Remarks by Angel Gurría, OECD Secretary-General, delivered at Instituto de Empresa, Global Alumni Forum
30 September 2011, Madrid, Spain
(As prepared for delivery)
Dear Guillermo, Ladies and Gentlemen,
Thank you for giving me the opportunity to speak to you at your Global Alumni Forum. The Instituto de Empresa is undoubtedly one of the most prestigious business schools in the world, so it is a great honour to be here tonight to discuss the world’s current economic outlook.
Our discussions come at a critical time. As you know, the global scenario is worsening. Hardly a week goes by without growth forecasts being reviewed down, the stock exchanges registering massive losses, and rating agencies downgrading the sovereign debt of major economies and companies. We urgently need to reverse this trend and get back on the road to recovery.
Let me share the OECD’s assessment of the current situation and outline some of the policy challenges we face, particularly in the Eurozone.
A worsening global scenario
Only a few months ago, global recovery seemed to be on track following the worst crisis in our lifetime. Recovery was progressing at different speeds across countries and regions, but it appeared to be becoming both self-sustained and more broad-based.
However, the rebound has faded, particularly over the last three months. The OECD Interim Assessment, presented last 8 September, projected considerably slower growth in the final two quarters of this year: economic growth in the G7 economies excluding Japan will remain at an annualised rate of less than 1% in the second half of 2011. Although growth will remain stronger in most emerging markets, it will do so at a more moderate pace than initially thought.
Among the main reasons for sluggish growth are concerns about sovereign debt distress and related-bank exposure, as well as budget developments in the United States and the euro area to support a weak recovery. As a result, consumer confidence is falling.
In addition to this, job creation remains low and unemployment levels are unacceptably high: it constitutes the human face of the crisis. According to the OECD Employment Outlook, released two weeks ago, only a small dent has been made in the high unemployment levels experienced by a number of countries during the “Great Recession” of 2008-09.
By mid 2011, unemployment in the OECD area was still above 44 million, over 13 million higher than its pre-crisis level. As you know well, Spain is a critical case: unemployment is above 21%, compared to 8.2% in the OECD area. We estimate that 2.2 million new jobs are needed to bring Spain’s unemployment rate back down to its pre-crisis level – which was already higher than the OECD average. The difference we witness among countries—some of them with unemployment rates of 3-5% and others with double digit figures—illustrates that good policies make a difference. The variance between regions in Spain also highlights the importance of transforming the economic model and fostering those sectors that create jobs.
Another important aspect of this bleak scenario is the state of public finances. The current situation finds many governments and central banks with limited room for manoeuvre, and certainly less fiscal and monetary ammunition than most enjoyed three years ago.
The scaling back of public demand as a result of fiscal consolidation packages may have been faster than anticipated. And while substantial balance sheet adjustment by households and business was expected post-recession, especially in light of the imbalances that built up in the lead up to the recession, the adjustment seems to have been more drastic and perhaps earlier than expected.
Some additional factors have also contributed to the current slowdown. One is the global impact of the Japan disaster of May 2011, which caused severe disruption to global supply chains—now fully normalised. Another one is the unrelenting climb in commodity prices over the past 18 months, which seems to have been more damaging to activity than previously thought—here we also witness a certain drop.
What to do?
So what can we do? Effective actions aimed at restoring the confidence of households, businesses and financial markets are urgently required.
While short-term action is critical, clearly articulated commitments to credible medium-term policy measures hold the key to addressing immediate confidence issues and laying the groundwork for future self-sustaining growth. The ongoing crisis of confidence largely stems from failure in dealing with some long-standing fundamental issues.
Let me underline this: policy-makers need to think and act along the lines of a far-sighted approach rather than base their decisions on daily headlines or weekly movements of financial markets. Short term, emergency reactions without a medium and long-term strategy will only bring temporary relief.
Decisive action on this front needs to start today, with medium and long-term policies including:
(i) Tackling the debt issue and putting public finances on a sustainable track. This will require leadership and commitment towards the implementation of credible consolidation plans, and the creation of sustainable fiscal frameworks.
(ii) Secondly, advancing structural policies and reforms which tackle the legacy of the recession and enhance the growth potential of the economy. Here I am thinking in particular about policies that focus on promoting long-term employment and jobs that the economies of the 21st Century demand.
(iii) The third set of policies includes those aimed at getting financial systems back onto a sound footing. Indeed, in some countries this will require measures aimed at the recapitalisation of banks (and their funding).
(iv) Fourth, we need to implement policies that promote inclusive growth and help those made most vulnerable by the crisis. This is absolutely critical to give people a sense of common purpose that can help create the necessary consensus to support reforms. Tackling unemployment and inequality is paramount. We cannot fail again at allowing people to enjoy the benefits of globalisation.
(v) And last, but not least, we need to consolidate the global coordination tools that can help us respond with promptness and determination to global challenges. Improved global governance through the G8, G20, the FSB and the Framework for Strong, Sustainable and Balanced Growth is fundamental to orchestrate responses like the ones we witnessed in 2008 and early 2009.
Tackling the problems in the Eurozone
I will conclude by saying a few brief words on the Eurozone and the risks it faces.
The core challenge in Europe today is to deal with mounting imbalances within the region. For some, the answer lies in fine-tuning the European Monetary Union’s architecture in order to accommodate the independent nationally sovereign fiscal policies and different levels of productivity growth across the region. For us, the only way out—the only long-term fix to the problem— is the need to strengthen the governance of the euro area by promoting further fiscal integration.
The current contradiction between the full centralisation of monetary policy and the maintenance of other key policies, such as fiscal policy, at the national level needs to be addressed. Sounder national regulations and institutions, coupled with stronger European Union rules and discipline, are needed.
Among some of the concrete measures, the European Financial Stability Fund should be ideally increased to at least 1 trillion Euros, leveraged by techniques which do not involve increasing the total potential liability (like partial guarantees, put options at maturities, fast loss or even first loss modalities, etc.). This would send a clear signal that governments understand the magnitude of the problem and have the firepower and the will to use it. We should also seriously consider the benefits of launching Eurobonds.
Together with addressing the broader issue of the euro zone’s architecture, it is true that the key requirement for most individual member countries remains to consolidate their budgets in line with announced medium-term plans. At the same time, the challenge is to achieve this goal while supporting medium-term growth. This implies the need to introduce some flexibility in the consolidation path, particularly if the economy weakens significantly in the coming months.
Let us be clear: consolidation and tough adjustments are necessary, in particular in the three countries that have asked for assistance from the EU and IMF: Ireland, Greece and Portugal. As part of the agreements with the EU and IMF, they are implementing important packages. Other countries like Spain, Italy and the United Kingdom have also taken decisive measures and, in some cases, have made long-term commitments through amendments to their constitutions. Those with fiscal space should definitely use it. But more importantly for both sets of countries in the euro-area, they need to pursue comprehensive structural policy reforms to complement these efforts.
Ladies and Gentlemen,
We are at a critical juncture. The world economic outlook has weakened and growth is losing steam, while public and private debts are holding back investment and consumption. Many governments are caught in a vicious circle, with less ammunition at their disposal than three years ago.
But policymakers can break this cycle if they seize the initiative, rather than simply react to the beat of the markets or the rating agencies. This implies going strategic, going structural, and going social. I hope we are up to the challenge.
Thank you for your attention and I look forward to a fruitful discussion moderated by Guillermo.