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Observers should understand that the process of restructuring and reform entails certain economic consequences - namely a period of current account surpluses. I see this as part of a healthy adjustment that will help the euro area to play a constructive role in global demand in the future.
Learning the lessons of Japan
A key lesson we have learnt from the Japanese experience is the importance of banking sector repair and structural reform. On both fronts, the euro area is now making progress. First, substantial bank balance sheet repair has taken place since 2008. By October this year banks had raised around €225 billion of fresh capital and a further €275 billion has been injected by governments – equivalent in total to more than 5 per cent of euro area GDP. As a result, the median Tier 1 capital ratio of euro area banks currently stands above 12 per cent. Looking further ahead, next year we will have a new European supervisor in place and the year after a new resolution framework and potentially a single resolution mechanism. This will allow for tougher supervision on weak banks, and ensure that non-viable banks can be wound down safely and effectively.
Thanks to early labour market reforms, according to the OECD index labour market institutions in Portugal, Spain and Greece are now more flexible than those in France, Germany and the Netherlands. Reforms to increase competition and improve the business environment have been slower, but in several countries we are now seeing movement in the right direction. Governments have improved regulatory frameworks, reformed judicial systems, removed protections from regulated professions and raised the quality of public administration.
The economic consequences of adjustment
As the public sector is consolidating, and the private sector is deleveraging and rebalancing towards exports, the external sector has to go into surplus for a period of time. The euro area current account surplus is expected to rise above 2 per cent this year. There have been some claims recently that this constitutes a "beggar-thy-neighbour" approach as Europe is importing global demand. This is a very hort-term view. Europe’s contribution to global demand in the years before the crisis came largely through governments, firms and households taking on too much debt. This had to change. The ongoing process of reform and restructuring will allow Europe to support global demand in the future – but in a sustainable and stable way. I would add that ensuring balanced growth between major economies would be greatly helped by efforts to accelerate regional free trade agreements, in particular the Transatlantic Trade and Investment Partnership (TTIP) between Europe and the US.
Looking within the euro area, the main focus has recently been on the German current account surplus. There are various negative claims made about this, for instance that German competitiveness hinders intra-euro area adjustment and the return of stressed countries to growth. I think we need a more nuanced view:
The solution to rebalancing is for other countries to become more competitive, not for Germany to become less so. We need to maximise competitive pressures within Europe to achieve higher efficiency, innovation and productivity growth. And thanks to the structural reforms that are taking place, this is actually what we are seeing. For example, since 2011 Portugal’s export market share has increased by 11 percentage points and Spain’s by 8 percentage points.
At the same time, I see a vital need for new investment in Germany. Investment is still around 1 percentage point of GDP lower than it was in 2007, and in that year Germany already had the lowest investment ratio in the euro area. To raise investment we need structural reforms in Germany as well – for instance to liberalise the services sector – thus creating a virtuous circle of higher potential growth and better investment opportunities. And by definition, if more German savings were invested at home, the current account surplus would also fall...
Looking forward to 2014, the key challenge is to stay on this path to create the fastest possible rebound in growth and job creation. This entails building a genuine Banking Union with a strong single resolution mechanism; it entails finding new ways to support structural reform implementation, for instance through so-called reform contracts; and it entails deepening our political union to ensure full legitimacy in the eyes of citizens. All this requires effort and determination to achieve – but it is well within our reach.