"We all own reforms" - speech by Eurogroup President Jeroen Dijsselbloem at the Peterson Institute, Washington, D.C. on 14 April 2016

Ladies and gentlemen,

In the days before our IMF meeting everything always becomes gloomy... I'm not saying that the IMF is to blame, their pointing out some risks. But, the economic recovery in the euro area is continuing and were on a third year of growth, it's becoming stronger. We are harnessing economic tailwinds and reaping the benefits of the decisive measures we took to strengthen the euro area economy. But we need to do more to maintain this growth momentum to increase potential growth, and we need to shift our focus from the short to the longer term. Over the past few years, the euro area has taken decisive action to reinforce its foundations of the emu. This has increased fiscal and financial stability and the euro area is now in better shape. Yet the crisis has inflicted long lasting scars on our economies. The measures we took to ensure financial and fiscal sustainability have been painful and affected the most vulnerable in our society. Ordinary families have not always shared equally in the benefits of economic growth. And that is also a theme at the moment in the US. And it is this inequality that causes a sense of insecurity and disaffection in society. But adjustments are unavoidable to maintain our high level of social welfare and reduce inequality. So it's time to look forward and redirect our gaze to policies that will make the economy more robust in the long run.

This means rethinking all the instruments in our policy toolkit:

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  First, expansionary monetary policy. It is much debated. It supports our economy in the short run, but the limitations are imminent and negative side effects are becoming stronger.
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  Second, fiscal policy needs to be geared towards a long-term strategy to improve the quality of public expenditures.
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  Third, we need to re-accelerate the engine of convergence, the convergence machine that Europa has been needs to be restored. and innovation by structurally reforming our economies.

Let me elaborate on these policies.

Monetary policy

Over the past few years, monetary policy has been highly accommodative in order to bring inflation towards its target level. The current low-interest-rate environment acts as a tailwind for our economy. It supports the economic recovery in the short run. But this effect is short-lived. It simply cannot foster a sustained recovery if underlying structural problems are not addressed. It only creates the conditions and allows time for governments to implement difficult structural measures. In due course a sensible strategy to phase out this policy has to be designed. We have to face the fact that expansionary monetary policy can have negative side-effects, like potential financial instability. If bubbles are created, monetary tailwind can turn into a windstorm and lead to boom-and-bust cycles. We should be well aware of the limits of monetary policy.

Let me now turn to fiscal policy.

Fiscal policy

I firmly believe that our fiscal policy needs to be geared towards a long-term strategy to improve the quality of public finances and to improve equality. The European Commission's recent forecast indicates a broadly neutral planned fiscal stance for the euro area as a whole in 2016. This stance reflects a balance between long-term fiscal sustainability and short-term macroeconomic stabilisation. Beyond this fiscal stance, there is a clear need to look at the composition of our expenditure. It is our common goal to foster durable growth. And by improving the composition of public finances, our social welfare state and equality can be addressed at the same time. Let me give you an example of how this can be done. The tax wedge on labour in the euro area was already relatively high before the crisis and it has even increased during the crisis. This is an obstacle to efforts to boost growth and create jobs. But we are making progress in this area. In the Eurogroup we've set a benchmark against which we measure our performances not the issue of the tax wedge on labour. This benchmarking exercise, together with sharing best practices, gives fresh impetus for further reforms and reductions in the tax burden on labour. Lowering the tax wedge not only fosters economic growth and employment. If designed well it also reduces income inequality. On the expenditure side, there is a need to look at public investment, and education in particular. Instead of increasing the money we spent on education, during the crisis many countries in Europa cut back on this part of their budget. Why is education so important? Because inclusive growth is key for creating innovative economies that lead to sustained prosperity. And education is in turn essential for stimulating income equality and social mobility. In the past few years inequality has risen in OECD countries. This is a worrying trend, as high levels of inequality can lead to lower social mobility. Especially for the bottom 40 per cent of families on the lowest incomes. People that have less access to high quality education. Analysis shows us that both the level of spending on education and the quality of education itself can be improved. The picture varies between euro area countries, but the euro area as a whole has not reached the efficiency frontier yet - and so there is ample room for improvement.

Structural reforms

Improving the quality of public finances is only part of the story. The key to fostering sustainable and inclusive growth is structural reform. In recent years we've made progress. In the European Union we've established a banking union and started working on a capital markets union. In various countries reforms have boosted productivity and competitiveness. For example, the labour market in Spain was rigorously reformed in 2012, resulting in quite a strong growth in jobs the following years. Product markets in Portugal and Italy have been reformed, opening up various sectors and stimulating economic growth in both countries. And actually Greece , too, has implemented some important product market reforms, such as measures that make it easier to start a new business. These reform efforts propelled Greece from the 109th spot in the World Bank Doing Business Index in 2010 to 60th place in 2015. This has laid the foundations for further economic growth. At the same time, support for structural reforms is fading. Years of austerity have affected the everyday lives of families and individuals. The measures are tough and the benefits are not always clearly visible, not in the short run. And the strength of support is being further sapped by uncertainty stemming from migration and the threat of terrorism. Structural reforms are becoming more and more challenging. But we simply have to do more. With an ageing population and low productivity gains over the last decade, it's essential that we further encourage potential growth by means of policies that maximise productivity gains. Policies to further integrate our internal markets, and expand trade opportunities. Policies that strengthen our economic structure by making labour markets function better and making taxes less distortive. But while these policies are essential if we are to maintain and increase our level of social welfare, they are often perceived as a threat to our welfare system. Insecurity about further reforms is understandable. People have not profited equally from economic growth in the past. Disposable income increased, but less than GDP growth per capita. This is true for all income categories but mostly for the lowest incomes. This is due to an increasing capital-to-income ratio combined with the hoarding of profits. Companies and wealthy investors have gained more. That is also why the Panama papers have triggered such an outcry. Some measures taken during the crisis only served to heighten this effect. Banks and their investors, for instance, were supported at the taxpayer's expense during the banks bail-outs. This was necessary to save our economies in the short term, but did not correct problematic incentives in the sector. In the long-term policy we've devised, we've succeeded in turning this situation around. For example, by introducing bail-in rules for the banking sector. Investors and risk-takers will bear any costs in the future, rather than taxpayers. They take the profits in good times and should carry the losses in bad times. A sound economic and fair principle. And there are other ways forward, other ways we can support sustainable growth and reduce inequality.

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  As I've said, education is key in driving growth and redressing inequality.
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  Also, tax reforms can contribute: we can move away from tax on labour to less distortive taxes.
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  And we have to work on reforming our product markets. In a way that opens up closed oligopolies. Creating opportunities for outsiders. Thus introducing innovations much faster and stimulate job growth.

Conclusion

Let me make a few final remarks. After the economic crisis the groundwork was laid for a stronger economy. At the same time, we are still not resilient enough for the next crisis. If it may come, and when it may come. We need to continue making our economies stronger to maintain our high level of social welfare and equality. Expansionary monetary policy has played its part. The same goes for expansionary fiscal policies. Now it's time to shift our focus to policies that foster long-term and sustainable growth, by increasing the quality of public finances and carrying out well designed structural reforms. In the past people have not always benefited equally from economic growth, and support for structural reforms has for that reason fallen. Our task, then, is to devise policies that foster economic growth and reduce inequality. Social fairness and opportunities for all should again be at the top of our agenda.

Thank you.