Tale/innlegg | Dato: 20.11.2012
Finansråd Svein Gjedrem holdt sist uke et av hovedinnleggene under møtet i OECDs Economic Policy Committee (EPC).
Innlegget om utfordringene for euroområdet presenteres i sin helhet her:
Lead statement on euro area issues:
- Thank you for inviting me to speak in this session. Also thanks to the OECD secretariat for excellent background papers. They identify, in my view, the most important challenges and set the tone for our discussion today.
- I would like to divide my comments equally between the immediate policy challenges and those related to the future institutional framework of the euro area.
- The euro area has made much progress in the last months. Financial market conditions have improved, and the risk of a liquidity squeeze seems to be reduced, mainly thanks to the credible backstops established by the entry-into-force of the European Stability Mechanism, the ESM, and the OMT from the European Central Bank. Fiscal consolidation is proceeding fairly well, in contrast to the situation in some other large advanced economies. Structural reform has gained momentum in peripheral countries. Rebalancing is gradually taking place, within and between countries. Work is underway to address deficiencies in the euro area architecture. Authorities in Frankfurt, Brussels and capitals should be commended for their hard work, which seems to be bearing fruits.
- But there are many challenges ahead. Financial flows and the pass-through of monetary policy remain seriously impaired within the monetary union. Output is on a declining path, and estimates for 2013 have been revised downwards since our last meeting half a year ago. In many countries, new growth is sorely needed to bring public finances back on a sustainable path and to avoid cyclical unemployment turning structural.
- On monetary and fiscal policy, I generally share the assessments made by OECD secretariat. Inflation is moderate and expectations well-anchored, but capacity utilization in the euro area is low. The ECB should therefore continue to use its creativity to support the economy, within its mandate of price stability. Fiscal policy must head towards a sustainable path. At the same time, it would be a strong advantage if automatic stabilizers could be allowed to work in the case of unexpected budgetary shortfalls. Failing to meet nominal targets is better than setting off a destructive spiral of negative demand. But there are caveats: Deficits must be financed without further undermining confidence. It is also difficult to correctly estimate underlying tax revenue, given the uncertainty about how much production capacity has been lost as a result of the crisis.
- Structural reform is imperative. If we can improve the way our economies work, it will translate into higher growth and ease the debt burdens. Reforms can also help reduce imbalances and improve competitiveness in deficit countries along two routes. They can improve productivity. Reforms can also support a more flexible economy that facilitates the reallocation of resources into tradable sectors.
- [Reforms of product markets and labor markets should go hand in hand. We all know that labor markets should be flexible, that we should avoid unnecessary segmentation, and that we should protect workers instead of industries, firms or jobs. We know that over-regulated professions may create rents for insiders, but harm the overall economy. Overcoming vested interests and political turmoil is hard. But if this is not the time to do it, when is?]
- OECD's Going for growth shows that there has been some progress on structural reform in the southern euro area countries. A similar picture emerges from The World Bank's Doing Business Indicator.
- But the pace may be insufficient, even if the direction is right. When I look at the regulations in some of the countries under market pressure, there is clearly the need to do more. Labor markets seem far too rigid also after reforms. Severance pay is one example. It has been cut, but remains high. We have to ask ourselves: Can countries with very high unemployment afford to delay?
- Improving the sentiments of investors, business leaders and households is a key to advancing the economic recovery. To gain credibility, sound and timely implementation of agreed reforms is just as important as agreeing to new proposals. Financial conditions have improved in recent months, but the new equilibrium in government bond markets might be unstable. Even a small increase in uncertainty might be enough to spark substantially higher interest rates for the countries under market pressure. It is reasonable to ask whether the current equilibrium would be more stable if the OMT was activated, and investors actually saw money on the table.
- Another way to improve confidence is to set out a credible plan for the future institutional framework for the euro area. The current crisis represents a historic window to take action. However, the plethora of initiatives underway must be assessed against sound economic principles and with a view for the long term.
- A banking union seems sensible in a currency area with an integrated financial market. If successful, it can help break the negative feedback loop between national sovereigns and banks. A single supervisory mechanism for euro area banks might also reduce the risk that vulnerable banks are given favorable treatment by national authorities.
- But, as noted by the secretariat, a true banking union must include supervision, a resolution framework, deposit guarantees and the resources to back up failing banks. But the costs to taxpayers should be kept as low as possible. Therefore, the resolution regime should ensure that holders of shares, subordinated loans and possibly senior bonds all must bear losses if a bank fails. This will also reduce the fiscal risks to the euro area as a whole.
- When the banking union is set up, it would be appropriate to reconsider the tradition in continental Europe with thinly capitalized banks. . I would like to bring your attention to a box in the addendum to the general assessment paper, with a very strange name, box "4 bis". For the euro area banks, it illustrates that the level of capital – as a share of total assets not weighted by risk – simply is too low.
- Also, it might be appropriate to rethink the principles for cross-border banking for countries within the common market, but outside the banking union. A transparent and sound approach would be to limit reliance on branches. To get there, host countries with national supervision could be given the authority to require that operating branches become daughters subject to national supervision.
- Let me now move on to the framework for fiscal policy, and stabilization policy more in general. As we all know, a framework is being built to prevent imbalances and improve fiscal discipline and coordination in the euro area and the EU. This is an important endeavor, and if successful, it will reduce the risk of future macroeconomic imbalances. The remaining part of the job is to ensure consistent and sound implementation over time.
- Even with this framework in place, I have an uneasy feeling about the macroeconomic buffers that would be available to deal with an asymmetric shock to the monetary union. A comparison to the Scandinavian countries – Denmark, Sweden and Norway – might be instructive. Our macroeconomic policy has several cushions, including a fiscal policy with buffers. The euro area states will have little room for maneuver in years to come, and the common EU budget is too small to make a difference. With the exception of Denmark, the Scandinavian countries have flexible exchange rates. All three countries have stable inflation expectations, some macro-flexibility in wage formation and well-capitalized financial institutions. In the euro area, the exchange rate is fixed, wages fairly rigid and bank capital low in many countries, and labor mobility is likely to remain too low to offset the effects of an asymmetric shock. The system is vulnerable. A positive shock is likely to translate into higher wages. A negative shock might start a long period of high unemployment.
- This raises the need to consider other macroeconomic buffers, including fiscal transfer mechanisms. Minimum, common unemployment insurance for the euro area might be an option. This could be an important step from mere fiscal coordination towards fiscal union and risk sharing.
Let me sum up:
- In my view, authorities in the euro area are correct in addressing both the short and the long term challenges. With high unemployment, sluggish growth and mounting debt – there is no time to lose.
- Timely implementation of agreed reforms should be an immediate priority. This will build confidence. Be aware of the risk of waiting too long to activate the OMT.
- When establishing a banking union, it must be done right. The resolution of banks should be organized and financed at the euro area level.
- In due time, stronger economic buffers should be put in place. This includes more flexible labor markets, as well as a fiscal transfer mechanism for the euro area.
Thank you, chairman.