European Union

Structural Reforms for Growth and Socio-Economic Cohesion

 

Remarks by Angel Gurría,

Secretary-General, OECD

Economic and Financial Affairs Council (ECOFIN) informal meeting

Riga, 24 April 2015

(As prepared for delivery)

 

 

Dear Ministers, Governors, Ladies and Gentlemen:

 

It is a great pleasure to have the opportunity to address this Informal ECOFIN. I’d like to thank the Latvian Presidency for inviting me to speak to you and for their excellent leadership.

 

 

A brighter economic outlook, but deep challenges remain

 

The situation in Europe is looking slightly brighter. We have revised Euro area GDP growth up by one third of a percentage point to 1.4% for 2015 and 2% for 2016.

 

Bold action by the ECB is starting to bite, helping euro area governments in their efforts to avoid a prolonged period of stagnant real incomes, weak labour markets, and excessively low inflation.

 

These are encouraging signs, but there is no room for complacency! Europe still faces very complex challenges. Growth is likely to remain sluggish for a long time. Unemployment will decline only gradually, and high levels of income inequality and youth unemployment still persist. Meanwhile trust in governments remains low.

 

It is vital that monetary, fiscal and structural reform work together to revive investment and promote more resilient, inclusive and sustainable growth.

 

Some EU countries (e.g. the Mediterranean countries, and Ireland) have made remarkable progress with reforms, yet other EU countries (including some of the largest economies) are showing signs of reform slowdown. These core countries need to reform!

 

In addition, recent research from the OECD points to a secular slowdown in productivity across OECD countries, amplified by the crisis. Italy, the UK, Spain and the Netherlands all share the same feature of flat or negative productivity with many other EU economies. We have seen a fall in the rate of new business start-ups and in investment levels in recent years. Given demographic challenges, enhanced productivity will be a necessary condition for economic growth and higher wages.

 

It is time to intensify and accelerate reforms!

 

 

Time to intensify and accelerate reform

 

I assure you that policy reforms will make a difference. We have been carrying out work to quantify the impact of their reform programmes. It shows that reforms pay off. In Italy, for example, announced reforms could increase GDP levels by as much as 3.5% within five years, and up to 6% by year ten.

 

First, we need to foster innovation to spur a step-change in the way goods and services are produced, distributed and marketed at the global level – a “next production revolution” if you like. Improved access to risk capital will facilitate the reallocation of resources to efficient and innovative firms and lift investment in knowledge-based capital. Greater attention should also be given to small firms, who are also playing an ever-increasing role in innovation.

 

Second, we need to ensure that markets, in particular for services, are functioning and competitive. The OECD’s work on trade in value added shows services make up a large share of value-added, even of manufactured goods. Yet, OECD research shows that barriers in the services sector of the EU hardly changed, or even deteriorated between 2008 and 2013. Achieving a single digital market in Europe would be an important step and would additionally give firms a greater chance at scaling up investment in the European market.

 

The OECD welcomes the Juncker Plan in this context and stands ready to support you in your efforts to make it happen. Of course, the effectiveness of the plan depends on full implementation of its third pillar - the removal of regulatory obstacles to investment. OECD analysis indicates that reducing regulatory differences between EU countries could raise cross-border foreign direct investment in the EU by up to 25% and trade intensity by up to 15%.

 

 

‘Triple-win’ reforms for inclusiveness and the environment

 

But let’s not forget that structural reforms are not just about growth. The ultimate objective must be to achieve greater inclusiveness and well-being. Given high and rising levels of inequality in many EU countries, reforms should be designed so as to avoid any negative impact on income inequality – both for social reasons and because higher inequality is likely to dampen demand.

 

First, we need to get people back to work! Unemployment in the Euro area topped at 12% in the middle of 2013 and has since eased moderately to 11.3% in February 2015, but is still far higher than in the UK, US and, especially, Japan. The OECD makes a range of recommendations to bring people back into work, particularly amongst groups that face significant employment barriers, such as the long-term unemployed, youth, women, migrants and older workers.

 

Second, investing in skills and education remains crucial, not just for growth, but also for equipping our people for meeting labour market demands and also for reducing  inequalities. In 2013, only 39% of individuals in the EU labour force judged their computer skills to be sufficient to look for a job or change job within a year. This is not acceptable!

 

Third, reforms need to be designed so as to reduce pressures on the environment and support countries’ transition to a low-carbon economy. While economic growth usually comes with higher pressures on the environment, some growth-enhancing reforms such as increasing environmental taxes, introducing road pricing or removing harmful subsidies can be good for the environment. And investment policies can be designed to encourage greater investment in green technologies.

 

Finally, let me add that there are often concerns that structural reforms can weaken activity in the short run and increase inequality. If so, governments might think twice before embarking on reforms, especially in countries hit hardest by the crisis.

 

But most structural reforms do not depress short-term activity, nor do they increase inequality. And some, besides increasing potential growth, also provide short-term stimulus and equity gains. It is therefore possible – and highly desirable – to prioritise reforms likely to yield ‘win-win’ or even triple-win gains!

 

Ladies and Gentlemen:

 

The EU and its insitutions can turn the page and leave the crisis behind. But it will have to intensify and expand its efforts to implement structural reform. The OECD is ready to help.

 

We have just prepared this brochure, Structural Reforms in Europe: Achievements and Homework, prepared at the request of the Latvian Presidency. We very much hope it will be of service to you.

 

I look forward to hearing from you how the OECD can support the EU structural reform agenda to deliver better policies for better lives across the European Union.

 

Thank you.