Global Economy and Framework for Growth
Remarks by Angel Gurría,
4 November 2012,
Mexico City, Mexico
Your Excellency, Mr. President,
Ladies and gentleman,
I am afraid we are not yet seeing the light at the end of the tunnel: the Global economy is facing again strong headwinds and a new slowdown. Recession is taking hold in the euro area and growth in the US is slower than anticipated. Our projections show that growth will continue to be sluggish. Even the performance of developing and emerging economies is not looking great as the slowdown in the advanced economies is now being felt in the emerging-market economies, notably in China, India and Brazil.
There are some good news, paradoxically coming from Europe: LTRO, Fiscal Union, Banking Union, ESM, ESM+ECB and OMT.
But these are overshadowed by pending issues that are weighing down on growth prospects and confidence:
• We still don’t have a fully operational banking system, particularly in Europe, I’ll return to this subject in a short while;
• We have not yet addressed the debt issue in many countries and this includes Greece where there may be a need for a buyback of existing private debt to ever have a chance of getting to 120% of debt to GDP; as well as in Spain and Italy which are performing well but are under market pressure.
• We need to ensure that the various decisions taken by European Leaders are fully implemented; and
• We avoid the “fiscal cliff” in the US.
So we must re-instil confidence in the system: both in the short term, by implementing our decisions; by addressing the remaining hurdles of the crisis; by propping-up demand where there is space; but also in the medium to long term, by building up a productivity and competitiveness agenda that puts the emphasis firmly on growth.
Going back to the G20 Basics: Growth, Growth, Growth… and Structural Reforms!
I understand that the Russian Presidency would like to go back to the G20 fundamentals by refocusing its agenda on growth. This is most timely. But let me add that structural reforms – and competitiveness in particular - should be the cornerstone of any new G20 growth narrative.
Take the so-called “deficit countries”: What they critically need in the current context is a comprehensive and ambitious competitiveness agenda that would encapsulate, for instance, the enhancement of their regulatory environment, the introduction of more competition in their product markets, a reform of their tax system as well as the reduction of dualism in their labour markets. This is precisely the kind of reform agenda which the OECD is currently crafting in partnership with some of the European members of this Group. Pay-offs are potentially high, equivalent to an increase of 0.5% to 1% per year depending on how thorough, comprehensive and well sequenced the reforms are.
The G20 must deliver on its structural policy commitments, but it must also consider broadening the scope of its reform agenda so as to harness new sources of growth. Besides “standard” structural reforms, members of the Group should put innovation centerstage – which would encompass not only R&D, but also higher education, and entrepreneurship, as well as investment in intangibles. By the same token, green growth policies have still to be mainstreamed in G20 policy commitments.
Going back to Basics: the “Unfinished Business” of Financial Regulation.
In the “unfinished business” of financial regulation, the G20 should probably go back to basics. The risk for the financial regulation agenda of the G20 today is to become overly complex and technical so that we would be collectively losing sight of its overall “raison d’être”.
Take for instance the measure of bank’s capital. We all know that the standard Tier 1 capital over risk-weighted assets ratio captures the risks taken by banks on their balance-sheets rather imperfectly. This is the reason why the OECD is advocating a very simple and powerful alternative measure of the adequacy of bank’s capital: a leverage ratio defined as Tier 1 capital over total assets that would be set at a safe median level of 5 percent. By this measure, I am afraid, several countries of the Group would still have some way to go, about USD700bn to be more specific, to ensure a proper recapitalisation of their banking system.
In the same vein, we have been advocating, for several years now, the separation of commercial banking from large-scale and complex securities (notably derivatives) businesses to avoid the cross-subsidisation of excessive risk taking. We are encouraged to see that this proposal is gaining ground within the G20 (Volcker, Vickers, Likannen, etc.).
Mr. President, dear Ministers,
Tough macroeconomic decisions and G20 coordination thereof have delivered good dividends since the start of the crisis. But now we need new tools to secure strong, sustainable and balanced growth and put our people back to work. As we did under Mexico’s Presidency, the OECD stands ready to assist the G20 in this endeavour and to work closely with the Russian Presidency in the next months.
Thank you very much.