The confidence factor

Secretary-General of the OECD

According to the latest Economic Outlook, growth in the OECD will reach some 2.7% in 2010. But while the global economy may be out of intensive care, it remains very fragile, as underlined by market volatility, rising public debt and high unemployment. A key missing ingredient is confidence. What must be done to restore it?

Governments in OECD countries face a twin challenge of restoring growth while bringing order back to public finances. These are two sides of the same coin, and a lasting recovery will only come by striking a new balance between them.

Take fiscal deficits, which are expected to average 6.7% of GDP this year in the OECD area. Deficits of this magnitude are unsustainable. On the one hand, tough public spending cuts and tax hikes are important to reassure markets and avert a costly, upward drift in longterm interest rates. As the crisis sorely reminded us, governments, just as businesses, must keep their finances under control by keeping a lid on their borrowing requirements, both for good housekeeping and also to maintain the wider economy on an even keel.

But there is the other side of the coin: today, with interest rates historically low in most countries, it has been argued that raising taxes or cutting spending will squeeze already weak demand.

In all cases, finding a balance is vital for long-term growth. It is not simply a question of austerity versus stimulus, as some commentators would have it, but of targeting and timing policies carefully to achieve healthier finances as well as sustainable growth. This is an enormous challenge, and we must get it right.

But achieving a new balance between consolidation and growth is not the only issue on which a lasting recovery depends. The underlying question of what kind of economy we are building still looms large. As soon as the crisis struck in 2008, the OECD was quick off the mark in joining the international effort to address it. We set out response strategies to restore long-term growth and the confidence needed to sustain it. We realised fundamental changes were needed, and that a return to “business as usual” would be out of the question.

The immense financial and employment challenges facing us only confirm this. Until the causes of the crisis have been firmly dealt with, confidence will remain weak and markets volatile, compromising even the most determined fiscal consolidation and stimulus programmes.

Governments have responded with very public commitments at the OECD and within the G20 to push for an “upside” scenario based on strong, sustainable and balanced growth.

Policy actions have followed. Fundamental financial reforms are well under way in the US, measures to improve public sector efficiency are advancing in some European countries, and there have been encouraging signals from China about introducing a more flexible exchange rate regime. These are all steps on the way to rebuilding confidence, but more “down payments” are needed to create the stronger, cleaner and fairer economy we all want.

Several priorities for action were highlighted at the annual OECD ministerial meeting this May, among them strengthening regulation and supervision in our financial system, boosting active labour market measures, harnessing new sources of growth – including green growth –, bolstering innovation, and maintaining fair and open trade and investment regimes to promote development and global progress. Fiscal consolidation and growth-friendly policies must reinforce each other in support of this broad, longterm, strategy.

Standards of governance must be raised, too, and our commitment to this goal was reinforced at the ministerial meeting when OECD and other countries, including Brazil and Russia, issued the Joint Declaration on Propriety, Integrity and Transparency in the Conduct of International Business and Finance. Ministers also reiterated the importance of global co-operation for making progress. The OECD has given meaning to this goal by welcoming Chile and Slovenia as our newest members, and inviting Estonia and Israel to join, too. Our common goal is to build better policies for better lives, a goal that will form the leitmotiv of our Organisation during the 50th Anniversary celebrations starting later this year.

Together, we must address the causes of the crisis, and find the right balance between fiscal consolidation and growth. Thus, confidence will grow, and with it the stable employment and investment we all badly need. Only then, will we be able to declare this crisis well and truly over.

For more on the declaration, see

See also and

©OECD Observer N° 280 July 2010

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