A transcript of the FT’s interview with Angel Gurría, secretary general of the Organisation for Economic Cooperation and Development. He speaks to Scheherazade Daneshkhu, Paris correspondent at the Financial Times, about structural reform and lower living standards in Europe.
Scheherazade Daneshkhu: Hello, I am Scheherazade Daneshkhu, Paris correspondent at the Financial Times. This is View From Europe in Paris, and with me is Mr Angel Gurría, secretary general of the Organisation for Economic Cooperation and Development. Mr Gurría , we are seeing the US heading towards recession and its banking system under severe strain. The OECD has been cutting its growth forecasts, how long do you think it will take before Europe feels the full force of this situation?
Angel Gurría: It is already feeling the force of the situation, except in this particular circumstance it is less vulnerable than the United States because the housing problem, the subprime issues originated in the US. But now what we have is a much more serious, more widespread problem, lack of confidence, the credit crunch, and the financial system, which is a conveyor belt through which the economy moves, is partially paralysed. That is also affecting Europe. So, we are also reducing our growth forecast for Europe, although probably you will see a much stronger slowdown, maybe even a recession in the United States. It will not be the case for Europe.
SD: We have seen action from the Fed, do you think policymakers have done enough to contain the crisis so far?
AG: The policymakers have been addressing what were the perceived needs of the moment. This started as a problem about the quality of assets. Right now the great story is a problem of funding, providing liquidity so that the institutions can continue to conduct their day to day business. The Fed, as well as the central banks of all the world, are providing large infusions of liquidity so that there will not be any lack of the funding for the organisations. And last but not least, they are taking care that large institutions which are critical to the system do not fail.
Northern Rock in the UK and Bear Sterns in the United States. So, the shareholders are losing, but the question is the system must be preserved. It’s a system first, the system second, the system third, I think they are doing it the right way.
SD: There has been a lot of debate about whether loose monetary policy is to blame for all this. In other words, that interest rates were cut too low for too long. The OECD has been asked by its shareholders to look at this issue. What are your preliminary conclusions?
AG: The problem is that there is a very paradoxical situation. We aim to have long periods of stability with low inflation and low interest rates. And then of course, when you have them, you blame them for the fact that today you had a bubble, and I suppose the answer is balance of these two elements. Nevertheless, today we have a problem, we have to face it. The short term problem will be solved by injecting more liquidity, by lowering interest rates and by protecting that large institutions do not fail. Therefore this is what you have to do. We will then worry about the medium and longer term impacts, and the more long term view of the markets.
SD: Is anyone to blame for this crisis? I mean, what are the lessons that you think you will be drawing from this to prevent repetition of a similar situation in the future?
AG: There are regulatory issues, there are supervisory issues, there are macro issues. That means it’s not just monetary policy, it’s also fiscal policy. They are also part of the solution. In the United States we have very drastic reduction of interest rates, but also a very large package of fiscal stimulus, which is worth 1 per cent of GDP. So you are working on both sides, and it’s an appropriate response for the short term, and it also has to intervene in the long term. Fiscal discipline, monetary discipline, and continued attention to the structural issues has to be a rule. We cannot lose sight of the ball, as they say in tennis. We really have to keep at it. Why? Because the countries that did are better prepared today to face the music, and the countries, you know, it’s never too late, the countries that start acting in consequence today, will be better prepared to face the problems in the next few years if there are.
SD: That’s right, so governments should exercise greater fiscal discipline, and you mentioned there regulation. Do you think that the nature of European regulation is too fragmented? Is it time for a pan European financial regulator?
AG: I think that the fact that today we do not have a unified single response to the problem is derived from the fact that we have different circumstances and different situations. Regulations tend to become more and more like each other, or at least consistent with each other, because the business of finance is more cross-border. In fact, the business of finance was probably the first globalised [sic] business that there ever was, and it continues to be. It’s leading the effort of globalisation; therefore regulations are going to continue to be – if not identical – more consistent with each other.
SD: A pan European regulator you think is not viable then, a single one?
