OECD-IMF Conference on Structural Reform in Europe
Keynote address by Angel Gurría, OECD Secretary-General
Paris, 17 March 2008
Good morning ladies and gentlemen. It is a great pleasure to welcome you all today to the OECD-IMF conference on structural reform in Europe, which we organised together with my friend Dominique Strauss-Kahn. We are now both in the business of providing sound policy advice to governments, but we both know from our earlier incarnations how difficult it is, for leaders and authorities, to implement such advice, not matter how sound it may be.
Europe needs to raise its growth potential, and close its performance gap with the OECD best achievers. Thus, it clearly needs to advance its structural reform agenda. Reform is not an end in itself, but a tool to build more flexible economies that are better able to compete; a tool to build societies where the less advantaged can benefit from growth.
The Economic and Monetary Union is helping to create a more integrated and more prosperous Europe. It has also imposed healthy disciplines. From environmental standards, to the EU Lisbon Strategy, the EU has set up ambitious targets for the region. But clearly, more needs to be done.
GDP per capita growth over the last decade has averaged a little below 2% per annum, about the same as in the United States – and these days growth is actually stronger on this side of the Atlantic. But living standards remain around one-third lower in Europe and this gap is the same as it was back in the early 1970s: the period of catch-up, “les trentes glorieuses”, has been over for a generation.
The quest for economic reform is all the more relevant considering a highly competitive international environment. Globalisation brings many benefits, but has also toughened competition for European firms that are feeling the heat as China, India and others move up the value-chain.
The strength of the euro is just one more competitive challenge as is the turbulence that we are presently experiencing in financial markets.
Demographic trends bring additional complexity to this picture. Ageing is changing the face of European societies. By 2050, 30% of their population will be above 65 years old. Public spending on pensions and health care is forecast to soar. Major changes will be needed to defuse this time-bomb, including in pension and in migration policies.
Europe confronts several important challenges;
The annual average number of hours worked per person is around 15% lower than in the leading OECD countries: despite substantial recent progress, the employment rate remains about 4 percentage points below the Lisbon target of 70% and even though the unemployment rate has fallen, it still exceeds 7%. European employees work less hours per week, less weeks per year, and exit the labour market at a much earlier age than their US counterparts. Labour productivity, especially in services, is lower in Europe than in the best performers. Output per hour worked is only about three-quarters of that in the United States.
Several continental European countries, notably France and Germany, achieve relatively high levels of labour productivity but suffer from low labour utilisation: many of the least productive workers are shut out of the workforce. Thus, labour market reforms, as well as further product market reforms, are needed.
By contrast, a country such as the United Kingdom exhibits good labour market performance, but productivity is lower. The Nordic countries have their own particular social model which achieves good results, but lags in both productivity and labour utilisation. Average annual hours per worker are particularly low in these countries, as well as in the Netherlands. Therefore their labour markets should be more flexible and encourage work more.
The problems facing lower-income European countries, including the new EU member states, centre mainly on the need to boost labour productivity. They need to tackle disincentives to work and make their education systems more effective.
In Europe as a whole, the educational achievement of young people has to improve in order to enhance productivity. Our latest PISA scores on reading, maths and science, demonstrate that this is one of the greatest challenges for the future of region, where we can find some of the best achievers in the world – notably star performer Finland – but also some who are still lagging behind.
The importance of education is highlighted in the 2008 issue of our yearly flagship surveillance exercise, Going for Growth, where we show that substantial efficiency gains would be attained if primary and secondary schools in individual countries were to catch up to best national practice and if national school systems were to catch up to best international practice.
Going for Growth also puts the spotlight on the relatively low tertiary graduation rates prevailing in some European countries and discusses how to boost them as well as the quality of university-level education. There is no magic bullet, but a combination of better financing arrangements and greater autonomy and accountability of individual institutions can go a long way to improve performance. This is the case in particular in France, our host country, where action was taken on that front last year.
The EU itself pursues common policies that can contribute to raising living standards, but more needs to be done by removing barriers to enhance labour mobility; by strengthening the internal market, especially in the services and financial sectors and by opening up network industries to competition. The reform of the Common Agricultural Policy is a must and may be easier with today’s higher prices. That said, many actions remain the primary responsibility of national governments.
The real question is where to start. At the OECD we try to get some answers based on decades of identifying best practices in public policies. We conduct regular economic and sector surveys for all our individual member countries, but also for the European region and also for the Euro zone. In the particular case of Going for Growth, we establish benchmarks and make specific recommendations on key policy priorities for each country and for the EU as a single economic unit. Every year we compare performance and compliance with our recommendations of the year before.
Another question is how to achieve these reforms. Democratic processes take time but there is always too little time in a highly dynamic global economy. Reforms need support, need majorities, need a certain amount of consensus. How to build this consensus? How to identify and compensate the ones who lose from reform? How to sell reforms to the public? And how to reform and perform at the same time? How to reform and be re-elected?
At the OECD, we have engaged in an ambitious project on the political economy of reform. We received a mandate from our member countries not only to provide sound policy advice, but also to support countries to create the necessary environment to move the reform agenda forward and to help inform and conform the debate on the costs and consequences of both policy actions and inactions.
How can further reform be achieved? European countries can learn from some of their own neighbours. For instance, those that made the most progress in easing product market regulations are more successful at adopting information and communications technology and attracting foreign direct investment.
This is one key aspect of the framework conditions that allow innovation to flourish, alongside flexible labour markets. This will be part of the OECD Innovation Strategy, in which we are actively engaged.
At a time of heightened economic uncertainty and looming inflationary pressures, it might be tempting to hold back on structural reform until the clouds have cleared. But this would be a mistake: a bold reform package can boost growth by making the economy work better and lift some of the fog around the future economic environment.
Our findings also suggest that there are synergies between structural reforms: an appropriate package or sequence of measures can be the best way of overcoming entrenched interests. Piecemeal or marginal changes can make things worse.
A common fear about reform is that it may exacerbate the perceived dichotomy between “Liberal” and “Social Europe”. True, reforms can create losers, as well as winners. But we have to be careful that in the pursuit of raising overall economic performance we do not undermine the achievement of desirable social objectives and vice versa. Governments should protect people by well-designed systems of collective insurance, but burdensome and unnecessary regulations defeat the purpose.
These are just some opening ideas. But this is not only about Europe, it is about the world. Everything that happens in and to the European region is important to the world. Europeans have to assume their role as one of the global economic locomotives. This is why I look forward to hearing more about the reform agenda for Europe and about how we, at the OECD can better help make these reforms happen.