Secretary-General

The Challenge of Competitiveness in Europe: an OECD perspective

 

Remarks by Angel Gurría, Secretary-General OECD

Bratislava, 6 December 2012

(As prepared for delivery)

 

Excellencies, dear students, Ladies and Gentlemen,


It is a pleasure to be here today to receive this honoris causa degree from the University of Economics in Bratislava. This university has an impressively high employability rate of its graduates – almost 97%! This is a mark of relevance and I feel honoured to join your alumni.


Today, I would like to focus on one of the most pressing challenges for restoring growth, creating jobs and better opportunities for European citizens: I am talking about the need to regain competitiveness and tackle imbalances in the euro area.


Europe needs to regain competitiveness as a new source of growth


Despite significant differences among countries, the euro area faces a slowdown in activity, with real GDP projected to contract mildly in 2013, but it is expected to gather momentum gradually throughout 2014 according to our latest projections released last week. Some parts of the European industry have lost ground in global markets, while the emerging economies have gained market share and have moved up the export value chain.

 

This outlook reflects  significant differences in competitiveness between the European countries with large external deficits and those with large external surpluses. These differences are not new and they have exacerbated the internal imbalances in the euro area. Addressing these challenges is key to a better outlook for Europe.

 

Competitiveness is essentially about productivity. It is about how much each worker produces per hour worked and how much output the economy produces by combining all of its resources: labour, capital and skills. There is a wide gap between the best and low performers in Europe and this gap reflects primary differences in the level of productivity across countries.

And it is not only the level of productivity at a given moment that matters for competitiveness. The evolution of productivity is just as important and it varies significantly from country to country. Productivity is generally lower in the southern euro area countries and in Central and Eastern Europe, despite some fast convergence in the latter countries. But overall, during the last decade the increase in productivity in the Euro area has been less than 1% per year - below the OECD average and below Japan and the United States.

 

Unsurprisingly, unit labour costs have diverged considerably in the euro area. This reflects the different trends in productivity growth and in wage compensation among countries. In Germany, wages have increased moderately, resulting in flat unit labour costs. But in countries such as Greece, Ireland, Italy, Portugal and Spain, wages kept rising over the past decade, despite moderate or even stagnant productivity growth. This divergence in unit labour costs has played an important role in the trade and current account imbalances that have built up in the euro area since its inception.


Looking ahead, productivity is likely to grow slowly in Europe under current policies. According to the OECD medium-term projections, labour productivity will grow by 1.6% per year in the euro area through 2025, close to the average of the years between 1990 and 2010. This needs to change! Low productivity growth has important implications for the growth potential of European countries. As the European population ages, productivity will need to rise to offset the losses resulting from the shrinking working-age population.

We must address these worrying trends to place Europe back on a sustainable growth path. But can we achieve this? Let me table 6 key policy recommendations.

 


 

Policies to regain competitiveness in Europe

 

  • First, Europe should further develop its Single Market: it is among the European Union’s most powerful tools to stimulate growth and competitiveness. The potential of a market of 500 million consumers is being held back by fragmentation. Many markets remain organised largely on national lines, where the median market size is less than 10 million.

 

Increased market integration would bring the benefits of comparative advantage through specialisation, stimulate competition, reward quality, promote synergies and advance innovation. It can also foster capital market integration and labour mobility.

 

Also, consumers – you and I – would benefit from a greater variety of products at lower prices, due to reduced production costs and higher efficiency. To illustrate the potential gains from greater market integration, recent assessments suggest that the first two decades of the Single Market raised the European Union’s GDP by 2% and boosted employment by 1.5%.

 

  • Second, European countries should introduce policies to ease excessive product market regulation. Increased competition in the product market is essential to support innovation and productivity. There is room for further action even among the best performers. For example, regulation in the retail sector in Germany, Italy and Spain, and and in the professional services sector in Germany and Italy is still restrictive, although the overall restrictiveness of regulation is below the OECD average in these countries. This  points to areas where more work is needed to unleash opportunities for growth and jobs.

 


 

  • Third, innovation plays a key role for productivity enhancement. With some non-OECD economies accounting for a growing share of global R&D, stepping up innovation is crucial for boosting Europe’s competitiveness and achieving sustainable growth in the longer term. This is a particular challenge for the Southern European countries, whereas Germany and Austria remain very well positioned and ahead of other euro area countries. The Slovak Republic invested about 0.6% of its GDP in R&D in 2010, well below the 2.8% of GDP spent on R&D in Germany.

