G20 Finance Ministers and Central Bank Governors Meeting
Remarks by Angel Gurría, OECD Secretary-General
Moscow, 15th February 2013
Your Excellency, Mr. President, Ministers, Ladies and gentleman,
The mood has been evolving somewhat since our last meeting in Mexico in November last year - for the better fortunately. The “fear of catastrophe” in Europe has receded owing to decisive policy moves by our European colleagues. In the US, the “fiscal cliff” has been partly and at least temporarily overcome. But global prospects remain very fragile.
This week’s fourth quarter growth numbers for the U.S., Japan, and most of Europe remind us that this is very much still a time for action, not for complacency.
We expected poor performances of European economies in the fourth quarter. But actual figures are worse than expected. With a -2.3% quarter-on-quarter annualised growth rate, this is the worst quarterly result since 2009!
These numbers are also a reminder of what is at stake. Weak private and public consumption, and falling investment, show that stronger demand is needed. At the same time, the space for macroeconomic demand management is limited in most advanced G20 members. And international frictions around monetary policy and foreign-exchange policies are distracting us from focusing on productivity, competitiveness, and other medium and longer term objectives.
Just for the record, by the way, the OECD believes that there are no currency wars. We are further away from a currency war than we have ever been in several years. In fact, the major currencies, according to the OECD at least, are closer to their long term real effective exchange rate levels than they have been in a long time. What we have are legitimate efforts to use whatever steam is left in monetary policy to revive growth and jobs. We hope they succeed. We have a big stake in their success. So, let’s not fight the wrong wars or the last war all over again.
• More than ever, we need decisive economic measures on the supply side that can boost confidence - the touchstone of all our efforts - and can tip the scales towards an upside growth scenario relative to the downside risks.
1) Several countries in the Group, especially in Europe need a full-fledged and comprehensive competitiveness programme to regain lost ground, based on structural reforms such as those advocated in the 2013 issue of our Going for Growth publication which I unveiled with Minister Siluanov earlier today: Everything from strengthening competition in network industries to reducing labour market dualism; from reforming the wage bargaining system and improving labour force participation to enhancing public sector efficiency and making taxation more labour-friendly. It is very encouraging that some European countries have made very ambitious commitments in the context of the G20 Framework for Strong, Sustainable and Balanced Growth. Let’s not lose the momentum. Now is the time to deliver!
2) Even the best performers within the Group, including both advanced [Germany, Australia, Korea, Canada] and emerging market economies [China, Brazil, Mexico, Turkey], must take bold steps forward.
Their economies are also confronting challenges – lack of innovation, heavy regulation and insufficient competition; and in some of them, inefficient education or health systems, high informality of the labour market and insufficient diversification. These are bottlenecks that are constraining growth and/or impeding the rebalancing toward stronger domestic demand.
Overall, pay-offs are potentially high. According to our simulations, they can drive an increase in world GDP of up to 2.5% at the beginning of the next decade, compared to a baseline scenario of limited reforms.
• Let me add that if structural reforms are a powerful tool to increase productivity and the growth potential of our economies, reforms can also make medium-term fiscal consolidation somewhat easier to achieve, and can inject confidence if properly designed, packaged, sequenced and communicated.
Consider for instance the activation of labour market policies and employment friendly tax reforms: they can help strengthen the jobs content of the recovery and boost households’ confidence and prospects. Beyond stronger private demand, reforms that increase employment feed directly into tax revenues and lower welfare bills. In other words, structural reforms can help address or avoid the false “austerity versus growth” dilemma that is currently keeping advanced economies’ policy-makers awake at night. Consolidation is necessary, but the package should be about structural reforms that boost growth, help achieve fiscal sustainability and secure good social outcomes.
• Speaking of fiscal consolidation, let me stress how important timing is in this domain.There is no doubt in my mind that in the majority of advanced economies, government debt must be contained to avoid high-risk premia on bond yields, restore fiscal credibility and create fiscal space for the future. But it is important to get the speed of fiscal consolidation right: we should not stifle demand and undermine confidence of economic operators to an extent where the consolidation effort would be self-defeating. So without changing course, if we use the flexibility already built into the programs and allow automatic stabilizers to operate, we can arrive at the point of destination safely, even if it takes a little longer.
• For economic agents to regain confidence, trust must be restored. Trust in the financial system and in banks to start with. I am afraid recent developments in this realm have not been fully reassuring:
The introduction of new banking regulations is insufficiently coordinated at the global level, thereby raising a threat to the proverbial level playing field that could undermine the globally coordinated reform effort and add to a reform pushback;
At the same time, many large banks’ business models have been little changed compared to the pre-crisis era: for instance, new products such as Exchange Traded Funds (ETFs), and high-yield products and trading are at the forefront of banks’ current business strategies. This is worrying.
Last but not least, we should remain vigilant vis-à-vis new waves of market exuberance: by way of illustration, a bubble in high-yield credit is currently underway. For the first time in history, (junk) bonds’ yields have gone below yields on equities. This poses many risks - notably the risk of a sharp reversal when the rate cycle turns – while a relatively high cost of equity capital works against long-term investment and hence growth fundamentals.
These developments call for completion of the financial reform agenda, starting with the separation and ring-fencing of banks’ activities – a move which the OECD has been advocating for years. Franck-Dodd – Volcker; Vickers; Likaanen; are names we should remember every day.
Also, after 5 years into the crisis and with a massive increase in unemployment and poverty, what most urgently needs to be restored is citizens’ trust in governments and policymakers. For this to happen, reforms aimed at restoring the growth potential of our economies should not further damage the social fabric by exacerbating the general trend towards higher unemployment and the trend towards greater inequality observed even before the crisis. The latest issue of our Going for Growth report actually finds that many of the suggested reforms to boost growth – such as broadened and fairer access to education - also help with achieving enhanced equity. Let’s not lose sight of this important social imperative: this is a precondition for ensuring public support for an ambitious reform agenda.
Finally, upholding trust at the global level is equally critical. This is a form of capital that has been accumulated within the G20, thanks to your collective efforts towards international policy coordination and successive compromises. Let’s not dissipate it… but let’s not get distracted either! Let’s go structural, go social; go green and go institutional.