Remarks by Angel Gurría, OECD Secretary-General, delivered at the European Parliament ECON Committee
Brussels, 26 November 2013
Ladies and Gentlemen,
It is a great pleasure to address the Committee on Economic and Monetary Affairs of the European Parliament, now for the second time.
The crisis which hit us over five years ago has left us four legacies: first; low growth. As shown in the latest Economic Outlook that we launched last week, world GDP growth is expected to reach only 2.7% in 2013, the lowest rate in the last four years. While we expect global growth rates to move again towards 4 per cent in 2015 (its average rate in the decade to 2008), the recovery will be uneven.
While growth in the US is picking up (3% expected in 2014), potential downside risks remain in the form of fiscal brinkmanship. In Japan, growth is expected to slow down (1.5% in 2014) and there is the big question over the high debt burden. The Emerging market economies’ high growth rates are also expected to come down.
As you know, in Europe the recovery is lagging and uneven. Growth is resuming at a low pace in most EU countries outside the euro area. But in 2013 the euro area itself will experience a second year of recession (-0.4% growth), and a slow improvement over the near term (1.0% in 2014 and 1.6% in 2015).
The second legacy of the crisis is unemployment, which remains unacceptably high, at 8% this year for the OECD countries on average, and falling only slightly to 7.5% by 2015. In the euro area, we expect unemployment to hit 12% this year and only to fall back below this level after mid-2015. Furthermore, long-term unemployment is increasing. Long-term joblessness ranges between 45-55% in some European countries, including Spain and Italy.
Youth unemployment has also reached alarming levels in some of these countries (around 60% in Greece, 56% in Spain). Youth (15-24 years old) not in employment, education or training (NEETs) in these same countries has doubled since the onset of the crisis to over 20% of the total youth population in 2012. There is a real risk of a lost generation.
Third, the crisis has intensified the increase in income inequality. During the worst years of the crisis – between 2007 and 2010 - market income inequality in the OECD went up more than in the preceding twelve years. But growing inequality is not new, we have been experiencing it for the past three decades.
In OECD countries today, the average income of the richest 10% of the population is about nine and a half times that of the poorest 10% – a ratio of 9.5 to 1. In the mid-80s, that same ratio was 7.5 to 1. In the US, the increase in this ratio has been even more dramatic, from 11 to 1 in the mid-80s to about 16 to 1 today. European countries have generally experienced a more muted increased in inequality. For instance, in France and Germany, the ratio has gone up from about 5 to 1 in the mid-80s to 7 to 1 today.
The fourth, and related, legacy is a loss in public trust in government. This is described in detail in our recent publications “How’s Life” and “Government at a Glance”, which also show similar declines of public trust in banks, the judiciary system, and other institutions. According to the “How’s Life” report, only 40% of citizens in the OECD trust their national governments – the lowest level since 2006.
This ongoing economic weakness is not surprising. It is the result of the malfunctioning of the four main cylinders of the growth engine.
First, investment remains weak. In OECD countries, the volume of fixed investment is some 8 per cent below its pre-crisis peak. Investment growth is also slowing in the emerging-market economies. Growth of investment is below 2%, the slowest in many years and well below trend.
Second, credit growth remains subdued. The banking sector, particularly in Europe, is still going through a painful deleveraging that is bearing on their capacity to lend. Bank credit in the euro area fell by 4% in the year to September. In the OECD as a whole, it was flat.
Third, trade growth is only slowly picking up. In volume terms the ratio of global trade to GDP remains slightly below its pre-crisis level. Sluggish trade growth (2 – 3%) reflects several factors, including the weakness of investment that I have already mentioned.
Fourth, growth in emerging-market economies has slowed down. In the BRIICS, trend growth declined by 1¾ percentage points between 2007 and 2013. This drop was driven by various factors, including ageing, declining investment growth and a slowdown in productivity.
For these reasons, strong and sustained growth is unlikely to return on its own. But we urgently need inclusive and green growth to heal the social wounds from the crisis and ensure sustainable development.
There are three tools that policymakers have at hand. One, monetary policy has helped much and continues to do so but is close to its limits, as interest rates approach zero and central banks rely heavily on non-conventional tools, such as ‘quantitative easing’, to address deflationary risks. Fiscal policy is even more constrained, because of the need for fiscal consolidation. Thus, it is important that at least automatic stabilisers are allowed to function, and for more time to be allowed to those countries which are enacting the proper reforms but which are constrained by the sluggish economic environment. The third main tool is structural reform and here we find great scope for bold and ambitious action on several fronts.
In Europe, the two most pressing structural policy priorities that must be addressed are the challenge of unemployment and the restoration the health of euro area banks.
Focusing on people and investing in skills
Policy measures to boost job creation need to be cost-effective and focus on the most vulnerable groups. Action is needed on both the demand and the supply side of the labour market. Labour market programmes, as we have recommended in our Youth Action Plan, can make a difference, including higher impact activation policies, effective counselling, job-search assistance, and even temporary hiring subsidies for the low skilled. Also necessary are better incentives for job-seekers and greater flexibility in labour markets, leading to a faster, clearer convergence path for those countries which allowed wages to rise faster than productivity for the better part of the last 15 years, together with.
