselling, training and other active labour market policies, are needed to address this problem.
Moreover, as exchange rate adjustment alone cannot do the full job of global rebalancing, structural reforms, which are desirable in their own right, should help address the underlying causes of global imbalances through their impact on saving and international capital flows. For example, if emerging countries were to expand their social safety nets and develop their financial markets, they could reduce their savings and their dependence on financial services from abroad.
Reforms are essential to improve the functioning and stability of financial markets. In this context, the planned increase in bank capital requirements is welcome, but it is also important to ensure that systemic risk is not building up in other parts of the financial system, and that moral hazard affecting the behaviour of financial institutions that appear “too big to fail” is addressed. In addition, achieving global consistency of regulation so as not to distort the global allocation of capital becomes more pressing.
Let me end by stressing that the OECD is strongly supportive of the G20 Framework for strong sustainable and balanced growth, and contributes to its work through the assessment of structural reforms on growth, fiscal positions and current account imbalances. A well functioning Framework should help avoid excessive imbalances from rebuilding. This should ease the pressure on the international financial architecture and facilitate the sorely needed reform of the International Monetary system.