03 March 2014

IMF/Lagarde: Europe—The path to sustainable economic growth

Speaking at the Global Forum on Spain, Lagarde listed three priorities for Europe to attain a trajectory of strong and sustainable growth and job creation. She also looked at the priorities going forward for Spain.

Europe

First: strengthen the architecture of the monetary union. This means completing Banking Union and repairing bank balance sheets. Why is this so important? A more complete Banking Union is essential to reduce financial fragmentation and sever the link between banks and sovereigns that has been so destructive. While some important progress has been made in this area, there is more to do to help deliver timely and efficient resolution. An effective common backstop is also needed.

By the same token, restoring bank health is essential for credit and investment to recover. Here, the work by the ECB on the forthcoming asset quality review (AQR) and stress tests is ambitious but appropriate. It is a complicated exercise, so good communication and implementation are important.

The second priority is to sustain demand through monetary and fiscal policies. The ECB has already taken a number of strong measures to help the Euro Area. Even further accommodative policies and targeted measures are needed to address low, below-target inflation and achieve lasting growth and jobs.

In terms of the fiscal stance planned for the euro area for 2014, we believe it is broadly appropriate—but it must be complemented at the national level with credible medium-term frameworks, and appropriately paced consolidation.

The third priority is to continue advancing product and labor reforms, which can make a significant contribution in unleashing productivity and restoring competitiveness. Simpler tax systems, streamlined procedures for entry and exit of firms, and stronger national insolvency regimes—all of these can help release investment and increase employment.

In sum, the challenge now for European leaders is to accelerate reforms that would set the stage for a more robust monetary union—one that is able to sustain higher growth and more jobs.

Spain

The first area is labour market reforms—which need to be deepened so that they can work for all. Both firms and their workers need to be assured that they can reach appropriate agreements on working conditions and wages. This is essential for jobs to be protected and created.

Workers need to be directly supported as well—through enhanced skills training and job-search assistance for the unemployed. And by further cutting the tax costs of employing people, especially the low-paid, the unemployed would face fewer barriers in finding work.

The second area concerns debt—which needs to be lowered. For firms, this means helping insolvent but viable ones restructure their debts, so they can stay in business and continue to invest and hire people. For the government, it means continuing to reduce the fiscal deficit in a gradual, growth-friendly way—especially by relying more on indirect taxes.

The third and final area is the business environment—which needs to be strengthened. Making it easier for businesses to start up and grow will lift their capacity to create employment. Making domestic firms more competitive will also boost their employment and productivity. The government’s plans to liberalise professional services and promote free trade among Spain’s regions go very much in this direction.

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The imperative for both Spain and Europe today is to recommit to their ambitious reform agenda. It is our collective responsibility—not only to restore strong growth, but to put millions of people back to work.

Full speech

See also: Euro Area — “Deflation” Versus “Lowflation”

© International Monetary Fund