Greater investment in training would facilitate the re-employment of jobseekers, especially those with low or obsolete skills. As we showed in the “Adult Skills Survey” - the “PISA for adults”- published last month skills are very unequally distributed and this is a major source of entrenched inequality. Training programmes are not always effective or well-targeted. One example is the adult training system in France. In our recent brochure on French competitiveness, we called for a major reform of this system, which cost about 32 billion euros in 2012 (same as unemployment insurance), but of which only 12% went to the unemployed.
Eliminating the financial drag
The second most burning priority is to address the weaknesses in the European banking system to strengthen financial stability, get credit growing again (which fell by 4% in the year to September in the euro area) and improve the transmission power of monetary policy. Banks’ capitalisation is progressing but we know that non-performing loans remain significant and even rising in some countries.
To revive credit, Europe needs to address fully persisting regulatory forbearance. This means that the real quality of the portfolios, including sovereign debt, needs to be recognised, and banks need to be restructured and recapitalised accordingly, where needed. The forthcoming third round of bank asset quality reviews and stress tests are a crucial step in this process and will have to be implemented rigorously and transparently. And, of course, the euro area also needs to achieve the full banking union with area-wide regulatory, supervisory and resolution authority.
Bold reforms to better protect the economy from future bank failures should also be considered. Separating commercial (deposit-taking) and investment banking activities would help to reduce systemic risks as would the introduction of a minimum leverage ratio, which we suggest should be set at 5%.
Supporting investment and innovation
Restoring growth in Europe also requires investment, which remains subdued since the crisis. In particular, investment is needed in infrastructure and knowledge-based capital.
Higher infrastructure investment will require improving public sector efficiency, and more funding at a time where public finances are heavily constrained. This clearly calls for enhancing private sector participation in this sector, as recommended by the recently approved G20/OECD High-Level Principles of Long-Term Investment Financing by Institutional Investors.
More investment is also needed in knowledge-based capital as source of innovation, which will in turn foster competitiveness, productivity, and job creation. In EU countries like Sweden, the Netherlands and the United Kingdom, most investment is now in such assets and contributes substantially to productivity growth. Fostering investment in knowledge-based capital requires more effective policy support for innovation.
More generally, improving the functioning of product and labour markets in the euro area would have wide economic gains. According to our analysis, if each euro area country were to move to best practice, aggregate output could increase by 22% by 2060, with even larger gains in countries that are the furthest from such best practice.
These and other structural reforms are already helping to correct economic imbalances. Unit labour costs are converging. All the European countries with support programmes or that have been under market pressures have already achieved or are close to achieving current account balance or a slight surplus. This is remarkable! However, the surplus countries also have made considerably less progress, making the adjustment process in Europe rather lopsided. Germany’s current surplus has even increased slightly to 7%.
Recovering tax revenues
To support all these initiatives, additional public funding will be needed. Putting an end to tax evasion by wealthy individuals and aggressive tax avoidance by multinational companies would be extremely effective. These practices undermine the integrity of tax systems across the world, profoundly distort economic competition, reduce available revenues to meet citizens’ and business demands and dent public trust.
The OECD has proposed a roadmap to help governments address these issues, the Action Plan on Base Erosion and Profit Shifting. Countries have already started working together along the lines of this action plan suppported and mandated by the G8 and the G20 and we highly appreciate the extensive cooperation with the European Union on this project.
Another challenge is the fight against offshore tax evasion. For many years, the OECD and the EU have been working together in this direction. With your support, as well as that of the G20, we are now progressing towards a new, more ambitious, single global standard for automatic exchange of tax information. Following our recent Global Forum in Indonesia, the challenge is now to put our commitments into action and implement a truly global standard for an increasingly borderless world, which we hopen to achieve by July 2014.
Trade and climate change
Europe also needs to throw its full weight behind two other key global priorities: maintaining open markets for trade and investment and promoting a move towards zero carbon emissions. Our analysis shows that achieving the WTO reform goals set for Bali would reduce trading costs by 15% for EMEs and 10% for advanced economies (a 1% reduction in trading costs equates to about €30 billion).
We also have great hopes set in the Transatlantic Trade and Investment Partnership (TTIP), which would the most significant bilateral Free Trade Agreement to date, covering almost 30% of world merchandise trade and 20% of global foreign direct investment. The potential welfare gains to the European Union and the United States could be as large as 3 – 3.5% of GDP
Tackling climate change should also be a top priority, as I highlighted at an LSE event in London at the beginning of October. As we approach the Conference of the Parties in late 2015 in Paris (via Warsaw), we need to start taking action now to put us on a pathway to achieve zero net greenhouse emissions globally in the second half of this century. The scale of investment needed to reduce our reliance on fossil fuel can give a huge boost to growth, as well as making growth greener.
Ladies and gentlemen,
The growth-oriented policy agenda I have highlighted is an ongoing one. It will require bold and ambitious reforms in some countries and a shared sense of purpose at the international level. I look forward to building on the very strong cooperation we have established with the European Parliament and with this Committee. And I very much hope also that these visits will continue to be a regular feature under the next parliament.
Thank you for your attention and I look forward to your questions.