Remarks by Angel Gurría, OECD Secretary-General, delivered at The State of the European Union Conference
31 May 2012, Palais d’Egmont, Brussels, Belgium
(As prepared for delivery)
Ladies and Gentlemen:
Europe is going through very challenging times. The financial crisis that erupted in 2007 has turned into an economic and social crisis and is now threatening the very institutional foundations on which the European Dream rests.
High unemployment, public finances in serious disarray in some countries, slow and unequal growth overall; these are all challenges that Europe needs to address through decisive action and comprehensive structural reforms to turn the Dream into a reality – the Dream of a prosperous, vibrant and fair society for all Europeans.
Let me start by making a quick scan of the vital signs of the European economy. Last week, I presented our latest OECD Economic Outlook during the OECD’s Ministerial Council Meeting. Our analysis shows that the euro area is likely to have entered a recession for the second time in five years. We expect a mild contraction in the area’s GDP by 0.1% this year before growth picks up again with a 0.9% forecast for the expansion of GDP in 2013.
While the recession seems to be relatively mild, growth within the euro area is strongly diverging, with more robust rates in the North and a deep slump in the South. 17 million people are currently unemployed in the euro area. Youth unemployment is particularly acute in the Southern countries.
We need to bring back trust and solidarity
It is absolutely imperative to guide the euro area out of the crisis and to put the monetary union on a much stronger track. And the only way to do so is by putting forward convincing and effective policies to rebuild trust. Trust in the financial system, trust in corporations, trust in government and trust within society.
It is also fundamental to foster solidarity. Solidarity among the peoples of Europe. Solidarity as shown, for instance, in the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the policy efforts to hold the Union together in these difficult times.
To bring back trust and solidarity we need appropriate policies. We need a euro area policy compact with a strengthened Firewall, sound implementation of the Fiscal Compact, and a strengthened policy framework focused on growth.
In order to attain these goals however, the euro area also needs stronger governance. The “six pack” economic and budgetary governance package are therefore especially welcome. They have substantially upgraded EU and national fiscal institutions.
For the past three years European politicians have been bashed for doing too little too late. But credit must be given where it is due and we should be fair in acknowledging that Europe has made tremendous progress in rebuilding itself in response to this crisis.
However, key pieces of unfinished business remain. Governments must implement reforms and stick to their commitments to make their economies more robust and to avoid another build-up of imbalances. Moreover, where it has long been lost, competiveness must be restored so that economies can compete in today’s globalised world.
Growth-friendly fiscal consolidation and structural reforms
More needs to be done regarding growth, a crucial component of the Euro area policy compact.
Fiscal consolidation is indispensable but its composition is equally important. Emphasis must be placed on expenditure restraint while ring-fencing pro-growth and employment-friendly expenditures, such as innovation incentives and active labour market policies. Where tax increases are unavoidable their implementation must be confined to the least distortive instruments, such as VAT as well as property and green taxes. There is much potential in many countries for raising green taxes, a policy option that is good for public finances while serving an environmental purpose.
However, the only sustainable way of returning to growth and restoring debt sustainability is to increase productivity and remove barriers to labour market participation and job creation. At the same time, the liberalisation of services and other policies that can strengthen domestic demand are crucial for those countries with large external surpluses. These goals can be achieved through ambitious reforms targeting product market regulations, labour market institutions, tax systems and education – as we say at the OECD, it is time to “Go Structural”.
The Way Forward: Completing the Single Market
These reforms have to be conducted at both the national and the supranational levels. The Europe 2020 Strategy and the measures taken in a number of countries since the crisis began are a good starting point. In order to transform the outlook, reforms will need to be far more ambitious.
Take the case of the Single Market. The potential of a European market of 500 million people is far from fully exploited. The European Union market remains fragmented, particularly in the services sector. This fragmentation has left Europe with far too many small firms that cannot reach the critical scale needed to compete globally.
For a truly integrated Single Market, our latest Economic Survey of the European Union identifies three challenges that need to be tackled.
- First, existing Single Market requirements need to be implemented effectively. We were surprised, for example, by how far some Member states are lagging behind in applying EU standards. Here we have to look beyond the regulatory environment and at the issues that are really thwarting cross-border activities. We proposed an annual country-specific report to examine what is missing in law and practice that is preventing the Single Market from working on the ground.
- Second, gaps in the Single Market need to be filled. Let me use telephone costs as an example. The cost of basic “phone/internet” packages varies significantly, and there are parts in the EU where the fastest internet connections are not yet available. This issue can be addressed by better co-ordinating national regulators, investing in infrastructure and through an effective competition policy.
- Third, Europe needs a much more coherent and consistent framework to foster cross-border economic activity. Business regulation across countries needs to be more growth-friendly so that it becomes easier for companies to set up and to operate across the Union. Long-standing questions about cross-border corporate and indirect taxation also need to be resolved through better administrative co-operation.
And let us not forget the ultimate purpose of these reforms: to foster inclusive social progress. Economics is not abstract, it is about people. People need the perspective of a better life for themselves and a better future for their children.
The rise in inequality, therefore, is of great concern to us. We addressed this issue in last year’s OECD report “Divided We Stand” which shows that the average income of the richest 10% of the OECD population is about 9 times that of the poorest 10%, up from 7 times 25 years ago. Even in traditionally more egalitarian countries, such as Germany, Denmark and Sweden, the gap between the rich and the poor has expanded.
Our analysis shows that investment in skills is the most powerful tool to fight inequality. Without adequate investment in skills, people languish on the margins of society, technological progress does not translate into economic growth, and countries cannot compete in today’s globalised economy.
Skills have become the global currency of the 21st Century. Doesn’t it seem irrational that while unemployment runs high, employers cannot find workers with suitable skills? We place great emphasis on this issue; last week the OECD presented its new Skills Strategy to help solve this skills mismatch, to facilitate the transition of youth from education to employment and to improve education efficiency. This message is all the more important in Europe, where so many countries are struggling with the consequences of globalisation.
Ladies and Gentlemen:
At such challenging times for Europe, let us not forget the Dream that has bound so many Europeans together for generations: a shared Dream of progress built on solidarity and mutual respect.
For the last 51 years the OECD has provided evidence-based policy advice that helped visions and dreams of ever deeper European integration come true.
We now need to demonstrate our determination to persevere in taking difficult decisions, implementing structural reforms, showing solidarity and building trust. Success in revitalising Europe and re-establishing its vigour will undoubtedly provide a strong basis for advancing the European Dream in pursuit of better lives for all Europeans.