Remarks by Angel Gurría
Brussels, 31 March 2015
(As prepared for delivery)
Dear Parliamentarians, Ladies and Gentlemen:
It is a great pleasure to have the opportunity to address the Committee on Economic and Monetary Affairs of the European Parliament once again.
Last time I addressed the Committee in November 2013, we were still in crisis mode. Two weeks ago, the OECD released its Interim Economic Outlook and it seems that the Spring of 2015 has brought encouraging signs for the global economy. Lower oil prices and widespread monetary easing have raised the potential for the acceleration of growth that is so needed in many countries, especially in Europe.
Strong domestic demand is driving growth in the United States. In Japan, monetary and fiscal stimulus provide the impetus for faster near-term growth, but longer-term challenges remain. A gradual slowdown in China, towards the “new normal” growth target (around 7%), is expected to continue. India is expected to be the fastest-growing major economy over the coming two years, while the outlook is likely to worsen for many commodity-exporting nations, with Brazil falling into recession.
Even if the global recovery is still quite irregular, and in spite of the current difficulties the situation in Europe is looking a bit 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.
The bold action by the ECB has provided an opportunity for the euro area to escape the risk of a prolonged period of stagnant real incomes, weak labour markets, and excessively low inflation. We are particularly encouraged by positive growth in the UK, Ireland, Spain and Portugal.
However, there no room for complacency. Europe is still facing very complex challenges. Growth is likely to remain sluggish for a long time. Unemployment will decline only gradually from its unacceptably high levels. High levels of income inequality and youth unemployment also persist. Thus, it is not surprising that trust in governments has eroded.
Monetary policy can create the foundations for growth and buy time, but it cannot resolve the underlying challenges. It is vital that monetary, fiscal and structural policies work together to revive investment and growth and put EU economies back on a sustainable path. Let me introduce some key OECD recommendations to strengthen growth and employment in Europe.
Despite progress in rebuilding public finances, debt-to-GDP ratios are still too high, in part because growth has been so low. The average fiscal deficit in the euro area was around 2½ percent of GDP in 2014, down from the peak of over 6% in 2009. Most of the necessary fiscal adjustment has already been achieved.
Given this progress on the numerator of the fiscal metrics, it is now important to focus on the denominator: growth. A slower pace of fiscal adjustment in the EU is appropriate to give structural policies and the ECB’s monetary policy easing a better chance to lift activity.
The composition of fiscal policy can and should be adjusted to support growth, employment and investment. The Juncker plan can go some way towards achieving this.
The OECD welcomes the considerable progress to strengthen the fiscal governance framework since the crisis, including the revised fiscal framework and the creation of the Banking Union. However, over-reliance on ad hoc extensions of the deadlines to meet agreed fiscal targets can undermine the credibility of the rules themselves.
I would like to suggest three ways to enhance the revised fiscal framework as part of improving medium-term fiscal sustainability:
As I have previously stressed, fiscal and monetary policy must be complemented by key structural reforms. Some countries – particularly in the periphery - have made huge progress in recent years. Continued implementation is now key in these countries.
Unfortunately, much less progress has been made in some large countries. More ambition to improve economic performance in these economies would put growth on a more robust and sustainable footing and reduce long-standing demand imbalances. Certain policies would also contribute to make growth more inclusive. For example, reducing labour market duality and upgrading the skills of the workforce and boosting productivity and wages, allowing wages to grow in line with productivity.
The OECD is working closely with a number of European Countries, including Italy, France, Portugal and now Greece, to support their Structural Reform agendas. We have also been carrying out work to quantify the impact of their reform programmes. Our analysis shows that reforms pay off. In Italy, for example, announced reforms could increase GDP levels by as much as 3% within five years, and up to 6% by year ten.
At the EU level, completing a genuine Single Market would contribute substantially to boost medium-term growth. The EU economy is still subject to significant barriers affecting key areas such as entrepreneurship and labour mobility as well as telecommunications networks and energy efficiency. These barriers reduce the returns to business investment, hamper productivity growth, and stymie employment and innovation.
Establishing an EU regulatory framework for the digital economy with technical and legal security and privacy standards would contribute to the expansion of this key sector. Seamless borders for issues such as copyright protection and rights, privacy & security and ICT services to create a single digital platform would support ICT firms and allow them to grow in scale. We congratulate Anders Ansip, VP for presenting last week the main components of the Digital Single Market to be unveiled in May. It’s exactly the kind of initiative that will both increase productivity and detonate investment across Europe.
Worryingly, the OECD’s Product Market Regulation indicators show that barriers in the services sector hardly changed between 2008 and 2013, and even seem to have deteriorated in some EU countries. This indicates that the EU Services Directive has had little impact so far in reducing barriers.
European cross-border infrastructures in network industries, such as electricity, gas and air and rail transport remain fragmented and insufficient. Upgrading these network infrastructures would unleash competition and increase productivity and employment possibilities within the single market.
The OECD is a strong supporter of the focus on these issues in the Juncker Plan. It offers a rallying point for European policymakers to speak with one voice in support of a Europe-wide policy to promote growth. The regulatory and structural policy reforms needed to support the Juncker Plan would have a positive impact that goes beyond the Plan itself.
The effectiveness of the Plan depends on full implementation of its third pillar - the removal of regulatory obstacles to investment. For example, upgrading cross-border infrastructure requires improved cross-border cooperation. 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%.
Greater attention should also be given to SMEs and high-growth firms. Small firms are playing an ever-increasing role in innovation, driven by changes in technologies and markets. Although only one element of the Plan, they are critical for innovation, entrpreneurship and job creation.
Overall, the Investment Plan for Europe could play a central role in addressing the critical infrastructure gaps, while also helping to support demand and mobilise private-sector funds to support growth and employment in the real economy.
The OECD has already offered support to the European Commission in the implementation of the Plan on a number of fronts, including on Public-Private Partnerships.
Finally, there is the important issue of tax transparency, which we will delve into in more detail in the next session, when we will be joined by our Director for Tax, Pascal Saint-Amans. The OECD has been working closely with the European Commission and the G20 in this area and we are now making rapid progress.
If we are to be effective, it is critical that we take a strong stand and present a united front in the global fight against tax evasion and avoidance.
Ladies and Gentlemen: The policy agenda I have highlighted is an ongoing one. It continues to require bold and ambitious action in some countries and within the EU Institutions. I look forward to building on the very strong cooperation we have established with the European Parliament and with this Committee. And I very much hope that these visits will continue.
The OECD will continue to work hand-in-hand with the EU to deliver better policies for better lives.
Thank you for your attention, and I look forward to your questions.