AG: I don’t think that at this stage that is the most important issue. I think countries know what they have to do in terms of the macro management, and they even know what they have to do about regulatory issues. But just think about the fact that half of the mortgages that gave rise to the sub prime crisis were not issued by institutions that were under the regulation of the Federal Reserve Bank of the United States. We had only in California, you had tens of thousands of individual mortgage brokers that were going around knocking on doors. Each one of them was a little individual bank. They had no control because the State regulators had no capacity. So basically we have to think about these problems in a broader way, take a harder look at the endless creativity and innovation that has happened in the markets, and how that has translated into products. But today our main concern is to inject some sense of normalcy in the markets, because the financial system is at least partially clogged.
SD: Mr Gurría, you have just held a conference on structural reform here at the OECD in Paris, but is this the time to be worrying about reform, when shouldn’t European policymakers be thinking about how to contain the current financial crisis?
AG: We would be doing a normal mistake if, because there is a financial turbulence, we would be forgetting about the medium and long term structural reforms that are necessary to assure that we have sustainable medium and long term growth. In fact, if you think about those countries that were worrying about these things a few years ago, they are the countries that are facing the situation today better. It is also an early warning. Things can go wrong. We had gone through this extended period of growth and prosperity, and all of a sudden, in a few months, the whole situation turns around, the outlook is quite negative now. So, it means countries have to keep an eye on the fundamentals. If the pillars of the house are strong and they are solid, then what colour you paint the house and what the windows look like is not going to be so important. That house is going to stand the winds, even the tornados.
SD: Some people might say that in fact a time of crisis is quite a good time to implement reform because people understand the need for it.
AG: We are about reforms here at the OECD, and we are about making the world economy work better, and we find it very concerning that indeed countries seem to be able to undertake reforms only in times of crisis. We actually have this large project called the political economy of reforms precisely to help countries take reforms in the good times. If you think about it, it makes a lot of sense. If the good times and prosperous times, even when there is a little bit of bonanza, there are resources available to cushion the effect of reforms on those who may lose out in the reforms. There is more capacity to create the necessary compensatory measures. When you are in a crisis, the suffering and the pain is much greater.
SD: Now, living standards in Europe are a third lower than in the US, and that’s of course the reason why we need structural reform in Europe to increase productivity. But when will Europe catch up with the US?
AG: Whenever Europe decides. It is up to the Europeans, because the Europeans work less hours per week, less weeks per year, and they exit the job market earlier. Why is this? Well, because of the taxation system, and because of the social security system, and because there are many easier ways out of the job market, and a lack of incentives to stay in the work. We have a publication called Living Longer, Working Longer.
Now, we fixed these labour rules 34 years ago, and people now live 10 or 15 years longer than they used to in those days. They want to stay in the job, but also, if you retire at 55 or 60 or at 65, then why stay on the job? But if you are going to make more by waiting a few more years and you are in good health and in good shape, you are productive, and you are going to earn even more if you stay till you are 65 and you have received vocational training, lifelong learning, training on the job. You have skills that are appreciated in the market, then of course you are going to stay longer and you are going to have this role in society, you are going to contribute to the growth of your economy.
SD: But output per hour worked is also lower than in the US. Why is that and what needs to be done about that?
AG: That has to do with skills. It has to do with how much capital is put next to each of the workers, and that also has to do with education, and it has to do with research and development. These are all structural issues that take many years, but the sooner the better. It’s not that Europeans like to work less or they enjoy their vacations more. Americans enjoy their vacations as much as anybody else and vice versa. It’s a question of how we have set up the social protection networks in our countries. Paradoxically, too much protection for the people who already have a job will make it more difficult for new jobs to be created. I say it’s a paradox because we all want to protect the workers, but too much protection can actually act against entrants to the market because companies may find it too expensive to hire, and even more expensive to fire, and then what they do is don’t hire.
SD: Mr Gurría, we’ve heard from you a list of things that Europe needs to do in terms of structural reform. Can you identify the three most important structural reforms that Europe needs today?
AG: Labour market reform, product market reform, and education, education, education. That includes primary, secondary, tertiary education, and it includes the broader element of education which would be the research and development part.
SD: You have said in your recent report on the European Union that European countries represent best practice in many policy areas, and that the challenge is to standardise these across the EU. In which areas does Europe lead the world?
AG: You have countries that are successful in exports, and that’s because they have high technology. For example, France is one of the countries that export nuclear facilities. In Germany you have a famous country with the quality of its cars, for example. In Japan you have a country that is famous for the quality of their electronics, and now the Europeans are investing in Japan and vice versa.
