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27 Mar, 2012

One Trillion Euros in Bailout Funds Needed to Kick-Start a “Stalling Europe” – OECD

Paris, 27 March 2012, (OECD Media Release) – Euro area finance ministers meeting this week need to boost the firepower of the European stability funds to at least one trillion euros, OECD Secretary-General Angel Gurría said today. The current level of commitment to the rescue funds is not enough to restore market confidence, he said.

A credible financial firewall will provide governments with the breathing space they need to focus crucially on revitalising Europe’s economic growth and competitiveness. “Weak financial conditions, fiscal consolidation and economic adjustment are restricting demand in the short-term before the long-term benefits on stability and growth are felt,” Mr Gurría said. “Decisive action to restore confidence and support demand is needed now.”

Presenting the OECD’s Economic Surveys of the Euro Area and the European Union in Brussels, Mr Gurría said: “The recent measures already taken to strengthen fiscal discipline, provide liquidity and implement growth-enhancing reforms – particularly in Greece, Italy, Portugal and Spain – are important advances towards a brighter economic outlook, but the challenges remain daunting.”

The economic, fiscal and financial imbalances of the area have led to weak bank balance sheets, high unemployment and low growth.

The survey calls for an ambitious programme of reforms in product and labour markets, tax systems and education to rebalance the economies, restore competitiveness, boost growth and bring down stubbornly high levels of unemployment – particularly among the young. It argues many reforms would stimulate growth even in the short-term.

“Europe is stalling. It needs to get out of first gear and make growth the number one priority,” said Mr Gurría.

To boost economic activity at the EU level, a step change in the political commitment to the Single Market is needed. The OECD says national regulations, rigidities and poor implementation of existing EU rules are frequently holding back cross-border economic activity, growth and job creation, and are undermining the EU economy’s efficiency and competitiveness. Greater progress is needed in opening services markets.

The report calls for an annual review for each country of the obstacles to benefitting fully from a market of 500 million consumers.

Despite some 24 million unemployed people across Europe, most EU countries expect growing skill shortages in certain sectors. Labour mobility within Europe is low. The EU should encourage migration in order to help workers and firms to achieve the most productive job matches.

The two surveys highlight the need for Europe to make fundamental changes to financial supervision and regulation. Europe needs an effective system of crisis resolution and excessively close ties between domestic banks and governments need to be undone.

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Summary of Proposals from the OECD Reports

The EU needs to tackle the economic crisis and move to stronger, fairer and cleaner growth. The EU27 economy is in a serious downturn driven by the euro area sovereign debt crisis and on-going weaknesses in the wake of the financial crisis as set out in the Economic Survey of the Euro Area. Longer-term prospects are for growth to be weaker than over the past twenty years, influenced by population ageing and sluggish productivity gains. Structural weaknesses in labour and product markets contribute to low productivity and employment, as well as slow growth. Higher growth would help to make current debt levels more sustainable and create more space to deal with social and environmental challenges.

An ambitious programme of structural reforms is needed. Removing policy obstacles to growth requires a broad range of measures to raise productivity and employment rates. The EU has set itself ambitious targets with the Europe 2020 strategy. Many of the necessary reforms require changes in national policies and institutions. EU policy instruments can make a strong contribution to growth by creating the right conditions and incentives to support national reforms. Improving EU and co-ordination of national innovation policies, as well as continued opening of EU markets to trade, would also help support sustainable growth.

Strengthening the Single Market should be at the centre of EU policy action to boost growth. Trade integration is lower than within a large federal economy such as the United States and price differences across countries remain high. The EU’s internal market remains fragmented in terms of trade and financial integration contributing to keeping average firm size low in Europe which contribute to low productivity growth. The main obstacles are market regulations at national level and poor implementation of existing Single Market requirements.

The Commission sought to re-launch the Single Market project with the 2011 “Single Market Act” Communication. The twelve key legislative actions it identifies should be passed by the end of 2012 as planned. Greater political commitment is needed to the scope of the Single Market project, which could be encouraged by a stronger evidence base and more innovative approaches to decision-making. Implementation of the Single Market, including the Services Directive, should be improved and more actively enforced by the Commission and within countries. The framework conditions for cross-border business should be improved, including by addressing cross-border corporate and indirect tax issues, and stronger implementation of competition policies and consumer protection at the national level. Further integration efforts are required on a sectoral basis for government procurement and the network industries, including through developing cross-border regulators and investment in infrastructure.

Download underlying data in Excel

Labour market reforms would create more and better jobs. Large differences in labour market outcomes across EU countries suggest that performance could be improved. High unemployment, particularly among young people, and low labour mobility coexist with skill and labour shortages in other regions. Labour mobility within the EU can help to meet labour market shortages. However, mobility is hindered by barriers stemming from restrictive domestic labour market and pension policies, and by weak enforcement and implementation of legal rights under the Single Market. The recognition of professional qualifications across the EU should be further developed and the access to public sector jobs improved. Reforms at national level to pension systems and housing policies, which would be beneficial in their own right, are an opportunity to tackle disincentives to worker mobility.

EU migration policy needs to be further developed to better respond to shortages of workers. With demographic changes underway, most EU countries expect growing shortages of skilled labour or workers in specialised activities. This should be mostly dealt with by making better use of the existing population and providing them with the right skills. The EU should develop policies to ensure that migration responds more directly to labour market needs. The Blue Card should be used effectively to make it more attractive to high-skilled workers.

Download the full reports by clicking on the links below:

Overview of the Economic Survey of the Euro Area 

Overview of the Economic Survey of the European Union