Restoring Confidence in Order to Return to Growth and Employment

 

Remarks by Angel Gurría, Secretary-General OECD

Madrid, 29 November 2012

(As prepared for delivery)


Minister, Ladies and Gentlemen,

It is a great pleasure for me to present our latest Economic Survey of Spain, which analyses the economic situation and contains the OECD’s main recommendations for restoring confidence, generating growth and creating jobs. The study responds in detail to three key questions for the immediate future of the Spanish economy: how to deal with the banking crisis, how to promote fiscal consolidation, and how to reduce unemployment, particularly among young people.

First of all, however, let me thank you, Minister de Guindos, for your support for our work throughout the process of preparing the report.

Spain is immersed in a deep recession, but has the means to overcome it


The Spanish economy is going through a prolonged recession; however, I would like to make it very clear that the necessary steps are being taken and that the OECD has confidence in the country’s ability to gradually overcome the crisis. Although economic recovery is taking longer than expected, this partly reflects the adverse global and European economic situation. The important reforms undertaken will produce their effects gradually, and in some cases sooner than expected.

As you know, in Paris two days ago we presented our updated outlook for OECD countries and the main emerging economies. The situation has worsened since May and we stress the need to solve the eurozone problems to avoid a further deterioration. The European banks’ sovereign debt situation is the main risk facing the international economy.

We forecast that GDP growth in the OECD area will be around 1.4% in 2012 and 2013, and 2.3% in 2014. This contrasts with our figures for the eurozone (contractions of -0.4% and -0.1% in 2012 and 2013, respectively, and growth of 1.3% in 2014), and for Spain (where we see GDP shrinking by -1 .3% in 2012 and -1 .4% in 2013, before growing by 0.5% in 2014).

Obviously, Spain’s problems are intimately linked to those of the eurozone, and the solution to the challenges facing Spain will depend on the capacity for  action in Brussels, Frankfurt and the major European capitals. Issues such as the bursting of the real estate bubble and the labour market situation have been aggravated by the eurozone crisis. Many of the decisions taken in the European Union, both on the banking question, and in terms of improving European institutions need to be implemented and activated as soon as possible.

Prospects for a rapid recovery in Spain are being complicated by the ongoing deleveraging process. Efforts by households, firms and banks to reduce their debt continue to shrink domestic demand, which causes a slowdown in economic activity and destroys jobs. And this, in turn, makes it harder reduce the public sector deficit.

Nonetheless, there are positive signs. We forecast that the current account deficit will shrink to 2% of GDP in 2012, compared to 10% a few years ago. And this is not just the result of weakening demand, because Spanish exports have been becoming more competitive and gaining market share. This is a clear sign that steps to bolster competitiveness bear fruit in a global economy.

The government is also approving and implementing a courageous programme of structural reforms which, far from being an option, were a necessity. But these reforms will only be deployed in full gradually and over the long-term.

As I mentioned, our report addresses three issues that are crucial for restoring confidence and overcoming the crisis. Let me now discuss them in greater detail.

Banking system: the financial crisis needs to be addressed quickly


Overcoming the uncertainties in Spain’s banking sector is an immediate priority: just by creating stability in the financial system we will be able to end the volatility that has prevailed on debt markets, and make it possible for credit and investment to start flowing again to fuel activity and consumption. Stabilisation of the financial system can also help break the vicious circle that has been formed between the banking sector and public finances.

Rapid and orderly winding-down of non-viable banks and recapitalisation of viable banks with capital needs is essential. The Memorandum of Understanding with the European Union provides a welcome framework that needs to be implemented. The government has also taken a very positive step with the recent creation of an asset management company (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (Sareb)), which will shortly start working to take over toxic assets and consolidate bank balance sheets.  . It needs to continue along this path. It is also necessary to ensure that potential losses are not borne solely by taxpayers, but are shared between private creditors and institutional investors.

Bank restructuring needs to be accompanied by a reform of bankruptcy procedures, to provide relief to households that have no realistic prospects of paying off their debts. A reform of these procedures, supported by more efficient court procedures could also help improve the restructuring of over-indebted firms and promote productivity.

But this is an area where action and responsibility should reach beyond the Spanish government. The rapid introduction of EU-wide bank regulation and direct recapitalisation of banks with eurozone funds are needed to ultimately break the dangerous vicious circle that exists between the banking system and sovereign debt, which operates through the spreads you are so familiar with. The launch of the new bond-buying programme (OMT) by the European Financial Stability Fund (EFSF) or the European Stability Mechanism (ESM) should also help narrow sovereign debt spreads and should be welcomed.

