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European Commission - Speech - [Check Against Delivery]

Speech by Commissioner Moscovici: "Structural reforms 2.0: for a stronger and more inclusive recovery"

Brussels, 9 June 2016

Ladies and gentlemen,

Europe is emerging from an economic crisis of unprecedented proportions, one which laid bare the need for deep reforms and a comprehensive policy approach. I am delighted to have this opportunity to share with you my views on why structural reforms are so essential for fostering growth and jobs in Europe – and on the type of reforms that I believe we now need to prioritise.

To effectively tackle the risk of persistent low growth, near-zero inflation and high unemployment, we need to combine structural, fiscal, and monetary policies, in an integrated and growth-friendly approach. This means, in my view, tackling both the demand and supply sides of our economies, because the impact of the crisis has been both cyclical and structural. In other words: the crisis hasn’t only weakened aggregate demand; it has also lowered our potential for economic growth. That is why supply-side, structural reforms have been, and remain, a key part of Europe's response to the crisis.

I know I do not have to convince this audience of how important structural reforms are to strengthen the fundamentals of our economies, to tackle barriers to growth and to facilitate adjustment to shocks. But the fact is that for many Europeans, structural reforms have too often become a by-word for painful adjustment, for punishment, for constraint, and the reforms, in the eyes of many people in Europe does not read progress any more. This is particularly the case in sectors and countries whose competitiveness had declined severely in the run-up to the crisis.

In the past, structural reforms have tended to focus on regaining price competitiveness, which in practice has meant wage moderation if not wage cuts. So it is no wonder then that structural reforms and internal devaluation are often unpopular. However, with the main adjustments now behind us, we can and must move beyond internal devaluation to a broader debate on competitiveness policy in the euro area.

And yet, there are also other reasons why structural reforms are sometimes unpopular. In some constituencies, it is because they tackle traditionally protected sectors with strong vested interests. In such cases, the costs of structural reforms are clearly defined and visible in the short term, whereas their benefits, though they might be significant, are felt less intensely, by a broader population, and over a longer period of time.

These political economy considerations make the adoption and implementation of this type of structural reforms a very difficult task to some of the population. But we need to stand firm. Excessive, unwarranted rents are economically and socially undesirable and should be tackled. They raise prices. They restrain innovation and growth. And they pass on the burden of adjustment to others – usually the more vulnerable members of society. They are unfair.

In reality, the term ‘structural reforms’ has become shorthand for a broad and diverse range of policy actions. Some of these are more likely to generate opposition than others. But this does not always have to be the case. Yes, structural reforms can mean job flexibility and wage moderation – but they can also be about vocational training and skills enhancement. Yes, structural reforms can mean more competition and lower profit margins in the short term – but they can also remove barriers to growth and innovation for companies in the long term.

In general, structural reforms linked to human capital improvements and innovation tend to be better accepted as they are perceived as being more fair. But reforms that improve the adaptability and reactiveness of markets also have a positive social dimension. Rigid markets hinder employment creation. And that broadens the gap between the employed and the unemployed part of the population. Reforms that tackle long-term unemployment minimise the risk of social exclusion and of lost potential. The best and more effective way to share the gains from economic recovery is by increasing employment. Product market reforms also help to unlock investment, supporting job creation and social inclusion. And consumers also stand to gain from well-functioning markets, through better quality products, lower prices and greater choice. There is a virtuous cycle.

It is up to us as policy makers to better communicate to European citizens, firms and consumers the benefits that ‘structural reforms’ can bring. To make clear that structural reforms are about much more than internal devaluation. And today we have an opportunity to do that. Now that the acute phase of the economic crisis is behind us, it is the right time to take stock, evaluate the legacy of the crisis and prepare for the future by designing what I like to call "structural reforms 2.0".

The key word of structural reforms 2.0 is productivity. Why? Because higher productivity leads to higher living standards and greater prosperity. Weak productivity performance has been at the heart of the long-term decline in potential output growth in the EU and other advanced economies. As our populations age and our labour forces grow more slowly, output growth will increasingly depend on our ability to improve productivity and investment.

The main causes behind the productivity slowdown are still debated, as you know as well as me, maybe even better. There are many theories and the answer is probably a combination of all of them. For me, in today's Europe, productivity is mainly about human capital. And that means education, in its broadest sense: primary education, university education which directly impacts the level of R&D, and vocational training of workers, the unemployed and migrants. This is the way to succeed, in for example reforming the labour markets.

To tackle our productivity problem we must invest more in knowledge-based capital and take greater advantage of the latest technological innovations. Of course, we must complement this with competition-enhancing structural reforms to improve how efficiently we allocate resources. This is particularly relevant for our economic resilience and the functioning of the EMU. But it is time for us to shift the focus towards more forward-looking, people-centric measures that will boost productivity in a holistic way. I want reform to mean progress and I want people in Europe to be capable of taking ownership of reforms, which is obviously not the case now.

Alongside human capital, flexicurity is another pillar of the new generation of structural reforms. This is about protecting workers by investing in their training and retraining and designing active labour-market policies that provide tailored support for workers to help them transition out of jobs that are no longer sustainable. It is about worker security, not job security, not only job security. Of course, for this to work we need to ensure that quality education, worker mobility and re-skilling are a reality.

And because we are in a context of budgetary constraints, which is not yet totally over, we need to ensure the quality of public expenditure. We have to ensure the quantity as well, but now will focus on the quality. Every euro spent must be spent as carefully as possible, and against debt. To do this, three practices must systematically be applied: experimentation, evaluation, and simplification.

We can do more to improve how we evaluate the quality of public expenditure. I strongly support a systematic evaluation of public policies, and of structural reforms in particular. A particular reform policy may work or it may not but we need to know why. Despite recent efforts, by the Commission and other institutions such as the OECD, the quality of the debate on that point in our Member States is still poor and too often ideological rather than fact-based. This is why evaluation is crucial.

More structured, systematic and independent analyses of structural reforms at the national level would improve policy decisions. The national competitiveness authorities proposed in the Five Presidents' Report, could potentially play an important role on this front: that is what they are made for. What I want to emphasise is that the foundation stone of structural reforms 2.0 should be for all countries to put in place mechanisms for the systematic and independent analysis and assessment of structural reforms.

Let me conclude by telling you in practical terms how I see the way forward for structural reforms and the role of the European Commission. The Commission has made carefully considered proposals to bring down barriers and to expand the single market. Only last week, we adopted proposals to enhance the digital single market, which will bring clear benefits to consumers and firms. We have also narrowed the scope of our country-specific recommendations - we can even do better, I am confident in that, which are the Commission’s main vehicle for promoting structural reforms in Member States.

But, and this is my final word, the implementation of these recommendations is still very uneven. They need to get more traction. The national competitiveness authorities envisaged in the Five Presidents' Report could become a perfect channel to build awareness about both the economic and social benefits of sound structural reforms, and to foster their implementation. Yes, we are in new period of recovery and we certainly need to come to an end with the first generation of structural reforms. Now we need to pave the way for a time when people will be able to feel proud and happy of the reforms led by Europe. Now is a time for structural reforms generation 2.0.

Thank you.

SPEECH/16/2124


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