10 December 2013

IMF/Lagarde: Outlook for Europe - Boosting growth and employment

Speaking at the EESC, Lagarde highlighted four key priorities to achieve growth and employment: improving credit flows; providing demand support; addressing debt burdens; and fostering job-friendly labour and product markets.

Europe seems to be turning the corner. Signs of growth have begun to emerge after several years of declining activity, and question marks about the viability of the monetary union have dissipated. There is a palpable sense of optimism in some quarters that the European crisis is over. But can a crisis really be over when 12 per cent of the labour force is without a job? First and perhaps most important, growth rates and output levels still remain well below where they should be. Second, growth has not been balanced across Europe and, therefore, may not be sustainable.

I will focus on the four key priorities we see to boost much-needed growth and employment:

(i) getting credit to flow better

The experience with financial crises has shown that a robust recovery cannot resume without decisively resolving the problems of an ailing financial sector. Europe has lagged somewhat behind other countries in this regard. It is critical that the flow of credit on reasonable terms to businesses and households be restored. That means restoring the health of weak banks by resolving the problem of bad loans on their books and making sure they are holding sufficient capital to be viable once again.

(ii) providing demand support

In the interim - while banks are being cleaned up and credit flows have yet to resume fully - public policy needs to do as much as it can to support demand. This means, the ECB needs to keep interest rates low and convince investors that it will do so for as long as is necessary. In contrast, government budgets have less scope to support growth, given large - and, in some cases, growing - debt. But there may be room to relax nominal budget deficit targets if growth forecasts fail to materialise.

(iii) addressing debt burdens

Growth will not pick up substantially unless households, corporates and sovereigns also get their finances in order. Reducing the debt burden will make borrowers more attractive in the eyes of lenders, and revive prospects for credit. It will free up income from the need to service debt toward supporting consumption and investment.

(iv) fostering job-friendly labour and product markets

The goal of reform is to break down barriers to growth. This means taking on entrenched positions and vested interests. It means bringing in more competition and flexibility to spark innovation, boost competitiveness, and enable resources to go where they are most productive. But it also means helping labour markets to support growth and adjustment.

Can this really work? Yes, reforms do pay off. There is growing evidence that significant reforms in product and services sectors can lead to sizeable productivity gains, which eventually creates room for higher wages and more job opportunities. Changes to the labour market need to be done in a manner that respects the legitimate rights of workers and pays due regard to income distribution. Solutions need to be devised through constructive dialogue with all stakeholders, including representatives of workers and business.

Beyond the labour market, big payoffs come from opening up product and service markets to competition to unleash new investment and new jobs. Lower regulatory hurdles for the entry and exit of firms and simpler tax systems, especially in network industries such as transportation and energy, can reduce the cost of business and help create jobs.

And there is also a financial dimension to long-term growth. It would be useful to develop alternative funding sources for small- and medium-sized enterprises, which are too reliant on bank financing at the moment. Recent proposals by the European Commission and the European Investment Bank to provide credit support to these enterprises through securitisation schemes hold promise.

Conclusion

Europe is on the right track. The recent improvement in growth and market sentiment is no accident. Looking back to the beginning of the crisis, it is remarkable how far Europe has come in pushing through reforms to tackle deep-seated obstacles to growth.

But there can be no letting up on reforms until growth has recovered sufficiently to arrest the rise in unemployment and debt. In the words of Madiba: “After climbing a great hill, one only finds that there are more hills to climb".

Although there are no quick fixes or easy answers, the IMF is dedicated to continuing to work with its European member countries, as well as with the European Commission and the ECB, to support the recovery and generate growth and jobs. We also remain committed to continuing to engage with all our partners—including all of you in this room—to address together Europe’s significant challenges.

Full speech

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