APPENDIX I: Euro Area: Policy Recommendations and Implementation
While the staff and authorities have generally been in broad agreement on the appropriateness of monetary policy, staff has at times, but particularly in early 2000, argued for an easier stance than was actually implemented; subsequent developments appear to have vindicated the authorities’ stance. As regards the monetary framework, staff advocated in 1999 inter alia a more precise definition of the price stability objective and the provision of more information by the ECB on the underlying reasons for policy decisions. As detailed in this report, the framework has evolved since then, moving broadly in the advocated direction.
On fiscal policy, staff has strongly supported the Stability and Growth Pact (SGP) as a viable option to combine fiscal discipline and flexibility in a monetary union with decentralized responsibilities for decision making. Staff has stressed that it is important to allow the operation of automatic fiscal stabilizers (as long as countries are not in clear danger of breaching the fiscal deficit limits), but that countries be held accountable for meeting underlying consolidation targets, the latter requiring refinements of the SGP that allow tracking consolidation efforts. While the authorities have in some of their communications emphasized that nominal deficit targets need to be met notwithstanding unexpected growth shortfalls, they also generally supported the operation of automatic stabilizers ex post, and, more recently, the Commission has undertaken considerable conceptual efforts to improve the monitoring of underlying fiscal adjustment efforts based on an agreed methodology for calculating structural balances.
The EU authorities have generally agreed with staff calls to step up and deepen structural reforms in the product, labor, and financial markets. While progress is inherently slow, there has been significant progress in selected areas, most recently on integrating financial markets. In view of the subsidiarity principle, however, responsibility for the ultimate implementation of most structural reforms lies with country authorities and, as detailed in the country Article IV reports, a delivery gap has opened between “words and deeds,” particularly in the area of labor market reforms.
Including the trade policies of the European Union
Meetings were held at the ECB with President Duisenberg, Vice Prsident Papademos, Ms.Hamalainen, Mr. Issing, and Mr. Padoa-Schioppa (members of the Executive Board), as well as with senior staff. At the EC the mission exchanged views with Commissioner Solbes Mira, Mr. Regling (Director General for Economic and Financial Affiairs), and other officials. The team comprised Messrs. Deppler (Head), chadha, Jaeger, Kieler, and Ross (all EUI). Mr. Lankes (PDR) joined the mission during its visit at the EC to cover EU trade issues. Mr. Deppler participated in the meeting of the Economic and Financial Committee (EFC) in Burssels on June 27, and returned to Brussels on July 11, 2002, to present the mission’s concluding statement to the Eurogroup
See Selected Issues paper, Euro Area Trade Flows and the Exchange Rate: How Much Disconnect?.
Eurostat estimates changeover effects added up to 0.2 percentage points to core inflation, most of it in services.
See, for example, the submission to the European Parliment’s Committee on Economic and Monetary Affairs by Svensson (2002), A Reform of the Eurosystem’s Monetary Policy Strategy is Increasingly Urgent.
See the three Selected Issues papers: The Eurosystem’s Definition of Price Stability; The ECB’s Policy Strategy: An Assesment of the ROle of the Money Pillar; and Central Bank Decisions and Financial Markets.
See “Monetayr Policy and the Role of the Price Stability Definition,” speech by Otmar Issing at the 2002 ECB Watcher’s Conference.
The improvement in small country structural balances in 1998-2002—some 1½ percentage points of GDP—stemmed from reductions in structural expenditures. In the larger countries, smaller reductions in underlying expenditures were offset by tax cuts.
The long-standing procyclical bias in these countries’ policy stance during cyclical expansions is documented in Chapter VI of the 2001 Selected Issues Papers for the euro area (SM/01/297).
See 2002 Broad Economic Policy Guidelines.
This ambiguity persists despite the German and French authorities’ explicit provisions that their commitments were growth contingent.
For the euro area as a whole, staff estimates suggest that about 85 percent of the automatic stabilizer response occurs on the revenue side.
The perspectives and policies of the three national authorities, which vary significantly, are described in the corresponding national Article IV staff reports, also to be discussed by the Executive Board in the second half of October. On present policies, the combined structural balance of the three countries is projected to improve by about ½ percent of GDP in both 2003 and 2004.
The Pact requires that a country bring its deficit back into compliance the year after a breach is reported. On this basis, the staff’s policy advice would be sufficient to address breaches of the 3 percent limit in all but exceptional circumstances.
See the European Financial Roundable.
See Market Access for Developing Country Exports—Selected Issues (SM/02/280).