Remarks by Angel Gurría, Secretary-General of the OECD, Moscow, 19 July 2013.
G20 Finance Ministers and Central Bank Governors
Ladies and gentleman,
If we take a step backward and look at the big picture, the following facts stand out:
Six years after the crisis, growth is not yet back.
- 17 quarters after the onset of the crisis, the output gap in the OECD is still estimated at around 6% compared to "only" 3% following the second oil shock.
- Growth is slowing in large emerging economies, it is picking up moderately in North America, and it remains negative in the euro area. Going forward, one cannot rule out the possibility of growth falling further in several regions at the same time.
Most worrying perhaps is the fact that the job crisis, far from being over or even receding, is turning into a social crisis. Job opportunities are falling in Europe, improving very gradually in the US and, too often, of poor quality in many emerging economies. Around 48.5 million persons are currently unemployed in the OECD area, 16 million more than before the crisis, according to the OECD Employment Outlook just released yesterday.
- Fewer and lower quality jobs bring less income, less output, more inequality. Recent OECD figures indicate that inequalities have gotten worse during the crisis, increasing more over the past three years than in the previous twelve!
- This is fuelling a vicious circle of low growth, high unemployment and growing inequality.
Last but not least, in many countries and in particular in Europe, financial system repair has been delayed or postponed, thus leading to stagnant lending and preventing a full recovery. Banks’ health, a key driver of their propensity to lend, remains especially precarious in the euro-area. At the OECD we have developed a measurement on banks’ default risk (“distance to default”), and this reveals that US banks are in a much better shape than European ones. Why? Because European banks remain overly leveraged and exposed to derivatives. Although this is also the case of some US banks – they have more capital and liquid assets than their European counterparts. We thus welcome the recent increase of capital requirements for Banks in the US.
This requires a concrete, ambitious and decisive policy agenda entirely geared towards achieving Jobs, Equality and Trust.- While fiscal consolidation and the false “austerity versus growth” dilemma have captured most of our conversation in recent months… Progress was being made and today we have a situation where only 25% of the needed fiscal adjustment – at least in Europe - remains to be done;
- To a large extent, the real concern is no longer fiscal consolidation as such, but rather that these policies are not showing their benefits in terms of confidence, growth and jobs. Why? Because structural reforms are lagging behind! The growth potential of our economies, dented by several years of underinvestment and by rising long-term unemployment, needs to be restored to pre-crisis level. This calls for ambitious structural reforms:
i) First - of course - in those countries most impacted by the crisis, where a fully-fledged competitiveness agenda is needed to achieve a positive growth scenario;
ii) But also in countries that have fared relatively well in the crisis but that have still much leeway to improve productivity and/or that are now showing signs of weakness. They need more innovation, enhanced competition, better education system and/or more effective government.
- It is equally critical that we restore the role of the banking system as a conveyor belt of the real economy. For this to happen:
- European banks need to be recapitalized and their needs for fresh capital must be estimated in light of a simple leverage ratio of 5% to make them genuinely safer. This has to go hand in hand with a fully-fledged banking union, including necessary resolution and credible backstop mechanisms, to sever the links between sovereign and banks in the euro-area once for all. Recent steps go in the right direction but more needs to be done.
- And banks’ business models, in Europe and well as in the US, still have to change in earnest. Separating globally systemic banks and ring-fencing their traditional (retail) from their riskier (derivatives) activities would have the advantage of “killing two birds with one stone”: limiting contagion and addressing the too-big-to-fail problem; while at the same time, leading to an adequate pricing of risk and to a greater focus on lending.