It is a pleasure for me to be here today to discuss the European Commission's Review of the EU Economy in 2000. This is, as usual, an excellent piece of work in analysing the European economy and a valuable input for the ECB. The topics covered in the report deal with the most crucial issues that need to be addressed in order to improve the prospects for sustained economic growth in the euro area.
Today, I will first review the outlook for economic growth and inflation in the euro area as presented both in the Commission's autumn 2000 forecasts and in other exercises such as the Eurosystem's staff projections which were published in the December 2000 issue of the ECB Monthly Bulletin. I shall then turn briefly to the current outlook for economic growth and price stability in the euro area in light of the information which has recently become available, and then analyse the current policy challenges in the euro area.
Before turning to these forecasts and projections, however, let me briefly mention a few considerations on the projections of Eurosystem staff, as recently published by the ECB. This publication was decided upon so as to share a further piece of information and analysis underlying the Governing Council's monetary policy decisions in a transparent manner with the public. The publication of projections will only lead to a better public understanding of the monetary policy of the ECB if these projections are read in a manner that reflects the way in which they are produced and used in the policy-making process. The public should evaluate the published projections for what they are and not for what some observers might wish them to be in the context of different approaches to monetary policy-making. Let me emphasise that the maintenance of the independence of the ECB and our common interest in the achievement of genuine transparency imply that it is for the ECB to select the format and nature of the published economic projections for the euro area. I am sure that this point will be recognised in our ongoing contacts. Let me also mention that, in order to further enhance the transparency of the publication of the Eurosystem's staff projections, one of the macroeconomic models supporting the production of the projections has just been published in the ECB working paper series.
The European Commission's autumn 2000 forecast was released at the end of November 2000. The outlook for the euro area presented in that exercise indicated that strong real GDP growth would prevail throughout the period from 2000 to 2002, while inflation was expected to decline over that period. The OECD and IMF forecasts were broadly similar to those of the European Commission. These forecasts were based on the assumption that the ECB would raise its interest rates over the forecasting horizon in order to maintain price stability. By contrast, the published Eurosystem staff's projections were conditional on the technical assumption of unchanged short-term interest rates. The assumption underlying the Eurosystem staff projections was made in order to facilitate the Governing Council's discussions by identifying the possible consequences of leaving interest rates unchanged. These projections likewise pointed to a continuation of robust output growth and presented a picture of inflation developments broadly similar to the forecasts from other international institutions (when small differences in other technical assumptions are accounted for).
Since the publication of this material, several developments have changed the outlook for the euro area. Most notably, the recent signs of a weakening of economic activity in the United States indicates that the slowdown in US economic growth could be stronger than previously anticipated, albeit rather short-lived, while the economic recovery in Japan may not be as strong as expected earlier. The exchange rate of the euro has appreciated between mid-October 2000 and 23 January 2001 by approximately 10% against the US dollar and in nominal effective terms, while oil prices have declined by approximately 15%-20% in US dollar terms over the same period.
In addition, new data have become available for the euro area. Monetary and credit growth have continued to slow down in November 2000. This information, which relates to the first pillar of the monetary policy strategy of the ECB, confirmed that the risks to price stability stemming from the monetary side have become more balanced compared with the situation some months ago. However, caution is still warranted, given the continued positive deviation of M3 growth from the reference value of 4 1/2%.
In addition, the most recent estimate by Eurostat of euro area real GDP growth indicated that a slight slowdown has occurred in the third quarter of the year 2000. More recent evidence from other short-term indicators, such as industrial production, support the view that growth in economic activity moderated in late 2000, after having peaked in the first half of 2000. However, overall economic activity continued to remain fairly robust. Industrial and consumer confidence remained at relatively high levels, also in the final months of last year. Consumer confidence has thus probably been supported by the continuous decline in unemployment, which stood at 8.9% in November 2000, the lowest level since mid-1992. While the more moderate prospects for world growth may be expected to be associated with some further slowdown in economic activity in the euro area, the dynamics of domestic demand suggest that, all in all, the outlook for euro area growth remains generally positive. This notwithstanding, real GDP growth may turn out lower than was expected in the autumn of 2000 but, all in all, realistic optimism is justified.
With regard to price developments, the overall decline in oil prices and the appreciation of the euro which has occurred over the past two months have been already reflected in some downward adjustment of consumer price inflation in the euro area and will probably contribute to a further reduction in HICP inflation in the period ahead. In December 2000, HICP inflation declined to 2.6%, from 2.9% in the previous month.
However, caution remains warranted regarding future price developments in the euro area. First, developments in oil markets are characterised by high volatility. Second, HICP inflation is still high and some indirect upward pressure resulting from the increases in oil prices and the depreciation of the euro over most of last year is "still in the pipeline". As a result, annual HICP inflation cannot necessarily be expected to move quickly back below 2%.
Over the medium term, there are still elements of upward risk to price stability which deserve continuous monitoring. One current risk is related to the evolution of wages in the period ahead. Wage moderation was remarkable in the past and has contributed substantially to the increase in employment, the decline in unemployment and to constraining inflationary pressures on the cost side. It is important that wage moderation continues. This should be facilitated by the decline in consumer price inflation which is expected to occur over the coming months. A second important factor will be fiscal policy in the euro area. The tax reforms that have been implemented in several countries of the euro area, and the reduction in the tax burden that will result from them, are a welcome development. However, in many countries the reduction in taxation has to be accompanied by a structural reduction of expenditure, in order not to threaten the progress achieved in fiscal consolidation so far.
While monetary policy will have to remain focused on its commitment to maintaining price stability, the challenge for the euro area will be how best to exploit and enlarge its growth potential in the coming years. Given the current uncertainty regarding the prospects for world economic growth, the maintenance of price stability and a further strengthening of the potential for growth in the euro area are the best contributions the euro area can make to supporting stability and growth at the global level.
There has recently been much discussion about the so-called "new economy" and the favourable effects that new information technologies have on productivity growth, mostly in light of the experience in the United States. Such effects may also be at work in the euro area, but there is nevertheless as yet no evidence of a broadly based "new economy".
In this respect, we share the Commission's view that structural reform policies will contribute to enhancing economic growth, fostering the supply of labour and capital as well as innovation and the diffusion of new technologies and production methods. Let me mention only a few fields in which further progress may be envisaged here. Reforms aimed at fostering labour force participation are necessary to offset the low growth in the working age population associated with demographic effects, which would otherwise restrain the growth of the labour supply. Capital accumulation needs to be promoted by further removing barriers to investment and facilitating access to investment capital. In particular, the reform of corporate tax systems coming forward in a number of countries should be beneficial for potential output growth. Lasting increases in productivity growth will to a large extent depend on the progress made in fostering a knowledge-driven economy and in creating the institutional structures needed for a rapid and efficient adoption of new technologies. Speeding-up and extending the current regulatory reform process in product markets will be important in creating the conditions to enhance competition and may be expected to have considerable economic benefits.
In the Commission's report, macroeconomic stability is the first element mentioned in the list recommended by the Lisbon European Council. Overall, sound economic policies geared at avoiding the appearance of macroeconomic imbalances and structural reforms that allow the potential of the euro area to be better exploited are the best contribution that the euro area can make both to achieving a sustained path of economic growth and to contributing to economic stability world-wide. In a period marked by high uncertainty this is of crucial importance.
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