Klaus Liebscher: The European integration: policies towards stability, growth
and employment
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, to the Bertelsmann
Foundation, European Forum Alpbach, Institute for Public Affairs, and the Bruno Kreisky Forum for
International Dialogue, Baden, 29 June 2001.
* * *
Ladies and gentlemen,
It is a great pleasure for me being with you this evening and let me first congratulate the organisers of
this conference for having chosen a combination of two very important issues for discussion on
European integration - labour markets and enlargement. I am pleased to share some thoughts with
you from the view of monetary policy.
The two elements of your conference title touch upon both the deepening and the widening of
European integration. I may recall that, in the wake of the fall of the Berlin wall, those two dimensions
were often discussed as alternative strategies. However, today it seems clear to almost everybody that
European integration has to proceed in both directions. The deepening of European institutions and
the widening of Europe's geographical extension are not mutually exclusive but rather dependent on
each other. Progress in one area does certainly give momentum to the other.
The most important step in the deepening process of European integration - at least to my mind - has
been the creation of Economic and Monetary Union (EMU). From a Governor of one of the euro area
central banks this statement will certainly not come as a surprise to you.
Although there was some scepticism or even criticism in the run-up to EMU, not only European
officials but also many observers outside the area have since confirmed that the transition to EMU was
taken successfully - including those observers who were originally very sceptical about the ambitious
aims lined out in the Maastricht treaty. And indeed, the list of preconditions for monetary union met in
recent years is impressive.
Let me single out just a few of those points, without attempting to gloss over the challenges that lie
ahead:
 First and foremost, while inflation has come down to historically low levels we cannot be
satisfied with the current inflation performance. At this point it has to be stressed that price
stability was not only a precondition of Monetary Union but - even more importantly - is the
prime objective of the independent Eurosystem. Thus, the European Central Bank will
ensure that medium-term inflation is in line with price stability. We are confident that such a
conduct of monetary policy will gain the trust of the public.
 Public finance has improved with the implementation of the Growth and Stability Pact. An
increasing number of countries are already recording budget surpluses. However, this
amelioration has predominately been due to favourable cyclical conditions and one-off
measures, with only modest help from structural changes. What is more, the visible
improvement in the average deficit ratio for the euro area as a whole may come to a halt in
2001 as large tax cuts throughout the area are being implemented without due
compensation on the expenditure side.
 Unemployment has come down to the lowest levels in a decade as economic recovery has
taken hold. Furthermore, labour markets have also become increasingly responsive to
growth, which may give an indication of progress with regard to labour market reforms. High
rates of turnover in the labour market are a signal that employers enjoy greater flexibility in
tailoring their staff numbers to production needs. However, remaining limits to the choice of
the most profitable combination of productive factors may still prevent firms from exploiting
the full possibilities of new technologies reducing both welfare and employment prospects.
Despite the favourable common trend of wage moderation - which increasing levels of
inflation may now put under threat - national wage negotiations should further take into
account sectoral and regional differences in productivity.
There is no doubt that the single currency has been an important catalyst in stimulating structural
reform processes.
Greater commitment of governments to undertake necessary structural reforms can be
observed - reforms to render product markets more competitive, to make labour markets more flexible
and to make the tax system more supportive to employment and investment. Additionally, several
countries are planning to reform pension and social security systems in response to the increasing
demographic burdens. Certainly, much more needs to be done, and awareness of the need for
structural changes must also rise. In line with this, the Lisbon process for employment, economic
reform and social cohesion - to which the Göteborg summit has added an environmental
dimension - will surely increase the potential of the European Union.
Some fruits of Monetary Union have already been harvested. Real convergence of interest rates to
relatively low levels has given a great impetus to economic growth. Another example is that currency
devaluation, which had been an important source of market distortion, is eliminated with EMU.
Particularly traditional so-called "hard currency countries", such as Austria has been during the last
two decades, were suffering from some elements of "beggar thy neighbour policies". Fortunately, this
is a thing of the past.
Still, the euro is rather an abstract notion to most of the citizens since it does not yet exist as a tangible
transaction currency. The euro project will receive much more support once the common coins and
banknotes have been introduced at the start of next year. The single currency will enhance price
transparency and reduce transaction costs, both of which are likely to promote competition and full
implementation of the Single Market for goods and services. But the euro will only be able to fulfil this
expectations if it is a stable currency strengthened by a determined monetary policy, structural reform
and wage moderation.
