WRITTEN QUESTION E-1714/01

by Erik Meijer (GUE/NGL) to the Commission

(14 June 2001)

Subject: Differing needs regarding interest rates as a result of unequal and non-simultaneous economic growth.

1. Does the Commission remember that in March and April pressure was brought to bear, inter alia by the USA, for the European Central Bank to lower its interest rates but that this reduction in interest rates did not initially take place on the grounds that it might increase the risk of inflation in the euro zone?

2. Does the Commission consider that the risk of inflation in May, when the interest rate was indeed reduced, had abated as a result of new statistics indicating that the growth in money supply was less than originally expected?

3. Is the Commission aware of a study by the Dutch-Belgian bank group ING according to which the economies in the euro-zone will grow further and further apart, inter alia because Member States and regions will specialise in different sectors such as high-tech, cultivation of vegetables or car manufacture and that this will result in economic highs and lows in different regions at different times?

4. Can the Commission confirm that the interest rates set by the ECB since the beginning of 1999 have had a beneficial effect for France in particular which succeeded in combining a low rate of inflation with remarkable growth in employment in the said period?

5. What is the Commission's opinion of publications which claim that Germany needs lower interest rates in order to stimulate its economy while the Netherlands requires higher interest rates to counteract the growing inflation and that Ireland and Portugal also need higher interest rates to cool down their overheated economies?

Sources: Rotterdams Dagblad, 18 May 2001 Financial Times homepage, 23 May 2001.

Answer given by Mr Solbes Mira on behalf of the Commission

(18 September 2001)

1. The Commission remembers that in March and April 2001 several people were asking the European Central Bank (ECB) to lower interest rates. In fact some of these demands originated from the United States.

There has not been any cut in the ECB's policy interest rates in March and April 2001. Obviously this absence of cuts cannot be attributed to single determinants. However, as the ECB has price stability as its primary objective one can conclude that the absence of rate cuts is indicating that the ECB has seen the possibility of adding risks to price stability by cutting interest rates.

2. Risks to inflation are originating from a bundle of sources. As inflation is a monetary phenomenon indeed too fast monetary growth could result in future inflationary pressures. Hence, a slower than initially measured monetary growth can mean a lower than initially perceived risk to price stability.

The case of the ECB's downward correction of M3 growth suggests that inflationary pressures indicated by strong monetary growth in 1999 and 2000 have been overestimated for a while.

Hence the Commission does not think that the risk has abated due to new statistics. It is only the assessment of risk that has changed.

3. The Commission is not aware of a study by the Dutch-Belgian bank group ING mentioned in the question. However, the Commission is aware of the subject of macroeconomic difference, in particular in terms of economic growth and inflation. Macroeconomic differences among euro area Member States are carefully watched by the Commission services in its regular analysis.

Specialisation of regions, however, does not necessarily mean long-term divergence as historical evidence from European countries indicates.

4. According to the latest macroeconomic forecast by the Commission, France had low inflation rates in 1999 and 2000 (0.6 % and 1.8 % respectively), while real gross domestic product (GDP) growth was at 2.9 % and 3.2 % in these years. The forecast development for this year and next comprises a continuation of strong economic growth (2.9 and 2.8 % respectively), while inflation was expected to remain below the euro area average in both years (1.3 and 1.6 % as compared to 2.2 and 1.8 % for the euro area as a whole. However, the growth performance of France was close to that of the whole euro area (maximum difference of 0.4 p.p. in 1999). With respect to the forecast the more recent information suggest that the Spring forecast figures are on the upper part of the most optimistic forecasts. For instance harmonised index of consumer prices (HICP) inflation has steadily increased over the last months and reached 2.5 % in May (up from 2.0 % in April and 1.4 % in March).

This performance has indeed been assessed as favourable, but it is difficult to name a single source as a mix of determinants has been responsible. Among them monetary policy is one part of the story. Other measures were taken by different authorities and also the behaviour of the private sector mattered a lot. Moreover as monetary policy is the same for all Member States one would have to ask why the same policy should have been beneficial to a single Member State while it did not trigger similar effects elsewhere.

5. Monetary policy in the euro area is conducted for the euro area as a whole (one size fits all). As the cyclical situation of the Member States and the structures differ this policy results in different monetary conditions in euro area economies. This is the specificity of the economic and monetary union (EMU) policy framework. It implies that, in a Member State, other economic policies have to be used in order to accommodate the monetary stance.