So basically Europe is becoming a place where you are using something which is a comparative advantage of Europe, which is its people, its education, its capacity to absorb technology. But what happens? One of the problems that we see in Europe is precisely that its universities are falling short because they don’t have enough autonomy, they don’t have enough financial independence, and their curriculum and their governance are not autonomous enough from the central authorities. Vis-à-vis some other places where this is happening to a greater extent.
So, you take comparative advantages of things that happened in Europe where you can see the products are inundating. I mean, the Fins are doing this with the telecom and you have seen for example development of housing and infrastructures in places like Spain. But the question is, every country has one or two or three success stories which are very obvious, but now through the Lisbon or the renewed Lisbon mandate, obviously the question to become the centre of knowledge, the most modern economy in the world, has to be a part of the single market undertaking.
What is very promising in Europe, and what is so important, is that we are in the process of creating the single market, and that of course is going to become the largest market, and therefore one of the most promising not only for each one of their single national units, but also for the region as a whole.
SD: Nevertheless, this productivity gap with the US has existed since the 1970s. We don’t seem to have seen an improvement there. Isn’t the real problem one that Jean Claude Junker, prime minister of Luxemburg identified when he said that we all know what to do, the difficulty is to get re-elected after we’ve done it. Isn’t that the real difficulty, the political will isn’t there?
AG: I think that is a shorthand for the difficulties of leaders to do what they have to do, and what they know has to be done, and at the same time, as was said and it is said repeatedly, be re-elected, which means not lose the support of the voters. For that, you need education of the public, translation of what it means to do the reforms, and mostly what it means not to do the reforms. People have to be aware of the cost of inaction. The cost of action is short term; the benefit of action is long term. But there is a cost of inaction, and you have to put it into the equation, and I think people will understand. People act in their own best interests, and if you put it to them with enough clarity and transparency, they will support the reforms.
SD: You have said that is part of your drive to encourage reform in Europe. You will be naming and shaming countries, so this is your opportunity. Can you name the country that’s done the most, in your opinion, in Europe to implement structural reform, and the one that’s done the least?
AG: Well, we have seen some countries that have been very successful. Finland and Ireland for example are repeatedly named as cases of success. However, rather than pointing fingers at particular countries, which by the way we do in our publication Going for Growth, every year we put it out and we say hey, last year I recommended you to do five things. What have you done about it, and now let’s see what your challenges of today are. So, we do keep score of that.
SD: Is there a country that consistently lags?
AG: No, countries do not consistently lead or lag. They lead in some things, and they lag in some others, depending on their own culture, their own traditions, their own history and their own political setup, because sometimes you get governments that are very fragile with coalitions that are very carefully balanced, and where the priorities of each member of the coalition does not fit with the others, and therefore whatever you want to change makes a coalition be endangered, and therefore the governance of the country be endangered. In these cases, you basically go through the years without much being done.
So we have to find ways to create the consensus in these societies that reform is absolutely indispensable. The other thing that we do, I mean, when we go to a country, we don’t tell them what to do because they know very well what they should be doing. What we tell them mostly is what everybody else is doing so that they hurry up and don’t get complacent. If your only criterion is that you are better off than last year, that’s not good enough, because you may not be moving fast enough vis-à-vis what the rest of the countries are doing, therefore you may be losing ground without knowing.
SD: So you are optimistic about Europe and implementing structural reform and closing the productivity gap with the US?
AG: I am very optimistic about the future of Europe. I think Europe has it under their own control and in their own hands to be able to close the gap. I think it’s a very competitive world, and if they don’t, it would be at their own peril. We need to get the women back to work, or more women back to work, more young back to work, or in work even for the first time, and we need the older members of society to stay in work, not to seek exit too young. We need more of the migrants also to be well integrated in the job market, and we also need some of the handicapped to have better opportunities. We need more of Europe to work. This is what we need. We have too many people who are not working. Not that they are unemployed officially, they are simply not working. There has been an explosion in the lists of disabled and sickness in the social security systems. We have to pair those down. So, we need more people in Europe to work.
SD: Mr Gurria, thank you very much for joining us on FT.com.
AG: Thank you very much.