Mr Duisenberg looks at the euro and a dynamic Europe
Speech given by Dr Willem F Duisenberg, President of the European Central Bank, on the occasion of
a conference organised by VNO-NCW in Scheveningen, Netherlands, on 5 November 1999.
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1. Introduction
Your Majesty, ladies and gentlemen,
It is a great pleasure for me to be here in Scheveningen today and I should like to congratulate
VNO-NCW on its hundredth anniversary. I have met less healthy centenarians. I should also like to
thank Hans Blankert for my pleasant cooperation with him in my former position, and I should like to
wish his successor, Jacques Schraven, every success.
Since 1 January 1999 the euro has become a reality. As you know, the euro area experienced a
slowdown in economic growth in the early part of the year. Fortunately, the recovery is now under
way. The challenge posed to policymakers, but also to entrepreneurs like many of you, at this juncture
is to ensure that the cyclical recovery is the beginning of a long period of growth without inflation. As
regards the economy of the United States, there has been extensive debate on the question of whether
the United States has entered an era of a "New Economy". Growth would be sustainably higher than in
the past, inflation would be a thing of the past, while economic fluctuations would be much more
limited than formerly. The cause of all this would be the boom in information technology. However
true this may be for the United States, for Europe the "New Economy", particularly in a
macroeconomic sense, is a goal rather than reality. This also holds for countries in the euro area, such
as the Netherlands, which are performing relatively well. Growth is high here, but this cannot (yet) be
said of increases in productivity. Inflation is on the high side, especially relatively speaking, and it is
still too early to put the theoretical books on the economic cycle away on the shelves forever.
However, I do not want to sound pessimistic. Europe can become a dynamic economy. What is needed
is the comprehensive administration of by now well-known prescriptions to get rid of old illnesses and
to avoid old mistakes. This can improve the conditions for entrepreneurs to do what they are really
good at: enterprise. Policy creates the conditions, but real growth has to come from entrepreneurial
activities. Whether that will lead to a "New Economy", we may discuss at a future anniversary. I
should like to deal with monetary policy first, and subsequently with the other economic policy needed
to allow Europe to use the potential which it certainly has.
2. The role of monetary policy: maintaining price stability
The euro is not and cannot be a cure for all of European problems. In particular, the introduction of the
euro will not by itself solve the unemployment problem and automatically increase growth. The single
monetary policy can provide a sound basis for economic growth and employment, but the degree to
which the economic potential of the euro is realised depends first and foremost on accompanying
stability-oriented fiscal and appropriate labour market policies. Let me start by elaborating on the role
of monetary policy.
Among central bankers and economists, overwhelming agreement exists that there is no long-run
trade-off between real activity and inflation. Attempts to use monetary policy to raise real economic
activity above its sustainable level will, in the long run, simply lead to ever higher inflation, not faster
economic growth. The best contribution which monetary policy can make to sustainable growth and
employment in the euro area is to maintain price stability in a credible and lasting manner, allowing
the considerable benefits of price stability to be reaped over the medium term.
It is also generally acknowledged that monetary policy does indeed affect real activity in the short run.
Although the focus must always be on price stability, in many cases the policy action required to
maintain price stability will also help sustain short-run economic and employment prospects.
However, in situations where monetary policy might face a short-term trade-off between adverse
developments in real activity and deviations from price stability, the overriding priority accorded to
maintaining price stability must be made absolutely clear. Any ambiguity on this point will simply
endanger the credibility and thus the effectiveness of the monetary policy response. The medium-term
orientation of the Eurosystem's monetary policy strategy permits a gradualist and measured response
to threats to price stability. Such gradualism helps to avoid the introduction of unnecessary uncertainty
into the real economy.
3. Non-monetary policies: stability and reform-oriented
The full benefits of the single currency will arise only if there is appropriate support from a variety of
other policy areas, above all national fiscal and labour market policies, and if structural reforms are
carried out in these areas. Price stability is a necessary, but not a sufficient condition for grasping all
the opportunities of EMU.
What role can national governments still play, now monetary policy has been centralised? A very
important one. A single monetary policy requires variation in other policies. It is of the utmost
importance that national governments continue to implement fiscal policies that aim at a budgetary
position close to balance or in surplus, as stipulated in the Stability and Growth Pact. If governments
achieve balanced budgets or surpluses in normal periods of the cycle, they create a safety margin,
sufficient to allow the operation of automatic stabilisers in the event of fluctuations in growth without
risking excessive deficits. Moreover, sound government finances are important to strengthen the
conditions for price stability and for the strong and sustainable growth necessary to support
employment growth.
