## A Rising Tide Lifts All Boats: How Europe, by Promoting Growth, Can Help Itself and Help the World, Speech by Rodrigo de Rato, Managing Director, IMF

_IMF News, May 22, 2006_

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## Bibliographic details
- Published: May 22, 2006

---

### Overview
- Speech by Rodrigo de Rato, Managing Director, International Monetary Fund, at the Austrian National Bank Seminar, Vienna, Austria, May 22, 2006.  
- Central thesis: raising potential and actual growth in Europe is the key policy objective—growth will ease fiscal pressures, help manage demographic change, reduce social tensions, and contribute to rebalancing global demand.

### Global risks and imbalances
- Key present risks:
  - High and volatile oil prices affecting global growth and inflation.
  - Risk of an avian flu pandemic; need for business continuity plans, especially for the financial sector.
- Global current account imbalances:
  - United States current account deficit: almost 6½ percent of GDP in 2005, and expected to be as high again this year.
  - Large surpluses in Russia, Saudi Arabia, Japan, and emerging market countries of Asia, especially China.
- Disorderly adjustment scenario:
  - Abrupt fall in U.S. consumption growth (e.g., triggered by housing market).
  - Sudden investor unwillingness to hold U.S. financial assets → abrupt depreciation of the U.S. dollar and increases in U.S. interest rates.
  - Potential global financial market disruption, downturn, and resurgence of protectionism with serious consequences for Europe.

### Europe's economic challenges
- Growth and employment:
  - Euro area growth: about 1¼ percent in 2005; IMF projects it will remain at about 2 percent in 2006.
  - Europe's key challenge: raise growth and employment while preserving social cohesion.
- Demographics and fiscal pressures:
  - Current demographic ratio: less than four people in the age range 15-65 for every one over 65.
  - By 2050, that ratio could be closer to two to one.
  - European Policy Committee's Working Group on Aging Populations estimates additional public expenditure of about 4 percent of GDP due to aging; IMF estimates somewhat higher when including long-term health care costs and different growth assumptions.
- Labor market outcomes:
  - Almost one in ten of the labor force in Europe cannot find a job.
  - Among the young the ratio is twice as high.
- Social and political risks:
  - Growing hostility toward further European integration and globalization.
  - Risk that complacency about current external balances leaves Europe vulnerable to spillovers from global adjustment.

### Structural reform agenda: product markets, financial sector, labor markets
- General prescription:
  - Pursue structural reforms—product market reform, financial sector reform, labor market reform—and fiscal consolidation to raise growth.
- Product market reform:
  - Defined as reduction in tariff and legal barriers, opening up markets to competition, creating a more business-friendly environment, and reducing distortions from state involvement.
  - Direct effects: increase productivity, reduce companies' costs (e.g., reduced administrative burden, lower barriers to trade).
  - Indirect effects: increased competition incentivizes efficient resource use, innovation, and disciplinary threats of bankruptcy or takeover.
  - Complementarity: product market reform is complementary to labor market reform—preceding or accompanying product reform raises employment payoffs from labor reform.
  - Country examples: Denmark, the Netherlands, and the United Kingdom undertook major product market liberalization alongside labor market changes; UK privatization reduced the share of GDP produced by public companies from 12 percent to 2 percent (1979–1997).
- Financial sector reform:
  - Productivity gap: productivity has grown by about 1 percent a year more in the U.S. than in Europe since 1996; almost half of this difference is accounted for by differences in productivity in financial services; much of the remainder is accounted for by retail trade.
  - Causes of lower European financial productivity: limited financial integration, fragmented payments and clearing systems, concerns over national ownership, differences in regulatory and supervisory frameworks, limited cross-border retail banking activity.
  - Benefits of greater integration: enhance competition, improve efficiency, lower cost of capital, improve monetary transmission.
  - Implementation barriers: differences in taxation and legal systems—especially commercial and consumer protection law—impede integration.
  - Supervisory framework: need for improved cross-border supervision, better crisis management arrangements, and a centralized repository for up-to-date information on systemically important financial institutions.
- Labor market reform:
  - Successful measures already implemented in some countries: liberalization of part-time and temporary employment, phase-out of early retirement schemes have improved labor utilization.
  - IMF recommendations:
    - Raise statutory retirement ages and adjust actuarial regimes to promote intergenerational equity and pension sustainability.
    - Improve targeting of social benefits for the unemployed (e.g., generous but time-limited unemployment benefits; link long-term benefits to active search and socially useful work).
    - Use income tax credits rather than high minimum wages to promote higher employment.
    - Merge permanent and fixed-term employment contracts into a single contract with severance pay based on duration of employment—recent IMF research suggests this would lower the structural unemployment rate in France by two percentage points.
  - Employment protection legislation: reduce restrictions on hiring and firing to lower structural unemployment, while finding ways to ameliorate social costs for those adversely affected.

