Remarks by Angel Gurría, Secretary-General OECD
Madrid, 29 November 2012
(As prepared for delivery)
Dear Minister, Sr Zaplana, Ladies and Gentlemen,
It is a pleasure for me to participate in this Club Siglo XXI roundtable on how to overcome the crisis, and share the OECD’s analysis and recommendations with you. As you know, this morning, together with Minister de Guindos, we presented our economic report on Spain which, in addition to analysing the economic situation, makes an in-depth study of three issues that are crucial for the country: the banking system, fiscal consolidation and unemployment, especially among young people.
Before discussing the case of Spain, I am sure you would like me to give an outline of our analysis of the global economic situation and the eurozone in particular, given that the day before yesterday in Paris we released our updated outlook for OECD countries and the main emerging economies.
The World Economic Outlook
Unfortunately, global economic prospects have worsened since publication of our previous Outlook at the end of May. Growth has slowed, causing the eurozone to sink into recession and also affecting the emerging economies. We forecast a weak recovery for the global economy over the next few years, with rates varying from zone to zone.
- Europe will not come out of recession until well into 2013: we foresee GDP contractions of -0.4% in 2012 and -0.1% in 2013, before a return to modest growth of around 1.3% of GDP in 2014.
- Growth will be more buoyant in the United States economy (more than 2% in 2012 and 2013, and about 3% in 2014) and Japan, although still below potential.
- Lastly, the emerging economies will recover more quickly, but without regaining the rates of the past decade. This faster rate of recovery reflects not only the dynamism of those economies but also the greater room for macroeconomic manoeuvre available to them.
Nonetheless, in our Outlook we stress the fact that major risks still remain that could produce what we call the “downside scenario”, in other words an even worse overall situation:
- The main downside risk stems from the failure to resolve the problems of the eurozone, which I shall discuss in greater detail later.
- The so-called "fiscal cliff" could also push the United States economy into recession if it is not resolved.
- The high levels of unemployment in the advanced economies could further undermine confidence and intensify the slowdown.
- The transition of the emerging economies towards a domestic demand-driven model will not be problem-free either, since it could curb the pace of growth of these engines of the global economy.
- And lastly, the geopolitical instability we are seeing carries significant risks for the global economy and supply chains. In particular, the situation in the Middle East could force up (already high) crude oil prices which would hinder the recovery.
Let me say that we also see grounds for hope. If the White House and Capitol Hill reach agreement to avoid the fiscal cliff — as seems likely — and if they do so in the framework of a broader public finance sustainability programme, this will generate confidence and demand could revive more strongly than expected. In fact, there already are some signs that the deleveraging process among North American households could be further advanced than we thought.
The eurozone: the main battlefield
Turning now to the eurozone, the OECD believes that what happens over the next few weeks and months will be crucial not only for the future of the Spanish economy — which is intimately linked to Europe through the euro and the common market — but also for the world economy. The global slowdown could last longer if Europe fails to reach agreements and take firm measures, particularly in terms of a banking union and solving the sovereign debt problem.
Apart from the rapid implementation of already agreed measures and progress on the proposals made by the President of the Council, the eurozone needs to correct its internal imbalances. Although the current account balance has certainly been converging since the onset of the crisis, this correction could be more nominal than real, reflecting a demand adjustment in the worst-hit countries.
The structural correction of these imbalances involves improving competitiveness, particularly in countries where this has stalled. Although average productivity growth in the eurozone over the last decade has been less than 1% per year — below the average of the OECD, Japan and the United States — this figure conceals significant differences that lie at the root of the trade and current account imbalances that have accumulated in the eurozone since its creation and that are crucial for understanding the current crisis.
At the OECD, we expect eurozone labour productivity growth to remain low, rising by 1.6% a year from now until 2025 — roughly equivalent to the average over the last two decades. This has important implications for the potential growth of European countries, because population ageing means that productivity growth is absolutely essential to make up for the decline in the working-age population.
In the medium term, this will result in a slowdown in the growth of potential GDP compared to previous decades, unless productivity increases more rapidly. And this is how we arrive at long-term projections such as those we published a few weeks ago, in which the eurozone share of worldwide GDP drops from the current 17% to 12% in 2030 and to 9% in 2060.
Our main hope is that the response to the crisis is “more Europe”, and that community integration continues to be deepened without delay. We also expect the major structural reforms being introduced to help turn the corner earlier than expected and make it possible to restore competitiveness. Our analysis estimates that the positive effects of certain measures could start to be felt in the short-term.
But, to maintain the reformist momentum, European governments need to explain properly to public opinion why these reforms are being introduced and what their long-term benefits will be. It is also essential to contain any adverse short-term social impact, particularly an increase in inequality. On this point, measures such as raising the retirement age, improving the efficiency of public services or certain tax adjustments, which I will discuss later, make it possible to maintain the fiscal consolidation drive while also promoting equity and growth.
Spain: immediate priorities
The Spanish economy is not immune to these dynamics. In fact, Spain is one of the leading examples of the need to “renovate or die”. The impact of the crisis has been more pronounced and more persistent here than in most OECD countries, as a result of the collapse of the real estate sector, the high levels of unemployment and rapid deterioration of the public deficit, which has caused the debt to skyrocket in a very short space of time.
The prospect of rapid recovery is remote, given that the deleveraging process is still unfolding and continues to restrain economic activity and job creation. We forecast that the contraction will be -1.3% in 2012 and -1.4% in 2013, with positive growth rates only returning in 2014, at 0.5%.
