Andreas Dombret: Statement at the OECD Working Party 3-Meeting
Statement by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the OECD Working Party 3-Meeting, Paris, 14 January 2014.
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Dear colleagues,
Thank you for giving me the opportunity to open the first round of our working group's
meeting. Let me begin by wishing you a Happy New Year. In my remarks I will focus on the
major OECD economies and address three issues.
• First, the current economic situation, taking into account the major economic
developments in 2013. Here, I can be brief thanks to the excellent background
papers the secretariat provided.
• Second, possible risks to the recovery stemming from financial market
developments.
• And third, policy requirements to keep up the current growth momentum.
In 2013, recovery was underway in the majority of OECD economies - including the euro
area as a whole. This positive momentum has been confirmed by the latest OECD leading
indicators that were published yesterday. However, growth is still low when compared to the
levels achieved before the global financial crisis. In addition, the recovery has been
remarkably uneven.
The US comes closest to a self-sustaining expansion. Here, I would like to emphasize the
substantial progress in household deleveraging and the successful correction in the housing
markets. Both factors will help future growth to be grounded on sound fundamentals. But the
Fed's caution shows that considerable economic slack probably remains.
In the euro area, the recovery is still nascent, muted and uneven. However, a number of
crisis countries have left their recessions behind. Rebalancing is underway. According to the
recent OECD Economic Outlook, all crisis countries are expected to achieve a current
account surplus in 2014. This would equal an average improvement of more than 10
percentage points of GDP compared to 2008. Thus, competitiveness-enhancing reforms are
beginning to bear fruit and need to be continued.
Germany is part of the rebalancing equation. Since 2007, the intra euro-area German current
account surplus has continuously shrunk from 4 1⁄2-% of GDP to 2 1⁄4-% of GDP. This
adjustment has been driven by rising imports. Domestic absorption has become a more
important driver of economic growth. As business investment is projected to rebound in 2014
and 2015, the rebalancing should proceed.
Japan is a special case, given its long-lasting deflation. Here also, the end-2012 recession
gave way to a remarkable expansion in 2013. Furthermore, against the backdrop of
significant monetary easing there are indications that deflation finally may come to an end.
In a nutshell: the advanced economies have entered 2014 in better shape than they were
one year ago. But they are far from being in good shape.
The economic improvements were backed by the extraordinary low policy rates and
unconventional measures by central banks. Insofar monetary policy can be regarded as
successful. But it came at a price. Monetary policy is in uncharted territory. Questions came
up whether further monetary easing could have diminishing or even negative returns.
Against this background, sizeable downward risks and vulnerabilities continue to exist. In
addition to those mentioned in the background note, I will briefly focus on the fragilities of the
recovery in the context of financial market developments.
In 2013 there was only one way for most asset prices to go: upward. The EuroStoxx 50
increased by 18%, the FTSE 100 by 14%, the Dow Jones by 28%, and the Nikkei
skyrocketed even by 57%. Funding conditions for troubled sovereigns and banks eased
significantly. Market volatility decreased, too.
After years of risk aversion, sentiment switched to a "risk on" mode. 2013 was a very good
year for financial investors. However, I look at these developments with some unease.
Indeed, catching-up dynamics after excessive pessimism up to the summer of 2012 can
explain some of the asset price increases. Yet abundant global liquidity in addition to abating
risks and improving fundamentals has certainly played a role, too. One might even argue that
the influence of ultra-loose monetary policies has begun to be stronger on financial asset
prices than on real activity.
The contrast between buoyant financial markets, on the one hand, and still limited
improvements in economic fundamentals and activity, on the other, is apparent. The low
volatility we have observed over the last quarters might even have blurred market
participants' risk perception.
Did financial markets enter a new phase of "irrational exuberance"? Such a verdict is
certainly debatable. But at least financial markets have anticipated significant further
improvements of economic fundamentals and prospects.
This creates vast room for negative confidence shocks. The global financial crisis taught us
how detrimental contagion and a negative feedback loop between the financial markets and
the real economy can be. Therefore policy makers should be ambitious to deliver. Fighting
reform fatigue will be the best insurance against the downside risks.
Building on the progress made in 2013, we will need to lay the groundwork for a sustained
recovery in 2014. Economic policies should be geared toward restoring the role of the private
sector in the growth process. Policies should foster productivity gains, increased employment
and higher investment in the real sector. The public sector must be prepared for leaving the
driver's seat of the economic developments.
As regards monetary policy issues, we will discuss them in detail this afternoon. So I will just
make one remark. Should the Fed and the BoE exit from their current extraordinary loose
monetary policy stance earlier than other major central banks this would constitute a
challenge for communication and expectation management. However, in contrast to a
widespread view, a timely exit should be primarily seen as a welcome step towards
normalization and not as a "risk".
Reducing the role of the public sector also translates into tackling its high debt levels. This
remains a key challenge. Consequently, policy makers need to use the current period of
relative calm and make progress in bringing down public debt ratios. In the euro area, the
trajectory of public debt has not been reversed yet. In Japan, the required adjustment
remains particularly challenging, while the US would benefit from long-term financial reforms.
Banking sector policies must ensure that the sector is well-capitalized and that balance
sheets are strong. This is especially important for the euro area's bank-based financial
system. With the first steps towards a banking union and the recapitalization measures
already implemented, a lot has been done. However, with regard to many European banks
there are still signs that markets do not believe that banks' non-performing assets have been
cleaned up thoroughly. The ECB's upcoming assessment is both a chance to create
transparency about banks' asset quality and to establish the basis for adequate
capitalization. It will contribute to enabling banks to once again perform their role as
financiers of the real economy.
However, in economic policy there is no silver bullet. I caution against the view that a
banking union can solve the crisis the euro area is currently facing. If successfully completed,
it will be milestone for European financial integration. But it cannot serve as a substitute for
further structural reform and fiscal adjustment. Financial and structural reforms need to give
incentives for increased private sector investment. In some euro-area economies we will
need to reduce the excessive debt burden in the non-financial sector and to improve
competitiveness, building on last year's achievements.
In Japan it is crucial to implement the third arrow of "Abenomics" as the IMF emphasized in
its latest World Economic Outlook. China, which we will discuss in more detail over lunch,
has embarked on a profound reform of the economic and social model in order to create the
foundation for private sector-led growth in the future.
So I welcome the emphasis the secretariat's background note places on investment. The
economic situation in the major OECD economies may differ significantly. However, with the
notable exception of Canada, lackluster investment has been a common feature. More of the
same of ultra-loose monetary policy will be no solution to this problem. The agenda of the
Australian G20 presidency and ongoing work on the OECD level leave me confident that the
work on fostering investment will continue during the year.
Let me conclude by posing three questions:
• First, will private sector investment pick up this year and take over a central role in
sustaining growth?
• Second, will monetary policy - where the required conditions are met - manage an
orderly exit from its extraordinary measures?
• Third, will fiscal consolidation and structural policies be continued in a challenging
political environment?
If we respond with "Yes" to these three questions at our meeting in January 2015, then 2014
will later be considered as a good year - the fourth condition of course being that Germany
wins the World Soccer Championship.
Thank you for your attention.
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