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Remarks by Angel Gurría, OECD Secretary-General
Launch of the 2007 OECD Economic Survey of the European Union
Paris, 20 September 2007
Good morning ladies and gentlemen. It is a pleasure to be here today to present the first ever OECD Economic Survey of the European Union.
This survey fills an important gap. As most of you will know, we regularly review the European countries that are also members of the OECD, and we review the euro area, but this is the first time we have tackled in depth the common and shared policies of the European Union. This is useful and important, not just because the EU is such a large part of the global economy – collectively, the EU is the world’s biggest economy and the biggest exporter. The review is important also because EU policies have such a large influence on individual member states. By one estimate, around half of new national legislation is driven or shaped by Brussels.
The Survey is also timely. This year is the 50th anniversary of the Treaty of Rome, which created what has now become the EU. It is the ideal time to think about an agenda for the future.
Before discussing the Survey, let me first of all thank the staff of the European Commission for their co-operation and the frank and open dialogue we enjoyed when preparing the Survey. Let me also thank the German Presidency of the EU, which greatly facilitated OECD’s task all along. I will first share with you our key conclusions and then our main policy recommendations.
Our basic assessment is a positive one. The European Union has made a major contribution to prosperity in Europe. The single market programme, while far from finished, has boosted incomes, competition and growth. Economic reforms are starting to pay off, especially in the countries that started early. Unemployment is falling and the slide in productivity growth has stopped – and will hopefully begin to pick up again.
But let me explain why we think more reforms are needed. Primarily, it is because living standards could be substantially higher. There is a sizeable gap in GDP per capita compared with the OECD’s best performers, and the gap has widened over the past decade. More than a third of the working-age population remains inactive. And the challenges are getting tougher. Globalisation brings great opportunities for vibrant economies but punishes less flexible ones, and population ageing will put welfare systems under pressure.
Having said that, it is important not to generalise. The Union is diverse. In some areas, European countries are among the best performers in the OECD : Finland for its school system, the United Kingdom and northern Europe for their labour markets, the Eastern Europeans, Spain and Ireland for their dynamism and Germany and France for their world-beating exporters. Some member states have learned that liberalisation works, while others have tended to shield companies from competition. The challenge is for Europe’s laggards to learn from its best performers.
With this background, we have five main policy recommendations. But note that these suggestions cover only the policy areas where the EU has some responsibility. There are many other things that member states need to do – not the least of which are labour market, welfare and education reforms – but these national policies are not dealt with here. They are discussed in our individual country surveys.
The first recommendation is to strengthen the internal market. A vibrant and competitive internal market is central to Europe’s long term prosperity. Indeed, already, it has made Europe prosperous. It has reduced prices and lifted innovation, entrepreneurship and growth. But we still don’t have the “great market without frontiers,” as Jacques Delors described the goal when the Single European Act was signed in 1987. Significant barriers to cross-border trade remain in place.
The main weak spot is the service sector. This is a long-standing problem. The impact of barriers to trade in services has been recognised at least since the 1959 Rapport Rueff Armand. Some national laws amount to non-tariff barriers to trade, while differences in regulations across member states make it more difficult to sell services to all European citizens. Many of these rules are there, at least ostensibly, for genuine policy reasons such as public safety or consumer protection. But they can be out of all proportion to their objective and have the effect of shielding local firms from competition.
The services directive is the big attempt to break down these barriers. While it will help, the outcome is uncertain. Member states need to make a genuine commitment to removing all unnecessary barriers to trade. And it could be backed up by fast-track legal avenues to make it easier for private individuals and firms to challenge the obstacles they face in everyday business. Otherwise, there is little alternative but the hard slog of harmonisation, sector by sector, rule by rule. The Commission is making a valiant effort to ensure that the services directive delivers real progress for the internal market, and we fully support its attempt.
