Suchergebnisse

enth.

The expansion of Western European production accelerated in the first half of 1997. Exports were the main engine, driven by a devaluation of European currencies and strong growth abroad. Domestic demand also picked up somewhat led by investment in machinery and equipment. Inflation remained at low levels. However, in most countries the bottom seems to have been reached. One major concern is the rise in import prices. The upswing will further gain momentum in the coming months and in 1998 as conditions shaping the cycle remain favorable. Real GDP in Western Europe will increase by 3 percent in 1998. Under the assumption that the decision concerning EMU due in spring 1998 is made in favor of a large monetary union, those countries with relatively high short-term interest rates will lower them quite substantially in next year. Against the background of high unemployment, countries with low interest rates will not raise key interest rates significantly. As a consequence, monetary policy in Western Europe on average will be further loosened. This will additionally stimulate economic activity but also raise risks of inflation. The major problem in Western Europe is unemployment, which remains stubbornly high or is even rising. As a contrast, unemployment in the United States has come down to the lowest level since decades. It is often stated that high unemployment in Europe is due to a restrictive monetary policy, led by a—supposedly—deflationary policy pursued by the Deutsche Bundesbank. This view, however, does not find any support when indicators of monetary policy are taken into account. Rather, they suggest that monetary policy has been expansionary in Europe for some time. In addition, the reduction of inflation since 1990 has been equally pronounced in Europe and the United States, which indicates that the monetary stance has not been significantly different. Furthermore, a striking fact in this regard is that the relatively steep fall of inflation in the United Kingdom was associated with a significant decline in unemployment. While total unemployment in Europe has followed an upward trend resulting in an approximate doubling of the rate, there have been notable exceptions within Europe. Among those economies that have experienced a decline in recent years are the United Kingdom, the Netherlands and Ireland; other countries seem to have joined the club. Overall, a variety of measures has contributed to the improvement of labor market performance in these countries. They include deregulations of product and labor markets that have led to wage moderation and more wage differentiation, and reforms of the tax and transfer systems that have resulted in improved incentives for both labor demand and labor supply. A central feature of individual countries' experience is that reforms tend to be more effective when they are comprehensive since there are important synergies between structural reforms in different fields.

enth.

In the fall of 1999, the recovery in Euroland is back on track. The turnaround was caused by the improvement in the world economy. After exports had been depressed in the past winter due to the weak demand in the crisis countries particularly in Asia, the impulses from abroad have picked up again. Furthermore, monetary policy has been expansionary, especially after the reduction of key interest rates in April this year. All in all, the upswing will gain momentum and will continue in the year 2000. In this paper, rules for monetary policy which are being discussed in the literature are used to gauge the stance of monetary policy. The conclusion is that interest rates will have to be raised if the reference path for money shall not be exceeded and if the target for inflation shall be achieved. Furthermore, the differences in growth rates of output across Euroland's economies are analyzed; it is found that there has been no significant convergence of income levels during the past decade. Finally, it is analyzed why inflation rates have differed in recent years. The main reason appears to be that the prices for nontradables in the various countries show different rates of change over time. Since such differences can also be expected for the future, inflation rates will not be equal, i.e., there will also be changes in real exchange rates in the monetary union. However, there is no reason for monetary policy to be concerned about this.

Stage Three of the European Monetary Union (EMU) will start on January 1, 1999. The new currency area, for which the name "Euroland" has been coined, will comprise 11 countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The project of a single currency has enhanced economic convergence among the participating countries to some degree, but differences with respect to the business cycle have remained pronounced. This can also be expected for EMU. A single monetary policy for Euroland will not affect regions uniformly, given the substantial differences between the participating countries with respect to, for example, institutional arrangements in financial markets and in labor markets, the public share in the economy or the structure of production. It is often argued that monetary policy in Europe is currently too tight; consequently, the upswing is at risk or even deflation is around the corner. This view is not supported by the facts. Various indicators suggest that monetary policy is actually quite easy. Given that European short-term interest rates are bound to converge around summer at a historically low level and key interest rates will hardly be raised substantially in the immediate future, monetary policy will remain loose for the time being. This policy increasingly bears some risk of accelerating inflation. In any event, there is no risk of outright deflation in Euroland. It is still an open question whether the European Central Bank (ECB) will use a monetary aggregate as an intermediate target (monetary targeting) or try to directly adjust monetary policy to (forecasted) inflationary developments (inflation targeting). Empirical work suggests that money demand in Euroland is sufficiently stable to pursue monetary targeting. Even if instability were to occur in the transition period and right after the introduction of the euro, this would not necessarily imply the superiority of inflation targeting because under such circumstances the reliability of inflation forecasts is reduced as well. The advantage of implementing the monetary targeting strategy that had proved to be successful in Germany would be that it allows the ECB to gain some of the Bundesbank's reputation. In 1997 public deficits in all countries of Euroland were kept within the limit of 3 percent of GDP set in the Maastricht Treaty. However, further consolidation is necessary in most countries in order to meet the obligations of the Stability and Growth Pact. Ultimately, the fiscal positions have to be sustainable in the long term. A rough calculation suggests that at present only a few of the prospective EMU countries have a sustainable fiscal position. In addition, fiscal policy seems to be less sustainable because in some countries one-off measures contributed significantly to the reduction of the 1997 deficits. After EMU is established, bilateral exchange rates as possible shock absorber cease to exist and other mechanisms of adjusting to a negative (external) shock are necessary in order to prevent unemployment from rising. The most important adjustment mechanism left is flexibility of wages. It would be counterproductive to increasingly negotiate wage settlements at the European level. Against the background of the rising need for differentiation, decisions that affect employment should, to the contrary, be more and more decentralized.

