Europe faces ‘crying need’ to loosen purse strings, warns OECD

16/7/2019

By Martin Sandbu

EU not adequately prepared for a potential shock and must boost growth

Europe is not well enough prepared for an economic shock and faces a “crying need” to loosen the public purse strings to stimulate growth, the OECD’s chief economist has warned.

Laurence Boone, who joined the Paris-based organisation a year ago, told the FT there was “a big question mark” over Europe’s ability to give fiscal support to the economy, which has been weakened by trade tensions.

But the OECD was “seeing very little” fiscal support in the eurozone, Ms Boone said — “only 0.3 per cent of GDP, when we have revised growth down much more significantly than that”.

“The national governments which have fiscal space and a crying need for public investment are not doing it enough, that’s for sure,” she said. “That means the northern European countries including Germany and the Netherlands.”

The prospect of an economic shock is a real one, Ms Boone said, warning that Europe had not seen the worst of the trade war yet. Tensions have “so far . . . been directed towards Mexico and Canada and moved to China”, she said, “but they will come to the EU, probably at the end of the summer”.

A former adviser to former French president François Hollande, Ms Boone’s tenure at the OECD has coincided with a sharp slowdown in trade, investment and industrial growth worldwide, with Germany’s export-dependent industry particularly exposed.

An added risk for Europe, Ms Boone said, was China’s attempt “to engineer a soft landing [by controlling its growth slowdown] given that it is a massive export destination for Europe”. Slower Chinese growth and “the amount of debt that is piling up in the economy” risked giving rise to financial instability, she warned.

In the event of a shock to aggregate demand, “we need fiscal support”, Ms Boone said. While she expressed “no doubt” that the European Central Bank could do more, “monetary policy is really, really stretched . . . they cannot address a shock by themselves”.

According to Ms Boone, a fiscal stimulus would not just boost demand: “A political commitment to co-ordinated action by eurozone governments would cost less for individual countries and send markets a signal that they are united.”

This would help reduce business uncertainty, which Ms Boone said was in part due to political fragmentation.

Lining up investments in green energy was “an obvious theme” for fiscal stimulus, Ms Boone said. “We are stopping nuclear plants, we want to close down coal plants but we are not investing into the energy of tomorrow in a similar-sized effort setting up a working group that would identify the projects — where and how — would be fantastic.”

Structural reforms, too, would make the economy more resilient to a shock by giving business greater certainty, Ms Boone said. On Friday the OECD published its annual growth report, in which it called for structural reforms including better education policy and shifting tax burdens from income to property.

Ms Boone cited French president Emmanuel Macron’s pursuit of liberalising reforms: “This continuity, which is rare in the French political landscape, is a very positive sign for businesses, in that they know the environment they work in is very stable.”

Ms Boone called on the EU to speed up “stalled” plans for unified banking and capital markets, and to “be firm” in global economic rivalries.

Competition policy should not be restricted to companies within Europe’s territory, Ms Boone suggested. Instead the EU should examine “who should invest in Europe and who should not” and “also whether one firm not on your territory is actually accessing your territory, selling goods and services in a way that your competition authority cannot tackle it”.

“We have to rethink competition and trade policy together to make Europe stronger and a partner . . . equal in weight and strength” to China and the US, she said.

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