Axel A Weber: Stability and growth
Closing remarks by Professor Axel A Weber, President of the Deutsche Bundesbank, at the European
Banking Congress, Frankfurt, 19 November 2004.
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1. Introduction
Ladies and gentlemen
Although I have been entrusted with delivering today's closing remarks, I am unwilling to say goodbye
to Lisbon.
The Lisbon agenda started off as a visionary project in March 2000, which was at the very peak of the
hype surrounding the New Economy, the pinnacle of irrational exuberance in the stock market - if I
may refer thus to Alan Greenspan -, and the high point of overconfidence. At times like those, visions
tend to become oversized - which is fine for visions.
European Monetary Union started off once as a seemingly oversized vision, too. The original plan was
aired as early as 1970. From then on, it took more than 30 years before you could feel the change in
your pocket. Now that we are almost six years into the euro era, we can safely conclude that the euro
was a vision worth pursuing. The vision of a stable single European currency has come true.
The Lisbon project basically aims at boosting the EU member states' potential for dynamic growth.
Progress towards the Lisbon goal hinges crucially on the efforts of national governments. For keeping
up spirits during the nitty-gritty of making this vision become reality, European leaders need, as the
Kok report rightly states, "to instil (the) hope that tomorrow will be better than today". This visionary
stance contrasts sharply with the present reality, where there is a prevalent, rather vague sense of
Europe being an underachiever.
2. Institutional foundations of stability
The two big European visionary projects - EMU and the Lisbon agenda - are interrelated. First,
reinvigorating the growth dynamics in Europe is crucial for fully exploiting the potential of a stable
single currency. Second, sustainable economic growth requires more than Lisbon-style reforms; price
stability is of the essence for sustainable economic growth. Stability and growth go hand in hand.
Stability must be safeguarded by a cleverly designed institutional framework that generates proper
incentives. I very much welcome the fact that this year's Nobel Prize for Economics rewards
theoretical research on the importance of a sound institutional setting. It should come as a useful and
timely wake up-call for those who are, in effect, contemplating watering down the institutional
foundations of the euro's stability.
Reforming the Stability and Growth Pact under the pretext of rendering it more growthfriendly would be
the wrong path to take. There is no such thing as the alleged trade-off between economic growth and
fiscal prudence! Nor is the budgetary discipline to be guaranteed by the Stability and Growth Pact a
hardship that central bankers wish to impose on finance ministers. Budgetary discipline is a "must" in a
monetary union of sovereign states. That is because the consequences of fiscal misbehaviour would
have to be borne by all the participants in the form of higher interest rates - which in itself might weigh
on growth. In history, currency unions used to fail due to a lack of fiscal commitment. Fiscal rules are
of the essence, and they need to promote sustainable fiscal positions.
The Maastricht Treaty enshrines the core fiscal rules of the EU: the obligation to avoid excessive
deficits, the practice of budgetary surveillance, and the excessive deficit procedure. The Stability and
Growth Pact clarifies these rules and puts them in more concrete terms: member states have
committed themselves to the aim of achieving budgetary positions close to balance or in surplus and
to submitting to annual stability (or convergence) programmes. Rules need to be straightforward,
transparent and binding. In its present shape, the Stability and Growth Pact is straightforward and
transparent. Its Achilles heel lies in its unsatisfactory lack of binding character in practice.
3. Changes to the Stability and Growth Pact
Let me comment briefly on the changes now envisaged for the Stability and Growth Pact. This week
the ECOFIN Council discussed the "strengthening, clarification and better implementation" of the Pact.
The new framework is scheduled to be finalised in spring 2005. The debate keeps on going under its
own momentum, and new proposals are constantly being ventilated.
Against this backdrop, it may be worthwhile recalling the basic economic idea behind the Stability and
Growth Pact: Sound public finances are to prevent the emergence of conflicts between monetary and
fiscal policies right from the outset. The state of sound public finances is characterised by a balanced
budget and a low level of public debt. This state of sound public finances is to be realised as soon as
possible. Nobody has ever refuted the underlying economic rationale of the Stability and Growth Pact.