 

Promoting innovation at the EU level  is one of the objectives of  the Europe 2020 strategy, which aims to invest 3% of the EU’s GDP in R&D. Pursuing this objective must be a priority. The challenge of innovation is particularly urgent in the countries of Southern Europe, especially in relation to the knowledge economy and the so called “Knowledge-Based Assets,” which are important new sources of growth.

 

  • Fourth, a highly skilled and educated workforce is key to boosting innovation, productivity and long-term growth, and to reducing social inequalities. But as our PISA (Programme for International Student Assessment) report shows, in many European countries, and this includes the Slovak Republic, the educational achievement of students in reading, mathematics and science is still below the OECD average.  Education and training should be improved to make sure that they match highly sought-after skills. Education is also crucial for ensuring equal opportunity for disadvantaged social groups, including the youth and the Roma, so that they are equipped with the skills needed to compete in the labour market. 

 

  • Fifth, labour markets play a central role in supporting growth. Increasing the number of participating workers and ensuring that their skills are well used will help to strengthen Europe’s growth potential. Labour markets are also a key area in which to tackle social inequalities and make growth more inclusive.  

However, many countries in Europe are faced with dualism in the labour market. Workers on permanent contracts are well protected, while workers on temporary contracts bear the brunt of labour market adjustment. The experience of OECD countries suggests that decentralised wage bargaining can help wages to better reflect productivity gains. It is encouraging that several euro area countries - such as Spain, Greece and Ireland - have already taken steps in this direction.

 

  • Last but not least, the tax system can help. European countries have relatively high average and marginal tax wedges on labour. Reducing this wedge is another way to boost growth by improving incentives to work and invest. In the current fiscal context, such measures have to be implemented at least in a “revenue-neutral” fashion. This can be achieved, for example, by reallocating the fiscal burden away from labour and corporate income towards consumption taxes, the taxation of property and environmental taxes.

Europe needs to implement changes in these and other crucial areas to regain competitiveness. But we must also consider a further, sometimes formidable barrier: how to put these policies in place.

The key challenge: how to make reform happen?

Reforms are crucially important for countries to improve economic performance and ensure the well-being of the population. But it is sometimes difficult to carry them through. At the OECD, we have identified a number of key tools that will help governments to carry out reforms. Sound evidence-based technical analysis – the “bread and butter” of the OECD work – is absolutely essential. But other elements are needed for successful reform. A clear electoral mandate, strong governmental leadership, effective communication, and finally, firmness and perseverance, patience and long-term vision – these are the building blocks of the path to reform.

Successful reform strategies also tend to give priority to actions which have faster, positive impacts on large segments of the population, such as policies to reduce unemployment and improve skills and education. As for measures with potential negative short-term effects, a phased approach should be taken to reduce these effects and ensure that long-term net benefits are realised. A clear commitment to reform and a well communicated vision can also help to win support among the population, especially for those policies with longer delivery periods.

 

Ladies and Gentlemen,

 

These challenges are too important to be addressed urgently; they have to be planned, promoted and executed impeccably! Reforms are essential for a brighter future for Europe, one that is founded on strong performance and inclusiveness.  A more competitive Europe is also good for the global economy, at a time when activity is slowing almost everywhere.

 

Reforms in Slovakia are important and contribute not only to stronger performance at home, but also in Europe at large. The Slovak economy recovered very strongly after the global financial and economic crisis and will remain among the strongest in the OECD.

 

But now the main priorities are to restore the public finances while fostering domestic drivers of growth and ensuring increased funding for education and active labour market policies, which will promote growth. The OECD Economic Survey on the Slovak Republic, which we launched today with Prime Minister Fico, offers concrete recommendations on how to improve the fiscal framework, raise labour market performance, and strengthen outcomes of the education system.

 

At the OECD, we are optimistic about the Slovak Republic, and about Europe, provided we pursue greater competitiveness and productivity through better policies for better lives.

 

Respected authorities of the University of Economics in Bratislava, dear friends!

 

I will strive to honour this degree and to be found deserving of the privilege it entails. It humbles me, and it commits me to do better, to reach for excellence, to serve better; to serve better; to serve better.

 

Thank you.



 

 

 

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