Structural policies are another key area where national flexibility is needed and a uniform approach
would be fatal. Many of the important challenges which the euro area countries currently face can only
be addressed through national policies. This concerns in particular the high and persistent level of
unemployment, which is rightly a source of deep concern. Clearly, the approaches that are most likely
to have a lasting effect are those that address the root cause of the problem, not the symptoms. The
root causes of high and structural unemployment in the euro area are structural rigidities in labour
markets as well as tax and public transfer policies.
The situation in euro area labour markets differs considerably. National unemployment rates range
from 2.8% in Luxembourg and 3.2% in the Netherlands to 15.7% in Spain. Some countries,
particularly those with more flexible labour markets, more moderate wage increases and better tax and
social security policies, have managed to avoid the trend of ever-rising unemployment. For example,
the Netherlands, Ireland and Portugal all currently show unemployment rates well below the euro area
average. There are also examples of other countries with higher unemployment rates, such as Spain,
that have begun to take steps to reform their labour markets and are now beginning to see tangible
results. We can also look at some of the non-participating EU Member States, such as Denmark and
the United Kingdom, to see that high unemployment can be reduced through structural reforms.
There are many examples of what can be done. First, there are measures to ensure that
low-productivity workers are not forced out of the labour market. To this end, the burden of taxes and
non-wage labour costs could be reduced for low-paid workers. In addition, minimum wage schemes
and wage agreements reached by collective bargaining need to take account of the need to preserve
jobs for low-productivity workers by reducing labour costs. Second, there are "active labour market
measures" which provide programmes of education, training and work experience targeted at the
long-term unemployed. Third, reforms to the tax and benefit systems could be implemented which
ensure that people are significantly better off in work than out of it.
I should like to emphasise that the structural reform agenda available to national governments to
promote economic development extends well beyond the reform of labour markets. For example,
national governments can take steps to promote entrepreneurship and make it easier for people to start
and run businesses and thus create new jobs. This could involve encouraging competition through
measures to promote the entry of new firms, such as reducing the administrative burdens they face and
making markets more competitive. Governments can also liberalise previously highly regulated
sectors, such as utilities, to increase efficiency and reduce prices to the benefit of industrial and
household users of these services. National governments may also wish to take steps to raise
productive investment in research and development to increase growth in expanding high-tech
industries.
Experience in the Netherlands shows that reform programmes indeed have the potential to
substantially improve the labour market situation. The decline in the unemployment rate from its
historical peak at 11.6% in 1983 to today's 3.2% is indeed impressive. However, even in the
Netherlands there is little reason to become complacent. Thus, there seems to be a need to step up
efforts to reduce inactivity and improve the flexibility of the labour market in order to help ensure
responsible wage developments and price stability. It would also seem that the Netherlands has not, as
yet, been successful in increasing output growth. A "polder model" yes, a "New Economy", no, not
yet.
4. Conclusions
To conclude, I am convinced that Economic and Monetary Union provides a great opportunity to
create and maintain a large zone of price stability and economic prosperity in Europe, including a
substantial reduction of unemployment. However, while price stability is a necessary condition for
fully grasping the opportunities of EMU, it is not sufficient. Stability-oriented polices regarding the
development of national fiscal positions and structural changes to improve the functioning of markets
are of crucial importance as well. Policymakers in all areas must take the new environment of
Stage Three of EMU and its consequences appropriately into account when forming their policies.
Only then will the euro be able to function as a true accelerator of economic growth in Europe.
The introduction of the euro and a common monetary policy have certainly not rendered national
governments impotent. With the possibility to vary fiscal policy and undertake structural reforms,
national governments retain the key powers to improve the performance of their economies. If the
terms of the Stability and Growth Pact are adhered to, there is sufficient flexibility to allow automatic
stabilisers to work in the event of cyclical fluctuations. Together with the social partners, governments
have a key responsibility to act decisively to ease the unemployment problem in Europe. Structural
reforms provide the only means of achieving lasting reductions in unemployment, preparing for the
ageing of the population and reducing the burden of government debt.