### Fiscal policy and sustainability
- Fiscal outlook:
  - Most budgets are not in bad shape currently, but demographic changes will impose significant challenges.
  - IMF view: costs of aging and long-term health care are significant and should not be offset by assuming higher employment and productivity growth without concrete measures.
- Policy recommendations:
  - Place public finances on a sustainable footing; governments should be reducing rather than raising debt now.
  - Target: broadly balanced fiscal positions by 2010.
  - Consolidation pace: steady consolidation of about ½ percent of GDP per annum is necessary to achieve objectives.
  - Governments should propose concrete measures to achieve agreed objectives and improve transparency.
  - Specific transparency measures: debate stability plans in parliaments alongside budgets; strengthen auditing agencies.

### International coordination and multilateral consultations
- Multilateral approach:
  - IMF mandate to pursue multilateral consultations to address vulnerabilities affecting individual members and the global financial system within a joint-action framework.
  - Multilateral consultations intended to facilitate collective analysis, consensus-building, and overcome hurdles to individual action by emphasizing benefits of joint action.
- Europe’s role in rebalancing:
  - Neither Asian exchange rate changes nor U.S. fiscal adjustment alone can defuse global imbalances.
  - Europe can contribute by structural reforms that raise domestic demand (especially in non-traded goods) and revitalize growth—this will ease global adjustment burdens and make action by others politically easier.

### Key statistics and projections (preserved exactly as in the speech)
- United States current account deficit: almost 6½ percent of GDP in 2005, and expected to be as high again this year.
- Euro area growth: about 1¼ percent in 2005; IMF projects it will remain at about 2 percent in 2006.
- Productivity gap: productivity has grown by about 1 percent a year more in the U.S. than in Europe since 1996; almost half of this difference is accounted for by differences in productivity in financial services.
- Demographic pressure: less than four people in the age range 15-65 for every one over 65; by 2050, that ratio could be closer to two to one.
- Aging-related public expenditure: European Policy Committee's Working Group on Aging Populations estimates additional public expenditure of about 4 percent of GDP; IMF puts the costs somewhat higher.
- Fiscal consolidation recommendation: steady consolidation of about ½ percent of GDP per annum; target broadly balanced fiscal positions by 2010.
- Unemployment indicators: almost one in ten of the labor force in Europe cannot find a job; among the young the ratio is twice as high.
- Labor market reform impact example: merging permanent and fixed-term contracts would lower the structural unemployment rate in France by two percentage points.

### Conclusions and policy priorities
- Growth is the central policy objective—"the tide that lifts all boats"—because it:
  - Reduces the fiscal crunch from aging.
  - Eases social discontent.
  - Helps rebalance global demand.
- Priority policies:
  - Product market reforms to increase competition and productivity.
  - Financial sector integration and supervisory improvements to boost efficiency and monetary transmission.
  - Labor market reforms to raise labor utilization, complemented by product market reform to maximize payoffs.
  - Fiscal consolidation and greater transparency to ensure sustainability.
  - Active participation in multilateral consultations and coordinated international action to address global imbalances.

*Speech by Rodrigo de Rato, Managing Director, International Monetary Fund, At the Austrian National Bank Seminar, Vienna, Austria, May 22, 2006.*

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## References

- [Austria and the IMF](http://www.imf.org/external/country/AUT/index.htm)
- [Kingdom of the Netherlands-The Netherlands and the IMF](http://www.imf.org/external/country/NLD/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Denmark and the IMF](http://www.imf.org/external/country/DNK/index.htm)
- [United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm)
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- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp052206_