Remarks by Angel Gurría, Secretary-General of the OECD
3 April 2014, Brussels, Belgium
(As prepared for delivery)
Ladies and Gentlemen:
It is a great pleasure to be back in Brussels to launch the OECD Economic Surveys of the Euro Area and European Union.
After many years of great difficulty, our efforts are beginning to pay off. By now most EU countries are recording positive - albeit low - growth rates. Current account imbalances have narrowed or become positive, financial market conditions are improving, and tensions have abated in European sovereign debt markets. Debt-to-GDP ratios are stabilising after much perseverance to consolidate public finances.
But the scars of the crisis still run deep. According to our latest estimates, average potential GDP growth in the Euro Area fell by some ¾ of a percentage point during the crisis, to about 0.8% in 2013. Joblessness remains high, particularly among the young who are facing unemployment rates of 30% or more in many European countries. Europe has also been left with high and rising nonperforming loans, fragmented capital markets, and negative feedback loops between sovereigns and banks, which are taking a toll on credit. Unfortunately, Europe cannot rely on a strong push from the rest of the world to drive growth.
Going forward, how can the EU restore and promote inclusive and sustainable growth? Our two Surveys point to three key areas: macro-economic policies that support growth and stability; financial sector reforms that revive credit growth; and labour and product market reforms that strengthen competition and mobility. Let me expand on these strategies in greater detail.
Macro Policies: Promoting Growth and Stability
Let’s start with macro-economic policies. Over the last three years there has been substantial progress in fiscal consolidation. But government debt levels remain too high in many countries. For example, the debt-to-GDP ratio (on a Maastricht basis) exceeds, 170% in Greece, 130% in Italy and 120% in Ireland and Portugal. This means that continued consolidation is needed to move cloer to the 60% Maastricht target over time, and that almost all countries will have to maintain tight budget positions for years to come. Nonetheless, in case growth disappoints, automatic stabilisers should be allowed to operate fully.
The policy mix of the move towards fiscal consolidation should also be adjusted to support growth and jobs. For example, raising the effective retirement age would not harm growth in the short term, while it would raise potential growth in the long term. Reforms of the education and health care systems should also rank high on the agenda, as they can produce large consolidation gains without compromising equity or service quality. There is also scope to improve national budgeting frameworks to better spot future spending and revenue pressures and to correct deviations from consolidation targets.
Given persisting economic slack, it is essential to maintain monetary policy support, in line with the ECB’s commitment to secure price stability. If substantial uncertainties were to re-emerge or if deflationary risks intensify, additional non-conventional measures should be considered. Europe should not shy away from using all the policy tools it has at its disposal within the mandate of its monetary authorities.
Let me now turn to a second key area: financial sector reform.
Financial Sector Reform: Reviving Credit and Investment
Restoring credit flows and fostering investment is crucial for the recovery. We have learned from international experience that the sooner banks’ balance sheet problems are dealt with, the faster economies regain strength after a financial crisis. It is therefore extremely important that the ongoing “Comprehensive Assessment” of balance sheets is objective, consistent and transparent. And it is equally important that based on the results of this assessment, banks be recapitalised, merged or resolved as necessary.
But prevention is better than resolution. The EU Capital Requirements Directive IV, which came into force in January, marks significant progress towards effective crisis prevention by raising equity capital requirements. But several issues remain:
- Government bonds are still treated as risk-free assets, although the crisis has shown that they are not necessarily risk-free. The authorities should therefore consider phasing out zero risk weighting.
- Banks should diversify their government bond portfolios to reduce their exposure to a single sovereign.
- The “leverage ratio”, which measures capital relative to non-weighted bank assets, has proved to be a good predictor for the riskiness of banks’ balance sheets. It is worth exploring its merits as a complementary capital requirement.
Europe also needs to carry out unbiased risk assessments in financial markets. This will help to encourage financing of sustainable growth and employment, rather than of housing bubbles, and discourage excessive debt accumulation.
While much has been achieved in setting up a comprehensive banking union, certain issues still need to be addressed. In particular, it is important to ensure that a single resolution mechanism with effective and swift decision-making is operative soon after the Single Supervisory Mechanism is in place.
These and other reforms will help trigger growth, but they are not enough on their own. That’s why at the OECD we stand by our call to “Go Structural!”.
Structural Reform: Boosting Growth and Employment
Structural reforms are essential for creating employment and fostering productivity growth. In the euro area, labour productivity has increased by only 0.6% annually since 2000. This is half the OECD average of 1.2%.
There is much that can be done in this area! Our simulations show that if European countries were to implement best practices in a range of different structural reform areas, gains in aggregate output could amount to around 6% over the next decade. Potential gains are higher in countries such as Greece, Poland and Slovakia, where they amount to 10% or even 15%.
A key priority for reform is to complete a well-functioning Single Market. This is an area where there is considerable scope for policy action. Let me mention four examples:
- While the Services Directive contains important elements for moving towards a single market for services, it doesn’t go far enough. Firms still have to comply with different regulations in different countries and there are still restrictions to establishing a business. There are large potential growth effects of removing obstacles to competition, not least because services support many other sectors of the economy.
- The proposed Directives on the free movement of workers and on pension rights have the potential to considerably improve labour mobility across the EU. But reforms could be more ambitious by eliminating double taxation of pensions, developing automatic qualification recognition and eliminating unjustified and disproportionate national barriers in regulated professions.
- In network sectors that are still regulated on a national basis - telecommunication and energy - efficiency gains can be achieved by making regulations more compatible across countries. This calls for more cooperation between regulators or even the establishment of cross-border regulators.
- There also remains scope to further reduce remaining FDI barriers in the EU, including certain equity restrictions, approval requirements and other operational restrictions.
In addition to advancing the Single Market, Europe needs to lower the administrative burden of regulation. Several initiatives have been taken in this regard such as the EU Administrative Burden Reduction Initiative and the Regulatory Fitness Performance Programme. But efforts could go further. For instance, directives could be drafted more effectively to reduce room for interpretation and undue loopholes.
Furthermore, EU cohesion funds should be better targeted in favour of growth and employment. The new “Partnership Contracts” that link parts of the disbursements of cohesion funds to governments’ commitment for action are a step in the right direction and their effects should be closely monitored.
Ladies and Gentlemen,
Let’s not be discouraged by the long road ahead. We should keep in mind how much has already been achieved. Who would have thought a few years ago that the Euro Area would soon take the last steps towards a banking union?
These impressive achievements should inspire us to make bold decisions to put the economy back on a sustained growth path – for the sake of the European Union as a whole, its individual members and their citizens.
Europe’s reforms beginning to pay off but continued effort needed, says OECD