Remarks by Angel Gurría, Secretary General of the OECD, delivered at the launch of the Better Policies Series on Economic Challenges and Policy Recommendations for the Euro Area
17 February 2014, Brussels, Belgium
(As prepared for delivery)
Ministers, Ambassadors, Ladies and Gentlemen:
It is a great pleasure to welcome you to the OECD’s seminar on “The Euro Area at a Crossroads: Policies for Growth, Jobs and Competitiveness” (Watch the webcast).
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After five years of work at every level to correct the fiscal, financial and external imbalances that led to the crisis, and to reinforce fiscal and financial institutions, the Euro Area is beginning to show signs of recovery. Financial market conditions are improving, tensions have abated in European sovereign debt markets, and debt-to-GDP ratios are stabilising after much perseverance to consolidate the area’s public finances.
But, despite these positive signs, growth is still weak and uneven. The steps we take today will determine whether Europe can regain its footing tomorrow and thrive, or continue along with low, sluggish growth. Let me share with you a snapshot of our take on the Euro Area’s current economic and social challenges.
A Hesitant Recovery: Sluggish Growth, Concerning Productivity, and High Unemployment
Although the Euro Area exited from the recession in 2013, the scars of the crisis are deep. Nothing shows this more disturbingly than the high unemployment, specifically among the young, which continues to weigh on the recovery in nearly all European countries. In several countries the jobless rate of young people totals between 30% and almost 60%. These people’s skills are eroding, their trust in government is waning, and they are becoming out of touch with the labour market.
Unfortunately, we cannot rely on a strong push from the rest of the world to drive growth and employment in the Euro Area. The current global economic environment is still fragile, with growth having slowed in many emerging market economies and the impact of monetary tapering in the United States still largely unknown.
The Euro Area needs to boost productivity and restore competitiveness. Since the inception of the common currency in several countries, especially in the Southern periphery of the Euro Area, the unit cost of labour rose considerably, leading to yawning gaps in price competitiveness relatively to the Northern countries and the outside world. The outcome of this is well known: rising debt in the South, widening imbalances in the Euro Area between North and South, mounting vulnerabilities for all! We are turning the corner on all this, but the task is far from complete.
How can Euro Area countries revive growth and jobs in this context? What can monetary policy do when we are near the zero-bound? Can we rely on fiscal policy when countries need to maintain medium-term consolidation efforts?
At the OECD we have been saying “go structural!” for years. The document we are presenting today provides a structural reform “roadmap” that can accelerate growth. Let me begin with our recommendations on financial sector reform.
Financial Sector Reform: Key to Reviving Credit and Investment
First, the good news: bank capitalisation is improving in the run-up to this year’s bank balance sheet reviews. But stress in the credit market continues, bank loans are still contracting – outstanding bank credit to the private sector declined by half a percentage point between the third and the fourth quarters of last year - and lending conditions remain tight. Small businesses in particular are being hit. Indeed, in comparison to the United States, Europe has been slow in dealing with weaknesses in the banking sector. This is one reason for the different growth speeds on both sides of the Atlantic.
The consequences are simple to understand! Without solid capital buffers, banks do not lend, posing a serious constraint on growth, and threatening financial stability. We need an institutional framework which encourages capital markets to finance sustainable growth and employment rather than housing bubbles and excessive debt accumulation.
It is thus very important to ensure that the asset quality reviews and the stress tests that will be conducted in 2014 lead to an objective, consistent and transparent overall assessment of banks’ balance sheets. This assessment must then serve as an objective, consistent and transparent basis for decisions about banks’ recapitalization or eventually some banks’ resolution.
This makes it even more important to accelerate the pace towards a comprehensive banking union that includes common regulatory and supervisory systems, as well as a common resolution mechanism and appropriate financial backstops. This should help European financial markets to return to a normal state of play so that credit can start flowing again.
By the way, the brochure presents a discussion on the issue of leverage ratios and bank captitalisation which I believe we must pursue.
But let’s be clear: financial reforms will not be enough to trigger growth unless complemented by a consistent package of structural reforms.
Structural Reform: Crucial to a Balanced and Sustained Recovery
We greatly applaud the courageous steps that have been taken by the Southern countries that were hit hardest by the crisis. Over the past five years, many have implemented ambitious reform programs in labour and product markets, and we strongly recognize this work. Indeed, our Going for Growth analysis of structural reform shows clearly that the impetus for reform has been much greater in the Southern countries than in the Northern countries in the past few years.
As we begin to see slow signs of recovery, it is crucial for countries to remain committed to their reform agenda and to take it even further. It is also essential for other countries, where progress has been slower, to step up their efforts. After all, dealing with the internal imbalances of the Euro Area and restoring its overall competitiveness is a collective challenge.
And the payoff of structural reforms for productivity growth is potentially very large. Our simulations show that if the Euro Area countries were to implement best practices in a range of different structural reform areas, such as regulation, this could amount to gains in aggregate output to the tune of 6% within the next 10 years.
In particular, further labour market reforms would have large effects in countries like Greece and Spain. Policy actions are needed to prevent unemployment from becoming structural: activation and training policies and reforms to tax-benefit systems are key.
Targeted measures are needed for some groups, such as the increasing number of young people not in employment, education or training, the “NEETs”. On average in the EU, this is almost 14% of all young people (15-24). And in Greece, the NEET rate reached 27% last year. It Italy it was well above 21%, and it was around 20% in Spain!
We must also not lose focus when it comes to competition-friendly product market reforms. Despite recent efforts in many Southern countries, barriers to competition remain above the OECD average and extend to much of the services sector. Incidentally, there is much room for opening up protected services sectors to domestic and foreign competition in the Northern countries too!
For instance, after Italy and Spain, France and Germany have the highest barriers to competition in services in the Euro Area. And France’s recent attempt to limit competition amongst taxi drivers moves us even further in the wrong direction. Turning to the network sector, there is no single market for telecommunications and energy, and barriers to entry are still high. Further pro-competition reforms could help achieve rapid job and productivity gains in sectors such as retail, trade and professional services.
Structural reforms can also facilitate intra-Euro Area rebalancing. Current account rebalancing has been remarkable in Greece, Portugal and Spain, which have moved from deficits of around 10% or more before the crisis to small surpluses by the end of 2013. Not all of this swing is coming from retrenchment; external competitiveness of the deficit countries is actually improving. But further reforms are needed to ensure that rebalancing persists once cyclical conditions improve.
It’s also important to recognize that there has been less progress in the surplus countries. Measures to create more favourable conditions for investment in these countries would help strengthen their domestic demand and achieve more balanced growth in the Euro Area as a whole.
Ministers, Ambassadors, Ladies and Gentleman,
There are still a number of significant obstacles in the way. It is vital that we remain vigilant of the downside risks that still loom on the horizon, such as sluggish trade, investment and credit growth, non-performing loans, threats to financial stability and slowing growth in emerging economies.
Having run out of room for monetary and fiscal policies, we must implement structural reforms to rebalance our economies and to lay the foundations for higher sustainable growth and employment, which in turn are crucial for putting public finances back on a sustainable footing. We must however also remain steadfast in our consolidation commitments, which sometimes involve a truly complex juggling act by policy practitioners.
It is our great hope that the document we are sharing with you today adds firepower to the efforts of policymakers at the national and EU level to regain competitiveness and boost productivity. The OECD stands ready to continue to support the Euro Area to get its engines of growth firing on all cylinders.