On June 25 and 26, 2013, the
Institute of International Finance held its spring membership meeting
in Paris. Unfortunately, I wasn't invited. To be honest, I wasn't
even aware of the meeting before it took place. Anyway, the content
is on-line and this is actually enough to write a short summary about
it.
The second discussion was about
economic growth prospects in Europe, to be achieved through
structural reforms.
Joaquin Almunia,
Commissioner for Competition, European Commission
Joaquin Almunia introduces and
leads the discussion. He pinpoints major economic topics which have
been discussed in Europe since the introduction of the Euro in 1999:
In the first decade since 1999,
economists talked about combating low growth by improving
productivity, employment levels, and common product and services
markets. Key reforms addressed the sustainability of social systems,
harmonized labor markets, and fought for common financial markets.
Since 2008, we discuss
predominantly the levels of indebtedness of member states. To bring
debt levels down, governments introduce structural reforms. At
European level, hot topics include the banking union and the
stabilization of the common currency through deeper economic
integration and better economic policy coordination.
Quotes:
“If we
have to discuss these issues at length and in depth, we can spend the
whole day and we will only be analyzing the challenges we have.”
“We
[Europe] are not yet there.”
“De-leveraging
is taking place [in Europe] in both the public and the private
sector.”
“We need
to cut this link between the sovereign risks and the balance sheets
of the banks.”
“This
economic and monetary union needs a second step forward with new
governance and new economic solidarity mechanisms.”
“Without
adequate mechanisms to resolve banks, the single supervisory
mechanisms [in Europe] and the Basel III rules will not work in an
efficient way and will put the burden of a solution of banking crisis
on the shoulders of our citizens.”
“[We
must] preserve the European social model to offer [the European
member states] which suffer high levels of unemployment a better
future.”
“Competition
enforcement is the most efficient and cheapest structural reform.”
Olivier
Garnier, Chief Economist, Société Générale
Olivier compares the German and
French economy.
He stresses four key success
factors of the German economy today:
- Corporate profit margins above historical average
- Low real labor costs, especially in the service sector
- Strong manufacturing sector
- Efficient use of the global value chain, namely through global distribution of work-flows
French companies experience
pretty much the opposite of the above, namely low profit margins and
high real labor costs. As a result, French SME’s lack pricing
power.
Turning to necessary economic
reforms in France, Olivier emphasizes the need for France to cut
government spending. In the end, only a smaller government budget can
lead to lower social contribution and other taxes. Generally
speaking, he believes that too much resource is allocated to the
French public sector.
On a positive note, Olivier
outlines two key strengths of the French economy:
- Demography: Contrary to the German population, the French population will increase in the future.
- Large pool of domestic savings: The French household sector is in good financial health. As a consequence, there is room for re-balancing of financial positions between the corporate and the household sector.
Quotes:
“In a
few years, structural reforms can pay off. It's better to start
sooner than later.”
“Before
looking at competitiveness, I prefer looking at profitability. The
key problem, right now, of the corporate sector in France is
profitability.”
“Germany
has been very good in taking advantage of [cheap] imports of
intermediate goods and some kinds of outsourcing while this has not
been done in France.”
“At the
end of the day, the reason why social contribution taxes are higher
in France than in most other countries is due to the fact that
government spending is higher in France than in other economies.”
“The
only way to cut labor costs [in France] is to cut government
spending.”
“It's
very important to convey that reforms can succeed.”
David Mackie, Head of
Western European Economic Research, JP Morgan
David explores the reasons for Europe’s recent poor economic
performance:
On the demand side of the
economy, he believes that ECB’s monetary policy constitutes a
structural impediment to growth in the Euro area. As a matter of
fact, the ECB has been less aggressive than central banks in the US,
the UK, and Japan, both to limit moral hazard and to avoid fiscal
redistribution. David especially criticizes Germany's insistence on
dealing with economic problems first and foremast locally as opposed
to finding common European solutions.
On the supply side of the
economy, David affirms Europe’s slower growth in labor productivity
and utilization. In his view, such slowdown is not only a cyclical
phenomenon but a structural impediment.
Finally, political governance
issues within the European Union also cause substantial difficulties.
Quotes:
“Growth
in many countries has been constraint in recent years by having to
adjust to prior excesses.”
“The
clock is now been set ticking on the ultimate exit from this very
extraordinary monetary stance.”
“Over
the last four years or so, the US economy has performed better, on
average [compared to the European economy], because of the FED's
monetary stance.”
“The ECB
has under-delivered relative to a standard reaction function.”
“The
[European] central bank has taken on responsibility for managing
moral hazard in the region.”
“The ECB
seems to believe that governments need to be under a certain amount
of pressure, whether that's from markets or from growth, in order to
make appropriate adjustments.”
“For the
Euro area to achieve a growth potential – even in the region of
something like 1 % – we need to see a significant recovery in
productivity growth and/or significant fall in the actual rates of
unemployment. And it is pretty hard to see how those things can
happen without a significant amount of fairly traditional kinds of
structural reform.”
“It's
[structural reforms] not just about legal structures but also about
bureaucracy and how laws are applied and interpreted.”
