Opening remarks by Angel Gurría,
10 June 2016
Ladies and Gentlemen,
Today we are launching two closely related OECD Economic Surveys, one on the European Union and the other on the Euro Area.
How is Europe doing? Compared to the situation in April 2014, when the previous Surveys were released, there are reasons for optimism. Growth has picked up, if only gradually, and spread to virtually all EU countries. Tensions in financial markets have decreased further and an agreement has been reached recently for continued financial support of Greece. Unemployment is steadily declining, although it is still too high in many countries.
This progress has been mainly home-grown, rather than brought about by a stronger world economy. Indeed, external demand is exerting a drag on Europe’s growth rate, although this has been offset by the favourable exogenous factor of lower oil prices. But crucially, the European Central Bank’s monetary policy has been supportive and fiscal policy is no longer a drag on domestic demand as the substantial fiscal consolidation of the past has come to an end. Important building blocks of Banking Union have come into operation. What a contrast with only a few years ago, when the euro area was in a full-blown crisis! European countries have moved forward by staying together and by reinforcing European policies and institutions.
Major challenges remain
There is no room for complacency, though, as important challenges lie ahead. Some immediate tensions, such as the refugee crisis, are putting pressure on European common policies and straining the spirit of European solidarity. The referendum on Brexit poses important risks for European growth in the short run and the future of the European project in the longer term.
More supportive fiscal and monetary policy
The main policy challenge identified in these Surveys is the weak economic recovery. GDP growth in Europe is projected to remain sluggish, investment is still weak (especially in the euro area countries hardest-hit by the crisis), unemployment remains high in many countries and inflation is too low.
Continued support from macro policies is needed
Both monetary and fiscal policies must act. The ECB should commit to keep monetary policy accommodative (i.e. not increase interest rates or shrink its balance sheet) until inflation is clearly rising to near 2%. But governments need to do their share as well. Countries with fiscal space should use budgetary support to raise growth, both at home and to the benefit of Europe as a whole. Common action on this front will be more powerful than countries acting alone.
Reducing non-performing loans to boost credit
Despite some progress, financing for firms remains a problem in several countries, as financial markets are still fragmented along national lines. Similar firms located in different euro area countries can pay very different interest rates on their loans.
Probably the most pressing and overdue issue is that many banks are still overburdened by non-performing loans (NPLs), which hampers both credit growth and credit reallocation towards more productive firms. Indeed, in some euro area countries, NPLs are so high that they threaten financial stability. Asset management companies have proved useful in resolving this problem, and there is a case for establishing one at the European level, as such an institution would be able to maximise economies of scale and diversify risks. For cases where financial stability is at stake and serious economic disturbances are a risk, waivers to some bank resolution rules, notably requirements to make bondholders pay for part of the cost of NPL resolution in case of state support, could be needed.
Related to the issue of tackling the stock of NPLs and reducing the threat they pose to financial stability, there is also a continued need to complete the banking union in the euro area. In particular, euro area countries should further harmonise bank regulation, reinforce deposit insurance (including at the supra-national level) and create a common fiscal backstop to the Single Resolution Fund.
Investing for the future
A key factor holding back growth and productivity is the weakness of investment, which in most European countries is still below pre-crisis levels. This is most pronounced for the euro area countries hardest-hit by the crisis, including Greece, Italy, Spain and Portugal.
A key area is public investment. Public investment in projects with high multipliers needs to be increased. Priorities should include projects yielding cross-country benefits, such as trans-European transport and energy networks. Upgrading national budgetary frameworks, for instance by wider adoption of multi-year expenditure rules, would improve public investment decision making.
To spur business investment, regulatory burdens hampering the Single Market need to be reduced. National regulations and technical specifications in network sectors should be harmonised further. Harmonised rules are needed to unlock the cross-border dimension of the digital economy.
Helping people to move to new jobs
Labour flows in Europe can help recovery, as people move across borders in search of jobs. Indeed, in the wake of the financial crisis labour mobility provided some respite in the hardest-hit countries. Many obstacles to greater labour mobility in Europe remain, however. Recognition of professional qualifications is unnecessarily complex and slow. Limited portability of pension rights and other social benefits makes it unattractive to move to jobs abroad.
Free movement of labour in Europe should be enhanced by simpler and faster recognition of professional qualifications using electronic procedures. EU-wide treatment of double taxation issues and improvements in portability of pensions and social benefits should be considered, in order to reinforce incentives for working abroad. The eligibility requirements and procedures for high-skilled workers from outside the EU should be simplified to improve Europe’s position in the competition for global talent.
Most of these recommendations have one thing in common: they call for collective action by European countries. Cooperative solutions have enabled Europe to leave the worst of the crisis behind it. Continued cooperation is needed to implement effective solutions to common problems. The alternative to collective action is not the status quo, but something worse: the risk that Europe will move backwards. This would jeopardise what has been achieved to date by the Single Market and the rest of the EU acquis, decreasing growth and destroying jobs across Europe.
Ladies and Gentlemen,
Europe has made a great deal of progress since the trough of the crisis, even if, as in the past, it often took a long time for the right response to be put in place. At this critical juncture for the European project, I trust that this slow but steady progress can continue, for the benefit of all Europeans. As these Surveys illustrate, the OECD will continue to offer the EU and the euro area its expertise and advice with the goal of better policies for better lives.