Brussels, 16/12/2004
“The present economic outlook for Europe is not that great, and the falling dollar will drive European growth prospects even lower. Meanwhile, workers have contributed more than their fair share. Low or even non-existent nominal wage increases have banished the threat of inflation, but this kind of extreme wage moderation will also hold back domestic consumption. Now, it's up to European policy-makers to stop talking nonsense about inflationary dangers. Instead, they should act to support consumer demand, and they need to act now,” says ETUC General Secretary John Monks.
Europe has failed to turn the tide of expanding world recovery into a self-sustaining growth cycle, due mainly to lack of support from domestic demand policies. Both fiscal and monetary policies have reacted too slow and too late. In doing so, they have let consumer and producer confidence slip away, instead of sustaining it from the outset. The end result of this ‘wait and see' attitude is that recovery is still weak, despite low interest rates and increased deficits.Faced with a renewed weakening of growth and a falling dollar, Europe cannot continue in this way. Instead of hoping to ‘freeload' again on US expansionary demand policies, Europe should take matters of domestic demand into its own hands.
The ETUC proposes the following measures:·
- Extend the ‘Growth Initiative' into an ‘Initiative for recovery'. With an impact of 0.05% of GDP, the existing ‘Growth Initiative' is barely noticeable and cannot act as a lever for confidence. Therefore, the European Council should invite Member States to present ‘national plans for economic recovery', increasing investment in education, social housing and sustainable development by 1% of GDP. If undertaken in a coordinated way, this initiative will boost confidence and thereby enhance growth.
- Reform the Stability and Growth Pact. Greater attention should be given to the position of the economy in the business cycle when implementing the Pact. A prolonged slump in growth should be seen as an ‘exceptional circumstance', justifying a temporary breach of the 3% deficit rule. Furthermore, the pace of deficit reduction should depend on the outlook for economic growth: strong deficit reduction in good times, limited deficit reduction in bad times.
- The ECB still has room to act. Interest rates are low, but economic performance remains dismal and inflationary dangers are imaginary. With interest rates in the euro area currently at 2%, compared with levels reduced as low as 1% in the USA, there is indeed still some room to act in Europe. Refusing to let real interest rates fall below zero is not particularly helpful in this situation.
- Avoiding a brutal appreciation of the euro. Financial markets need to be informed that a brutal appreciation of the euro is not acceptable. In turn, precise and timely exchange market interventions, as well as appropriate interest rates to discourage capital flows into the euro area, are required to support this approach.
The attached background paper, provides further analysis of the present economic situation, recent wage developments in the euro area and the ETUC proposals to save recovery.