The eurozones economic outlook
and long term growth prospects
Professor Otmar Issing, Member of the Executive Board
of the European Central Bank, yesterday spoke before the Committee on
Economic and Monetary Affairs of the European Parliament. In his address,
Issing delivers a macroeconomic outlook for the euro area and the most
important structural issues facing the euro area and focuses on the
European Parliament's draft resolution on structural reforms and the
The current economic outlook in the euro area In the course
of 2003, economic growth strengthened and the economic outlook improved
significantly. The conditions for a continued economic recovery are
favourable. On the domestic side, interest rates are low and financing
conditions are generally favourable. Furthermore, investment growth
should benefit from ongoing efforts by firms to enhance productivity
and hence profitability. On the external side, although recent exchange
rate developments are likely to have some dampening effects on euro
area exports, export growth should continue to benefit from the dynamic
expansion of the world economy. As President Trichet has made very clear:
We are not indifferent, but concerned about excessive movements in the
In our view, the short-term risks to this outlook of a gradual recovery
in the euro area gaining momentum in the course of 2004 are balanced.
However, over longer horizons some uncertainties exist, related to structural
imbalances in some regions of the world and their potential effect on
the sustainability of global economic growth.
As regards consumer prices, inflation rates have over recent months
remained slightly higher than we expected in the summer of 2003. This
has been due mainly to oil and food price developments but also reflects
increases in indirect taxes and administered prices. We expect annual
inflation rates to fluctuate around two per cent in the coming months
and fall later this year, remaining in line with price stability thereafter.
This expectation is based on the assumption that wage developments will
remain moderate in the context of a gradual economic recovery. Moreover,
the appreciation of the euro should continue to dampen price pressures
through its effect on import prices.
While certain risks to price stability may develop in an economic upswing,
this broad picture is also confirmed by cross-checking with the monetary
analysis. In fact, the accumulation of excess liquidity should not be
of concern for price stability, provided that the economic recovery
At its meeting on 8 January 2004, the Governing Council regarded the
level of key ECB interest rates as appropriate to ensure price stability
over the medium term. Interest rates in the euro area are currently
at very low levels by historical standards and liquidity is very ample.
From a longer-term perspective, the maintenance of price stability is
the best contribution monetary policy can make to strengthening economic
growth, since price stability creates an economic environment with low
real interest rates and high confidence among households and firms.
The importance of preserving public confidence cannot be overemphasised.
This concern should also inform fiscal policy considerations, especially
at the current juncture. This year will be crucial as regards strengthening
the credibility of the institutional framework for fiscal policy and
bolstering confidence in the soundness of the public finances of Member
States across the euro area. Together with the Treaty provisions, the
overall fiscal framework of the Stability and Growth Pact remains of
central importance and must be fully respected. These are the foundations
for trust and confidence in EMU. They are key not only to stability
but also to growth, since sustainable public finances are a precondition
for preserving low risk premia in financial markets. The Governing Council
therefore strongly urges governments and the ECOFIN Council to live
up to their responsibilities. Excessive deficits should be corrected
as soon as possible. And governments should now honour the commitments
they made last November.
Structural reforms and long-term economic growth in the euro area
Structural reforms are key to future economic success in the euro area.
Indeed, the recent debate on the possible adverse effects of the appreciation
of the euro is nothing more than a reminder of the structural problems
of the euro area. Such concerns illustrate the euro area economy's lack
of flexibility and consequent vulnerability to external shocks.
We all know what the euro area's major economic problems are. First,
the rate of structural unemployment is unacceptably high, and employment
growth and labour participation are too low. Second, productivity growth
has been modest, especially since the mid-1990s, resulting in moderate
potential GDP growth rates for the euro area. Third, the ageing population
has created a demographic situation that will place pension systems
under severe strain if corrective action is not taken.
Against this background, the ECB very much welcomes and supports the
impetus given to the economic reform process by the Lisbon European
Council. As I mentioned earlier, the ECB is actively contributing to
the creation of an environment of macroeconomic stability, increasing
the likelihood of the Lisbon agenda being fully implemented and the
potential benefits realised.
