Sabine Lautenschläger: Fostering global growth
Speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European
Central Bank, at the panel during the G30 International Banking Seminar, Lima, 11 October
2015.
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I would like to thank Jacob and Jean-Claude for inviting me to participate in this panel. You will
not be surprised that I will focus on the growth challenge faced by the euro area countries in
my intervention.
Let me stress from the outset that I believe that the euro area can make a much stronger
contribution to global growth than it has done so far. But for this to happen, we need a stronger
reform impetus in many euro area countries.
To substantiate this claim, I would like to address two questions: first, where do we stand on
growth and reforms in the euro area? And second, which structural reforms are still needed to
support stronger and sustainable growth?
Where do we stand on growth and reforms in the euro area?
Growth has been recovering in the euro area, albeit at a modest pace.
Output growth has been gathering pace throughout 2014 and in the first half of 2015 and
employment has been increasing.
However, developments are still uneven across member countries and it is not clear that the
recovery can be sustained in the medium term.
Our main concern is that across euro area countries domestic vulnerabilities are still very large,
which implies a limited ability to withstand adverse external shocks and to kick start a new
phase of sustainable growth. The vulnerabilities of many euro area countries are related to the
high stock of debt, both public and private, and to a number of structural rigidities and
institutional bottlenecks that prevent an optimal allocation of resources across factors of
production, and thus limit total factor productivity growth.
The current environment not only urgently calls for the implementation of structural reforms,
but also provides the right conditions for their implementation. With our monetary policy, the
ECB is greatly contributing to an environment favourable to implementing structural reforms:
our accommodative monetary policy stance helps countries to gain time, time to implement the
necessary measures to increase resilience and thus support sustainable growth.
However, there is only a limited role for demand-side policies. Fiscal space is limited and
monetary policy cannot carry the burden of the adjustment alone. For the euro area to become
more resilient and sustain stronger growth, national governments need to bring about further
structural change1.
Work in this regard has already started, and the reform wave of the countries hardest hit by
the crisis is showing some initial results, such as a GDP recovery related to comprehensive
labour market reforms. Other reforms, mainly on product markets, are expected to bring about
GDP gains, but they need to be implemented in full.
However, since 2013, very low financing costs for sovereigns and rising share prices have
eased the pressure to implement more difficult policies2. By definition, for structural policies to
be most effective, a long-term commitment, continuous implementation and strong reform
ownership are needed. This is the only way to permanently change expectations and growth
prospects.
This leads me to our second, more concrete, question:
Which structural reforms are still needed to support stronger and sustainable growth?
To start with, let me stress that all euro area countries, albeit to different degrees, still need to
implement structural reforms.
There are a number of credible reforms that are able to increase permanently total factor
productivity; to affect confidence; and to help reduce uncertainty and increase investment and
sustainable demand.
In particular, for the euro area I see the need to forcefully work on:
1. reducing red tape - by easing licensing procedures and facilitating access to credit
by viable firms;
2. improving the judicial systems - including the effectiveness of insolvency regimes;
3. increasing the efficiency of the public administration and tax systems;
4. reducing entry barriers in sectors sheltered from competition; and
5. reducing hiring costs and skill mismatch.
These reforms would unlock immediately "hidden" demand, increase economic resilience and
facilitate the working of monetary policy.
Among these reforms I believe that particular attention needs to be given to all legal,
administrative and bureaucratic impediments that can lead to an increase of the overall costs
for debt workouts, make the distinction between viable and non-viable firms more difficult, and
hamper firms' exit from and entry to markets as well as investment.
In concrete terms, this means improving the efficiency of insolvency regimes.
In corporate debt restructuring, experience to date shows that an effective insolvency regime
is critical to facilitate the early rescue of viable firms and the speedy exit of non-viable ones.
IMF analysis also shows that weak debt enforcement and ineffective insolvency frameworks
tend to lower the recovery values of problem loans3. Our internal analysis finds that in order to
be able to cope with high private debt ratios and to deleverage reasonably quickly, the strength
of the insolvency framework is important. Also, recent analysis from the European Commission
found evidence that in the presence of a high stock of private debt, the quality of insolvency
frameworks is important for financial stability and for spurring entrepreneurship and thereby
mitigating the impact of deleveraging on growth. In particular, it was found that a good
insolvency framework is associated with speedier adjustment of non-performing loan ratios.4
To highlight the differences in insolvency frameworks across euro area member countries, let
me mention a few country figures: in Slovakia it takes on average 4 years to resolve an
insolvency case, while in Portugal it takes 2 years and in Ireland it takes less than 5 months.
When looking at international practices, one can find three types of procedures through which
firms can deal with debt restructuring:
1. out-of-court procedures;
2. hybrid preventive restructuring procedures; and
3. formal insolvency or restructuring procedures.
In the euro area countries formal insolvency procedures are very common, while out-of-court
procedures have been much less used so far. However, voluntary out-of-court restructuring
can provide a speedy, cost-effective and market-friendly alternative to court insolvency
proceedings. This tool is particularly useful in cases where there is a lack of confidence in the
institutional capacity to support the operation of the insolvency system.
In the past few years insolvency laws have been amended, in particular in Spain, Italy and
Portugal, to better support early rescue of viable firms, to help the deleveraging process and
to free up resources for further investment and thus productivity growth. I believe that these
reforms, if the effort to implement them continues, will help us to grow out of the current high
private sector debt problem.
Of course, there are other possibilities and the list of potential reforms is long. I could elaborate
further, but my time here is unfortunately limited so I chose to constrain myself to this crucial
area of structural reforms.
Conclusions
Let me now conclude. As I said at the beginning, the euro area can make a much stronger
contribution to global growth than it has done so far. The conditions are very favourable for a
strong push for reforms; in particular, our monetary policy stance is supportive.
Reforms should now focus on boosting productivity and reducing the burden of the high debt
stock. Work in this direction has started and is ongoing, but the euro area governments need
to continue on this track with more determination and impetus.