Thus, the Pact suffers from neither a lack of economic reasoning nor a lack of clarity.
For a monetary policymaker committed to stability, the ongoing debate on revising the Stability and
Growth Pact is utterly uninspiring. Placing greater weight on the long-term sustainability of public
finances sounds reasonable; however, this provision should not be used as a "back door" for
introducing all kinds of exceptions. Discriminating between good and bad types of expenditure is of no
help either. I have serious misgivings about any endeavours to loosen the obligation to trim excessive
deficits in a speedy manner and about tolerating excessive deficits in periods of economic stagnation
or low growth.
Overall, the debate on reforming the Stability and Growth Pact has the air of reshaping the rules to fit
current fiscal practice - instead of reshaping fiscal practice to fit the pre-agreed rules.
Basically, the proposals now under discussion amount to substituting discretion for rules. The
implications of this paradigm shift must be borne in mind: heightened complexity, reduced
transparency, and discarding the principle of equal treatment. Abandoning rules in favour of discretion
would represent a major step backwards. EMU was once meant to be placed on a solid institutional
foundation instilling credibility. Rewriting the Pact as envisaged would deal another blow to the
credibility of the fiscal framework of the monetary union. From the viewpoint of a monetary
policymaker committed to stability, the envisaged change to the nature of the Stability and Growth
Pact would not yield any major benefits. It could, however, come at a great cost.
4. Fiscal policy and structural reforms
The growth policies agreed on in the Lisbon agenda are, amongst other things:
•
the completion of the internal market,
•
stimulating competition and deregulating the product markets,
•
reforms improving flexibility in the labour market,
• generating a climate conducive to entrepreneurial activity, to research and development.
I very much support this agenda. I do, however, not support proposals which, with reference to the
Lisbon agenda, suggest that expenditure related to growth policies should be disregarded when
calculating the deficit. In my, view, using the Lisbon agenda as an excuse for weakening the Stability
and Growth Pact amounts to upending conventional economic wisdom. The correlation between debt
and deficits, on the one hand, and economic growth, on the other, is negative. Never in economic
history have spendthrift policies produced sustainable growth. The opposite is true, and all the more
so as all European countries have to brace themselves for sharply rising fiscal costs resulting from the
pending demographic shift in an ageing society. Loosening budgetary discipline is no viable option for
promoting economic growth. On the contrary, it would undermine the long-term sustainability of fiscal
positions and thereby weigh heavily on future growth.
Public finances in Europe are already characterised by a large sustainability gap. Future pension
obligations in most countries are several times higher than the explicit debt burden revealed in the
national accounts. By a very rough calculation, it would, for example, take Germany three and a half
years' output to honour its combined explicit and implicit debt. If future generations are to handle this
sizeable burden - in Germany as well as elsewhere - there is, first, no way of getting around a tough
course of fiscal consolidation, which has to be augmented, second, by coherent policies to lift growth
potential - as agreed on in the Lisbon agenda.
I appreciate the fact that, last year, Germany directed its attention to structural reforms in the spirit of
the Lisbon agenda - even if this was driven more by the "push" of persistent economic stagnation than
by the "pull" of the Lisbon vision. Under the Federal Government's "Agenda 2010", labour market
flexibility has been improved in terms of the institutional framework, collective wage bargaining
agreements and working hours. Reforms in the social security systems have been enacted and will
help to contain the implicit debt burden. Among the remaining tasks, priority status should be given to
untying the link between labour costs and social security and to raising the statutory retirement age.
5. Concluding remark
Stability and growth go hand in hand. The Lisbon agenda and the Stability and Growth Pact
complement each other in lifting the EU's growth potential. Both are needed and we should not say
goodbye to either of them.