This means that many of the reforms being undertaken — and those that remain to be introduced — are not an option, but an urgent need. This morning, with Minister de Guindos, we presented the OECD’s main recommendations for restoring confidence, generating growth and creating jobs. Let me now share them with you.
Firstly, we believe it is urgent to resolve the doubts that continue to surround the soundness and solvency of the financial system as quickly as possible. The uncertainties weighing on the banking sector are raising the cost of sovereign financing and creating a vicious circle in relation to resolving the public debt problem. Stabilisation of the financial system will also make it possible for credit and investment to start flowing again to fuel economic activity.
Our recommendations in this area call for a swift and orderly winding-down of non-viable banks and the recapitalisation of viable banks with capital needs, giving the new asset management company (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (Sareb)) all the support it needs to restore bank balance sheets. We also believe that potential losses in the real estate sector should not be borne solely by the taxpayer, and we recommend a reform of bankruptcy procedures.
And, of course, we believe that the final solution to the problem in Europe involves introducing community-wide banking regulation and direct recapitalisation of banks.
The second issue we highlight in our report is the restoration of confidence in the sustainability of public finances. We have urged the government to take decisive steps to implement the already approved reform of the fiscal framework, and we firmly believe that showing determination to fulfil the deficit targets at all levels of government sends a signal of confidence to the markets.
Nonetheless, we believe that fulfilling the deficit target should be adapted to the trend of indicators. If economic activity slows more sharply than expected, we think it is reasonable to revise targets and time frames, and allow automatic stabilisers to operate in the short term.
To avoid deeper spending cuts which could hinder the recovery, and to protect access to health and education services, we see room for manoeuvre on the income side. The fiscal burden of taxes on labour could be reduced, offsetting this with increases in indirect taxes (particularly certain VAT rates), property taxes (taxing the property more than transactions), and increasing environmental taxes (the revenue of which in relation to GDP is still way below the EU average). The taxation of higher income groups could also be increased.
The third issue considered in our report is the structural deficit of the Spanish labour market. The destruction and sparse creation of jobs is the great social tragedy of this crisis, and we will only overcome it when we reduce the alarming rate of unemployment, which as you know, already affects one in every four Spanish people of working age and over half of economically active young people.
At the OECD, we support the most recent labour market reform because it addresses several of the most important structural weaknesses; but we believe that greater focus is needed on solving, once and for all, the underlying problems of the Spanish labour market: the use of fixed-term contracts, rigidity and lack of access for youth.
To put an end to the existence of two types of contract, fixed-term or open-ended, we suggest gradually introducing a single type of contract that preserves rights and guarantees while at the same time making hiring and firing conditions more flexible. We also see the need to eliminate the legal extension of sector-wide bargaining agreements where there is no agreement with the unions, because it reduces the motivation to secure company-level agreements.
These measures could help invigorate the labour market generally; but they would particularly benefit youth employment, which has been hit the hardest by precariousness, temporary hiring and lack of opportunities. Here it is important to improve the quality, management and incentives of public job placement services, particularly in the search for a first job. We also recommend improving access to post-compulsory education, as well as enhancing the quality of vocational training and its links to the world of employment and to secondary and higher education.
Spain: longer-term priorities
The measures I have just described are only a first step. It is not just a matter of overcoming the crisis but also of taking advantage of the opportunity if offers to improve on the economic model of the past.To this end, structural reforms need to be implemented to make it possible to modernise and diversify the productive fabric, raising growth potential and responding to the challenges and demands of the global economy.
The government is implementing a courageous programme of structural reforms that are putting us on the right path, but their full potential will only be deployed gradually. As well as deepening labour market reform, it is necessary to continue removing obstacles to business activity and to increase competition in the product markets.
And, of course, invest in education, innovation and green growth, which are the main drivers of the economy of tomorrow. Spanish 15-year-old students evaluated in the PISA report, for example, scored below the average OECD countries, particularly in reading comprehension. And many researchers and brilliant university students are forced to emigrate because of a lack of employment and opportunities.
The answer is to improve the quality of education, attract the best graduates into the teaching profession and upgrade curricula to provide training in the skills that the labour market really demands. It is also necessary to support sectors that create greater value added for the rest of the economy, such as green industries and renewable energies, in which Spain is at the forefront. Investment in Research, Development & Innovation (R&D&I), and improvement of the management and transfer of technology throughout the productive fabric, in addition to generating wealth will make it possible to increase the number of top quality graduates who remain in the country.
Ladies and gentlemen,
Let me summarise the main message of this talk in a single sentence: we will only overcome the crisis if we start to apply the policies that will lead us to the economic model that we desire for Spain in the future. In the OECD we want to send a message of confidence because we know that Spain is doing what it needs to do.
Lastly, we need to maintain a degree of perspective and recognise the huge potential of the Spanish economy: leading multinationals; booming exports; well-trained youth; one of the world’s major languages; a highly attractive country brand; a solidarity-based and cohesive social system; and, overall, one of the most successful socio-economic and political development stories of the last quarter-century.
This is our launch pad. The immediate future will be difficult, but if we persevere with the reform process we will be moving towards sustained growth in the medium and long terms.
The OECD believes in Spain and is at Spain’s service. You can count on us.
Thank you very much.
La Economía Española en el Contexto Global y Europeo: Análisis y Recomendaciones desde la OCDE
Official visit to Spain (29 November 2012)