Are we well on track towards achieving the Lisbon goals? I am afraid
not. Indeed, the 'alarm bell' sounded by your Committee's draft resolution
as regards structural reforms is more than justified, and even more
so when set against the ambitious benchmarks laid down by the Lisbon
agenda. There is too little momentum in the implementation of structural
reforms in the euro area.
In capital markets, the implementation of the action plan for financial
services would help to reduce existing obstacles to intra-European capital
transfer and foster access to capital. Its implementation scheduled
to take place by the end of 2005 is therefore of considerable
importance. So far, progress towards the liberalisation and harmonisation
of euro area capital markets has been significant, although the present
situation is still not ideal.
In product markets, entry barriers continue to hamper effective competition.
This is true not only with regard to markets in individual EU countries,
but also in the pan-European markets created by further integration.
In the services sector where most new jobs are created in the
EU excessive regulation persists.
While the privatisation process has almost been finalised in many EU
countries, market entry barriers hinder further reductions in oligopolistic
prices and hamper the creation of jobs through start-ups and firm entry.
Although some progress was made during the 1990s, more recently Member
States' commitment to greater competition has faltered and progress
in achieving this objective has stalled.
In addition, the target that R&D investment should reach three per
cent of GDP, with two-thirds financed privately, has still not been
met. Achieving this target can make an important contribution to raising
productivity growth and creating greater economic dynamism.
As regards labour markets, it is important to recall that the Lisbon
agenda set a target employment rate of 70 per cent, to be reached through
the introduction of greater flexibility and increased incentives for
the unemployed to take on jobs. Some countries have started to introduce
reforms in this area, reducing replacement ratios, tightening benefit
eligibility criteria and reducing the duration of unemployment insurance.
Moreover, forms of contractual flexibility, such as the introduction
or further development of part-time employment, are important in order
to attract a significant part of the working age population back into
productive activity, especially in relatively low-paid jobs with few
required qualifications. While a number of measures have been taken
in some countries, these steps appear insufficient in the light of the
objectives of the Lisbon agenda.
The ageing of the population will place an increasing burden on the
shoulders of those of working age unless corrective measures are undertaken
in a timely manner. While several Member States have initiated pension
reforms moving in the right direction, in particular by reducing incentives
for early retirement, much remains to be done to ensure that pension
systems are sustainable in the long term.
In conclusion, I share your assessment that a more determined effort
is required to meet the ambitious goals of the Lisbon agenda. And greater
efforts are also needed to convince the public about the long-term benefits
of the structural reforms.
Let me also stress that structural reforms can have fiscal implications
and must be embedded in a sustainable fiscal framework. Structural reforms
must not lead to higher deficits, but rather be accompanied by a qualitative
improvement on the expenditure side of the government budget. Indeed,
we have witnessed a deterioration in the quality of public spending
in recent decades. For example, public investment has fallen from 11
per cent of total public expenditure in 1970 to 5.3 per cent in 2003,
while spending on social benefits and transfers still accounts for more
than a third of total public expenditure. This is clearly a matter where
national governments need to act. Public spending should be focused
on productivity-enhancing physical and human capital accumulation. Furthermore,
let me emphasise the fact that many of the necessary reforms aimed at
expanding the euro area's production potential, notably the liberalisation
of markets, do not necessarily entail an increase in public expenditure,
and might even allow the public sector to make savings.
Finally, I would like to mention that the European Commission provides
important annual 'progress reports' which assess progress towards the
objectives laid down in the Lisbon agenda. Such 'benchmarking' of countries
against the Lisbon objectives fosters peer pressure and aids the identification
of best practices, which may ultimately help countries to realise those
objectives in full. This kind of exercise is therefore very important
and should aim explicitly to increase the attention of the general public
to the Lisbon process. I am aware that monitoring the progress of structural
reforms is a complex issue and that observers often get lost in the
details. Ways should be found to summarise the progress made in simpler
terms so as to make the process easier to understand for the general
public. This could also help to make monitoring progress towards the
achievement of the Lisbon goals an important element of national political