Financial services also need more work. While the Commission’s Financial Services Action Plan has made tremendous progress at integrating wholesale financial markets, it has struggled to make much progress in retail banking – and mortgage markets especially. Each country has a different way of protecting consumers and borrowers, which means financial products must be tailor-made for each market. The rules here need to be harmonised. Banks remain the first port of call for businesses that need capital to expand, partly because securities markets are not sufficiently well integrated. Europe’s companies would have easier access to capital if investment fund (or mutual fund) regulations were changed. Member states should also rethink the way they have implemented the takeover directive because they have ended up worsening rather than helping the integration of capital markets. And they should stop protecting “national champions”.
Second, open up network industries, such as electricity and gas, to more competition.
In network sectors that have been liberalised the most, such as air travel and telecoms, there has been a clear payoff in the form of lower prices and better service. But stronger competition is needed in a range of sectors, including electricity, gas, transport, ports and postal services.
Energy markets especially need to be linked together better and opened up to competition. This would lower prices for consumers and make energy supplies more secure. Today, vertically integrated energy giants can treat competitors unfairly and shut out potential entrants. The priority should be to create integrated EU-wide or regional markets. Regulators need greater powers and clearer rules over cross-border issues in order to eliminate transmission bottlenecks. Separating the network, generation and supply activities of the energy giants is also required to create a level playing field. There are several ways this can be done, but OECD experience has shown clearly that full ownership unbundling is the most effective way. The European Commission has been pushing hard in this area, and is to be commended for doing so. The legislative proposals issued yesterday by the Commission on energising Europe are a welcome development.
Third, keep reforming the Common Agricultural Policy, or CAP.
The CAP has been substantially improved in recent years. The 2003 reform, which introduced a single farm payment that is not tied to production, has reduced many of the worst problems that the CAP had created in the past. Even so, the benefits of this reform would be significantly enhanced if all payments were decoupled from production and if the level of support were reduced further. While support to EU farmers has fallen slightly over the past five years, and has become less distorting, it remains above the OECD average and well above the most free-trading countries. The Doha trade round is a good opportunity to show some leadership by acting together with the other major traders to reduce farm subsidies and open up its markets to the rest of the world. And because there are high tariffs on processed food products, reform needs to be broader than just tackling support to farmers. Moreover, the CAP would be more effective and efficient if it were better targeted at its objectives – for example, income support being focussed on lower-income farm households and poorer farming regions.
Fourth, remove barriers to the free movement of people.
A mobile workforce can strengthen the Union by acting as a shock absorber for economies that are out of sync with their neighbours. It can make companies more productive and innovative by bringing fresh perspectives and new skills and ideas. But mobility in Europe is low.
The language barrier is one explanation, but it is unlikely to be the whole story. There are some things that policy can do. Most obviously, countries could remove the temporary restrictions they have imposed on migrants from the new member states – or if not, they should at least use the time to reform their employment policies because payoff for migrants and the host country is higher when job markets are flexible. Mobility could also be enhanced by making occupational pensions portable, improving the recognition of qualifications gained in another member state, eliminating barriers in the regulated professions and reducing transaction costs on house sales.
The last recommendation is to get better results from regional policy.
A considerable amount of money has been spent on regional policies, yet income levels among the regions are not converging. Funding has to be focussed more tightly on the areas where it can do most good. That means funding projects that can spark sustainable growth. The EU has changed its regional cohesion policy recently, and it is now more like a block grant for the regions. With less co-financing than there used to be, we have concerns that it could lead to less careful project selection and management. More of the regional budget needs to be tied to results: if it’s not working, funds should be reallocated elsewhere.
So those are our key recommendations. Before finishing, let me make a point about why reform has proved so difficult. Reform is resisted often because of a belief that labour and product market protection is the price that must be paid for Europe’s social model. There is a sense that, as Chris Patten put it, “Europe’s jobless figures would be unacceptable in America; America’s inequality figures would be politically intolerable in much of Europe”. But if there is such a trade-off, it is far from simple. In the first place, there is no single European social model. And in the second place, some European countries have taught us that low unemployment and a dynamic business environment can be combined with high levels of equity and social inclusion.
To sum up, the EU has achieved a great deal but there is further work to create a more dynamic and integrated European economy. The anniversary of the Treaty of Rome is a good opportunity to renew the commitment to ever closer union and to the free movement of goods, services, people and capital.
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