Carlos Moedas, Secretary
of State to the Prime Minister, Portugal
Carlos uses Portugal’s recent
economic history to underline the importance of structural reforms
for economic growth.
He starts off by highlighting
three difficulties Portugal faces today:
- Structural reforms require important up-front costs and their benefits arise only over time. Reforming competition law serves as a good example here.
- Any structural reform embodies a fight between insiders, who are against reforms and don't want change, and outsiders.
- The world of twitter and facebook – “You cannot explain a structural reform in 140 characters!”
How can Portugal tackle its
problems?
- Quantifying reforms is important and should be done more often and in further detail: For example, economists should strive for quantifying the effect of reforms on potential GDP.
- Feedback loop: “Go and see if the reforms are really working […] and if [they are] not working, change the law again.”
- Finally, structural reforms should be carried out consistently in all European countries. For example, a services directive implemented in Portugal, but not in Spain, France, or Italy would clearly disadvantage Portugal.
Quotes:
“Portugal
has proven today, that it is actually possible to adjust under a
monetary union.”
“The
solution [for growth] is not about spending.”
“The
structural reforms are the ones that can actually bring growth back.
The problem with structural reforms […] is that they are very
difficult to explain and very difficult to sell to your
constituents.”
“Europe
is there to help us [Portugal] but we are actually also there to help
Europe.”
Pier Carlo Padoan, Deputy
Secretary-General and Chief Economist, OECD
Pier Carlo starts his speech
praising current structural reforms in and outside Europe. However,
equally important will be how those structural reforms are
implemented. Obviously, this requires an efficient administration and
a strong civil justice system.
Structural reforms are
indispensable for long-term growth. In addition, they entail positive
side-effects in that they facilitate and improve the current account
balance and fiscal consolidation. What’s more, they have a positive
impact on income distribution and inequality.
Another focus is on the difficulty to implement structural reforms,
namely due to the time difference between implementation and effects.
It might actually happen that structural reforms further deepen a
recession and increase unemployment in the first place.
With regards to the geographic
scope of structural reforms, Pier Carlo advises Europe to work
simultaneously on a supranational and on a country level.
Quotes:
“A good
qualitative long-term fiscal consolidation supports structural
reforms but also the other way round.”
“Of
course, in a recession, things are more difficult to see.”
“You
need a better macroeconomic and financial environment.”
“When
the cycle will get stronger – hopefully not too much down the line
– the impacts of [today’s] reforms will become [clearer].”
“We are
not seeing the results [of structural reforms] in Europe yet. But we
might see them sooner than we expect, once the cycle and the credit
system get better.”
“Structural
reforms are very important but they are also country specific.”
Jean-Claude Trichet,
Honorary Governor, Banque de France
In a forthright commentary,
Jean-Claude Trichet highlights the importance of structural reforms,
defends ECB’s monetary policy, and shifts responsibility to the EU
governance structure.
As regards structural
reforms, Jean-Claude
draws a disappointed conclusion: “We
[both the EU and the G20] know what we have to do […] and we do not
deliver.” This
is all the more surprising as examples for successful structural
reforms don’t lack: During the financial crisis, the most resilient
advanced economies were Canada, Sweden, and Germany and all of them
had carried out bold structural reforms previously.
As its former president,
Jean-Claude Trichet defends ECB’s monetary
policy:
In his view, as the central
bank’s action during financial crisis has shown, the often
criticized indecision of the ECB actually does not exist.
Beyond, ECB’s focus on
refinancing banks is actually due to the very structure of Europe’s
financial markets: Whereas the US economy is financed 80 % through
financial markets and 20 % through banks, the opposite is true for
the European economy. Jean-Claude points out that, in this context,
you virtually cannot compare the monetary policy of the ECB and the
FED.
As a final comment on monetary
policy, the former ECB president distinguishes between standard
measures (i.e. interest rates) and non-standard measures (i.e.
purchase of treasuries and securities): In his view, only standard
measures constitute monetary policy as such. Non-standard measures
are only additional instruments to implement monetary policy and to
substitute to an intermediation that is not functioning.
The governance
structure in the European Union
is the roots for its economic problems: “Putting
the blame on the central bank is not appropriate. I would put the
blame on governance of the Euro area.”
– says Jean-Claude Trichet. A cornerstone of this critique is the
lack of respect of the European stability and growth pact. A healthy
European economy would also require monitoring and correct
macroeconomic imbalances among member states. Finally,
implementing the European banking union is absolutely necessary for
the Eurozone to be successful.
Quotes:
“We [the
ECB] were the first central bank to embark on highly non-standard
measures on the 9th
of August 2007, in giving liquidity on an unlimited basis at a fixed
rate.”
“We [the
ECB] are supplying liquidity on an unlimited basis provided we have
the appropriate collateral.”
“The
main problem why the real economy is disappointing in some respect is
[…] that several countries absolutely had to adjust. And this was
unavoidable because the rest of the world was very clearly saying: We
will not finance your deficit eternally.”
“We
trusted the competitive channel would correct those imbalances [in
the Euro area], but it did not.”
Resource:
If you work for a member institution and register with the Institute of International Finance, you can watch or download the speeches here.