Last but not least, the introduction of a single currency is not just an economic project. It also carries a
political, symbolic and psychological dimension of European integration. While the replacement of
national currencies by a pan-European symbol is hardly changing the national identities of the
Member States, it certainly helps to promote pan-European thinking. Perhaps one should recall at this
point that integration is not only an objective by itself. What is at stake is sustainable economic and
social development and ultimately political stability and - without sounding pretentious - peace.
European integration will only be truly successful if it reaches out to the whole of Europe. Again it is
the concept of stability orientation that urges us to complete European unification. According to the
underlying rationale of enlargement, either we export stability to the accession countries, or we stand
to import instability.
If we manage the enlargement process successfully, this will also be conducive to our endeavour to
guarantee stability for the whole euro area. Such a mutual improvement is desirable in a very broad
sense: political stability, financial market stability, macroeconomic and - in the particular interest of the
Eurosystem - price stability.
The enlargement of the European Union to Central and Eastern Europe has arrived at a critical
juncture. Accession negotiations with ten Central and Eastern European countries and with Malta and
Cyprus have advanced dynamically, especially during the past half year. Difficult chapters - like
"Freedom of movement for persons", "Free movement of capital" or "Environment" - have been
provisionally closed with some applicants. Furthermore, some of the six "Helsinki group" countries
(which started negotiations only in early 2000) have made good progress in catching up, in the
accession negotiations, to the "Luxembourg group" countries.
The European Council in Nice opened the door for a widening of the Union, even if it did not fulfil all
expectations. Ratification of the new Treaty is proving more difficult than expected - as we
experienced quite recently - but it has to go forward, and I am convinced that it will go forward. The
new entrants deserve our full solidarity after having been the victims of historically tough luck.
There is no doubt that enlargement will encourage stability, growth and employment in a wider
Europe. There is consensus that the accession countries will reap substantial growth and employment
benefits from their membership in the European Union. Still, let me add a word of caution in this
context: It may take quite a while before new entrants will be in a position to fully harvest these
benefits. A fair share of realism is called for to avoid disappointment.
Enlargement will also foster macroeconomic stability in the acceding countries. Economic policy
coordination and surveillance will surely play a crucial role in making further headway towards price
stability, fiscal prudence and stable exchange rates.
I am sure that price stability should be regarded as the primary objective of monetary policy in
transition countries, too. However, while steering a clear course towards disinflation, explicit targets of
monetary policy should be chosen carefully. Adequate efforts towards stabilization and structural
change can reinforce each other and will foster the catching-up process. Structural reforms are the
key to long-term success and sizeable resources have still to be devoted to the structural
transformation of the production and financial sectors in Central and Eastern Europe. While accession
countries will have to shoulder a large share of these burdens, the European Union is committed to
support and underpin this process with significant financial means and extensive technical
cooperation.
This conference focuses on labour markets and social policies. For a central banker, labour markets
and, in particular wage-setting mechanisms, are of crucial importance. Still, I have the feeling that we
in the European Union do not know very much about the functioning of labour markets in the
accession countries. Without any doubt there is still room for improvement in these countries, and
lessons can be drawn from the experience of EU Member States with reconciling economical and
social aims - while on the other hand there is evidence that Central and Eastern European labour
markets tend to be more flexible, in a number of ways, than those of many Western European
countries. For instance, in Austria we discuss (and postpone) greater flexibility of shop opening hours,
whereas in some of our neighbouring accession countries they already have this degree of flexibility. If
both flexibility and security are important objectives, learning from each other should definitely be a
two-way street.
As you surely know, the accession countries will first join the European Union and only later adopt the
euro, after the sustainable fulfilment of the Maastricht convergence criteria. Retaining a reasonable
degree of labour market flexibility will certainly be helpful to bring about eventual full monetary
integration of accession countries. To be sure, this is not a plea for full deregulation. Rather, I would
commend to adopt a broadly liberal stance with selective regulation in areas where it is needed.
Moreover, and this comes from my Austrian experience, it should not be overlooked that the social
partners can play a constructive and, indeed, beneficial role in labour market and social policies.
I have sketched a number of challenges that European integration is currently facing. Political will and
leadership will be required for mastering these tasks effectively. Much is at stake, for the current
European Union and for the accession countries alike. I am convinced that the Eurosystem will play its
role in the process: We will make the euro a success by both unveiling and increasing the economic
potential of the Monetary Union.
Given the stability-oriented framework of EMU, combined with the determination of the independent
Eurosystem, the euro will be a stable and attractive currency. Alongside, the European stability zone
will gradually expand to more and more European countries, both incumbents and prospective EU
Member States. It will be a key task for the Eurosystem to manage this process properly, in particular
in terms of speed and timing.
Thank you very much for your attention.