enth.

Since the fall of last year, EMU countries have experienced a slowdown in economic activity triggered by a deceleration of exports. The expansion of internal demand has been more or less intact due to low interest rates and higher terms of trade. Consumer confidence has continued to rise and business confidence seems to have stabilized in early 1999. Economic activity in Euroland will gain momentum again in the course of 1999, mainly driven by domestic demand. The increase in real GDP will amount to 2 percent in 1999 and 2.7 percent in the year 2000. Monetary conditions are currently very favorable and will support the upswing. The three-month money market rate fell to 3.1 % following the concerted reduction of central banks' key interest rates in December 1998. Long-term interest rates are extremely low; corrected for inflation, the rate for Euroland is lower than the long-term average for Germany. In recent months, the growth rate of M3 has been somewhat higher than the reference value announced by the ECB (4.5 percent); narrow money has expanded twice as fast as M3. In addition, the euro has devalued considerably against the US dollar since the beginning of this year. Given the expectation that the slowdown in the economy is only of temporary nature, the ECB will not loosen its policy further but keep its key interest rate at the current low level for the rest of this year. The ECB decided to follow a medium-term strategy. Against this background, the current weakness in Euroland does not imply a need for action. Low inflation is also no reason to cut interest rates because consumer prices have been dampened by special factors, in particular the weakness of raw material prices, and not by a tight monetary policy. If interest rates were lowered in response to this transitory change, they would have to be raised again as soon as this effect fades away. Such a stop-and-go policy should be avoided. Likewise, the recent weakness of the euro against major currencies does not suggest that interest rates should be raised. For very good reasons, the ECB—as well as the American Federal Reserve Board—does not follow a target for exchange rates. According to the Stability and Growth Programs published by the governments, budget deficits in relation to GDP are projected to decline from 2.3 percent in 1998 to 0.9 percent in the year 2002 in Euroland. As the Stability and Growth Pact calls for a balanced budget or even a surplus over the medium term, fiscal policy is, in general, not yet on a course compatible with the intentions of the Maastricht Treaty. Only in smaller countries fiscal policy is making progress, while consolidation in larger member countries is not sufficient. It has often been argued that it is necessary to harmonize VAT rates and particularly capital income taxation in the EU in order to prevent a "race to the bottom", otherwise it would be impossible to supply an adequate level of public goods and to finance the welfare state. However, the development of capital income tax rates in the EU and in other industrialized countries does not provide evidence of a race to the bottom. But even if tax competition should become fiercer, there are still arguments in favor of competition: If tax rates are cut in a process of competition, government expenditures will have to decline with the result that inefficiencies in the public sector will be reduced. Given the high levels of government expenditures in most of the EU countries, there seems to be no risk that governments would be unable to fulfill their specific functions. In addition, tax competition might help to find better tax systems, and every country could learn from the experiences of other countries. In contrast, tax harmonization would probably lead to higher taxes in the EU.

enth.

The cyclical situation at the beginning of the European Monetary Union (EMU) is favorable: The upswing in Euroland has firmed, unemployment is going down, and inflation is low. However, economic growth outside the new currency area has weakened significantly during 1998, and fears are mounting that the crises in various regions of the world economy could endanger the current expansion in Euroland. Against this background, the significance of external conditions for the business cycle in Euroland — as well as the regional structure of exports — is analyzed. An important issue for an adequate design of economic policy is to what extent capacities in Euroland are currently utilized and whether cyclical unemployment is still significant. In addition, it is important to know whether the business cycles in the individual countries converge or not. In light of the findings from these analyses, the course of monetary, fiscal, and wage policy is evaluated in order to assess the outlook for Euroland until the end of 1999.