Speech

"Structural Reform and the European Model" -- Speaking Notes for Dominique Strauss-Kahn, Managing Director of the International Monetary Fund at the OECD-IMF Conference on Structural Reform in Europe

March 17, 2008

As Prepared for Delivery

1. Thank you for joining us here. Thank you also to Angel Gurria and his colleagues at the OECD for hosting this conference, together with the IMF.

2. This may seem like a strange time to be holding a conference on structural reform. We are in the middle of a financial crisis, which will have significant economic implications for many countries, so it seems that we have more urgent problems to address.

3. But actually, it's a good time to talk about structural reform, because it has an important bearing on what Europe will be like when it emerges from the financial crisis, and because mobilizing public support for reform is vital to the success of the European model.

4. I have said before that the European model is based on the desire to found a world of justice built on the irreducibility of human dignity. The model requires:

• that we take human rights seriously;

• that we focus on culture as a means of human development;

• that we achieve a balance between economic prosperity, social justice and the environment,

• and that we promote multilateralism.

5. The key question is whether structural reforms—the kind of reforms that Angel Gurria has talked about—are consistent with this model. I believe that they are mostly consistent with the European model, and with European values, moreover they can provide important support for them, for two reasons. First, because all of the values that we hold will become easier to achieve in an environment of economic growth. Angel has explained very clearly the ways in which structural reforms can help Europe to compete successfully in world markets and to produce high growth. Second, structural reforms can help to create new opportunities for European citizens, which again supports European values. People—especially young people—don't just want to be protected against failure; they also want the opportunity to be successful.

6. What does this mean for the kind of structural reforms that we should pursue?

• In the areas of labor markets it means we must focus on creating the conditions for new jobs, rather than only protecting old ones. Social safety nets need to move away from a focus on specific jobs and toward a focus on job opportunities and career development.

• In the area of product markets, we must open up service industries to competition in the same way that industries that make tradable manufacturing goods are already open. European productivity in tradable goods is already world class, and that is partly because those industries are open. But productivity in some non-tradable goods continues to lag behind. Market reforms aimed at promoting equality of opportunity and increasing contestability can lead to large benefits to consumers—air travel and cell phones, for instance. They can also benefit workers in those industries and raise growth in the economy by increasing productivity. Competitive and contestable markets for goods and services (including financial services) are crucial for economic growth.

• Fiscal reform can also contribute to growth. We know very well that Europe is aging, and that budgets need to adapt to deal with this. The trick will be to reform in a way that increases incentives to work. For example, by adequately reducing labor taxes when it will promote employment.

7. We see the benefits of these reforms clearly. But we must also recognize that people are hesitant about structural reform. Policymakers cannot dictate to people on this; they need to persuade people. Let me talk about some things that policy makers can do to expand support for structural reforms, and also some circumstances that they can take advantage of to generate support for reforms.

• First we should recognize that reforms may take different paths in different countries, depending on their starting points and on their circumstances. There is no need for a uniform approach—rather we need approaches tailored to the diversity of Europe.

• Within countries it can help if different reforms are pursued together. This can help to create a broad consensus for reform, as different actors see the benefits to them of the totality of reforms, and may be less inclined to focus on the costs to them of specific reforms. The countries that have done best in implementing structural reforms—for example Denmark and the Netherlands—adopted comprehensive approaches: a mix of labor market, fiscal, and product market reforms that complemented and reinforced each other. Relatively free product and labor markets allowed labor supply reforms to translate into more jobs rather than higher rents.

• It may also be that a sense of crisis can help mobilize support for reforms. At this time, the priority for European governments should be containing the economic damage from the financial market crisis. This is difficult because we are in an economic environment where inflation and recession are both potential problems. But in an economic environment such as this governments and citizens should also be interested in reforms that can promote growth without inflationary risks—that is in the kind of labor and product market reforms that we are talking about at this conference. So this is not a bad time to be thinking about structural reforms.

8. Before concluding, let me say something about this conference. I spoke earlier about multilateralism as part of the European model. The IMF and the OECD are both institutions that embody this multilateral spirit—the spirit of learning from each other and working together, which is also the spirit of this conference. We have some important work ahead of us. We also have some very good people to help us do it. I am especially pleased to welcome some old friends who will be speaking today.

9. Finally, as we go forward, let us keep our eyes on the prize. The European model is the product of many years of passionate endeavor by the citizens of Europe. It is worth an equal expenditure of passion and effort to sustain it. The model is not static: European governments and institutions must learn from the world and adapt to changes in the world—as their citizens are already doing. But there is also much that Europe can give to the world if we hold fast to the principles of justice and human dignity, and if we approach our reforms with these values always in our minds.

10. Thank you very much.