Brussels, 08/03/2005
- Wages have done more than their share in assuring price stability and improving profitability in the euro area. Recent collective bargaining agreements for 2005 resulted in extremely moderate wage increases (between 1 and 2%). There is absolutely no inflationary danger whatsoever!
- The euro area is the second largest economy in the world. It cannot hope to ‘freeload' forever on exports and the US consumer. Leaving domestic demand to its fate has a price and Europe has been paying that price in the form of meagre growth since 2001 (only an average of 1.2%, down from 2.7% over the 1995-2000 period).
- At the end of 2004, the recovery has once again weakened substantially and prospects are not that bright. European firms will continue to suffer from an overvalued euro exchange rate, US growth will slow down because of the need to bring the US public deficit down, extreme wage moderation (wage cuts in some Member States!) will hold private consumption back. Against this background, the last thing the European Central Bank (ECB) should be doing is to copy the US Federal Reserve and to prepare markets for higher interest rates.
- Reviving the Lisbon Agenda will not succeed unless Europe gets its macro-policies right. The upcoming reform of the Stability and Growth Pact (SGP) provides an opportunity that should not be missed:
- ‘Lisbonise' the SGP by declaring that Europe's innovation gap is to be seen as an ‘exceptional circumstance'.
- ‘Act together' by organising a European framework for ‘national recovery plans': Member States investing in the Lisbon innovation priorities receive exemption from the Stability Pact discipline, provided this exception is temporary and provided Member States draft convincing national recovery plans to be discussed and approved at the European level.
- This will get Europe out of its ‘low-growth trap' and kick-start an investment-led growth cycle. At that moment, the time has come for driving deficits and debt substantially down.
What is the Macro-Economic Dialogue?
At the European summit in Cologne 1999, it was decided to set up, twice a year, an informal exchange between the different actors responsible for macro-economic policy-making. This involves the European Commission, finance and employment ministers, the ECB and other central banks and European and national social partners. The aim is to improve the macro-economic policy mix so that Europe can achieve higher growth while respecting the objective of price stability. The Macro-Economic Dialogue at political level meets twice a year and is preceded by a dialogue at the technical level. No formal conclusions are published, it is up to each actor to inform those whom they represent.