Public finances: confidence needs to be restored


In relation to public accounts, the credibility of time frames and targets is crucial for generating confidence.  The reform of the fiscal framework and the constitutional limits imposed on public expenditure growth have changed the prospects for sustainability. It is now crucial to apply the regulations without delay, and in this regard, the priority the government is giving to fulfilling the new public deficit targets set in July sends a clear message. We also support the government’s plan to back those new rules with an independent fiscal authority to evaluate fiscal policies at all levels of government.

Nonetheless, if growth proves weaker thanexpected — which we believe is likely — we consider it reasonable to revise the deficit targets and allow automatic stabilisers to operate in the short run to prevent the recovery from being cut short. We also see a need for detailed measures to stabilise the debt owed by public administrations, particularly at the autonomous community level.

On the tax revenue side, we welcome the steps the government has taken to increase the tax burden, but we believe there is still room for manoeuvre. In particular, labour activity is still over-taxed, which dampens its dynamism. The tax burden could be shifted from labour income to indirect taxes, property taxes or environmental taxes.

For example, the general VAT rate could be applied to certain goods and services that are still taxed at a lower rate. There is also room to eliminate exemptions and deductions in corporate income tax (IRPF) — such as certain lower social security contribution rates that should only be applied to the very lowest brackets — and to increase taxes on higher-income groups. Inequalities should not be allowed to grow as a result of the crisis, and the tax system should enable those with more to contribute according to their possibilities to the major adjustment effort the country is making.

Another move to consider is making the rise in property tax (IBI) permanent, while reducing the tax burden on real estate transactions. And, of course, environmental taxes should beincreased, as they still only generate revenue equivalent to 1.5% of GDP, compared to 4% in many other European countries: this would not only provide additional revenue for the Treasury, it would also help reduce negative environmental externalities.

All of these measures would make it possible to create room to maintain certain social benefits which, well managed and with the appropriate incentive system, are essential for supporting the lower-income households that are suffering most from the effects of the crisis and unemployment.

Unemployment: the reforms must continue


One particularly important issue discussed in our report is the social impact of the crisis and the need to protect the sectors of the population which have been hit the hardest by the adjustments. Support for the most vulnerable groups is essential for maintaining the important social achievements of recent decades, and for strengthening cohesion.

In this regard, the overriding issue in the Spanish economy remains the tragedy of unemployment, which now affects more than 25% of the active population and, in particular, over half of all economically active young people in this country.

As you know, the OECD has strongly supported the recent labour market reform, because we consider it addresses several of the main structural weaknesses — particularly the excessive protection provided both to employees on open-ended contracts and to collective bargaining — which makes the Spanish labour market more rigid.

Until we reduce the use of two types of contract in the labour market, the problem will not be worker protection but a lack of jobs. On this point, if the use of two types of contract persists, the OECD recommends gradually introducing a single type of contract to preserve rights and guarantees while making hiring and firing conditions more flexible.

Numerous studies show that differences in severance pay between open-ended and fixed-term contracts have seriously impaired youth employment prospects and have eroded productivity; in addition, redundancy pay remains higher in Spain than in most countries.

Another way to improve the flexibility of the labour market in adapting to economic conditions lies in eliminating the legal extension of collective bargaining, which forces firms to adhere to sector agreements if they fail to reach a specific collective agreement at the firm level.

Public job search services also need to be improved. The government has adopted important measures in this regard, such as allowing temporary employment firms to offer placement services. But this will require an improvement in the supervision and evaluation of placement services, particularly at the autonomous community level. Quantitative and qualitative indicators need to be introduced here, linked to incentives for better performance and results.

Lastly, and particularly in the case of young people, job search assistance needs to be supported by access to training; and the first step in this respect is to facilitate the school-to-work and work-to-school transition. Too many young people leave the education system without the necessary qualifications. There seem to be two key priorities in this area: reduce the high drop-out rate resulting from grade repetition, and provide more flexible access to vocational training from secondary education and later into higher education.

The government is putting forward measures in this area. Efforts have also been made to reform vocational training to make it more attractive, an initiative that we also welcome. To continue moving forward in this direction, we propose further improvement of the quality of vocational training and, for example, integrating training contracts into study plans. Lastly, the education system should provide young people with the skills they will need tomorrow to compete on global markets.

Ladies and gentlemen,

These are difficult times and clearly the current climate is not encouraging. But the OECD sees in Spain a country that is taking the steps needed to resume the path of growth and job creation.

The crisis is hitting everyone hard, not just Spain. But it is also opening up opportunities to implement the structural reforms that the country needed to regain competitiveness and be able to generate more income, employment and welfare tomorrow. At the European level, institutional shortcomings are also being corrected, so that for the first time we will have the means to turn the situation around.

Please be assured, the OECD remains at your side. We are supporting our main economies with their structural reform agenda, to improve productivity and competitiveness; and naturally we will continue to do so with Spain. Confidence needs to be generated in this country’s economy; because we know it is doing what it needs to do, and has gained the support of its European partners and the international community.

Thank you for your attention.


 

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