david dodge : update on economic and monetary developments in canada opening statement by mr david dodge, governor of the bank of canada, before the standing senate committee on banking, trade and commerce, ottawa, 30 april 2002. * * * when malcolm and i appeared before you at the end of last november, a heavy cloud of uncertainty hung over the outlook for the world economy and for canada. much of that uncertainty stemmed from the september terrorist acts in the united states, which came at a time when the global economy had slowed more than expected. to counter that uncertainty and bolster consumer and business confidence, the bank of canada moved aggressively to provide monetary stimulus. between last september and january 2002, we lowered interest rates by 200 basis points, bringing the total reduction since january 2001 to 375 basis points. as it turned out, consumer confidence was not as badly shaken in the aftermath of those tragic events as had been widely feared. indeed, confidence bounced back as perceived geopolitical and economic uncertainties diminished. the world economy has begun to strengthen. here in canada, a robust recovery appears to be underway. growth in the fourth quarter of last year and the first quarter of 2002 was appreciably stronger than expected, so that the level of economic activity is now higher than we thought it would be six months ago. this momentum is reflected in the extraordinary number of new jobs created since the beginning of 2002. in terms of the two scenarios we had painted last november, clearly, we are into the more optimistic one, in which a recovery in consumer confidence leads to an early resumption of economic growth. what do we see now as we look ahead? the bank projects that, in the first half of 2002, the canadian economy will grow by between 3 1 / 2 and 4 1 / 2 per cent, at annual rates. and we expect that it will continue to expand in the second half of the year and in 2003 at a rate somewhat above that of its production capacity ( or potential ), which we estimate to be around 3 per cent a year. you may recall, senators, that at our last visit i spoke about the concept of potential output. we set monetary policy so as to keep inflation low and stable, thus contributing to sustaining economic growth at its full potential. six months ago, we assumed that our economy would be growing at a pace well below the rate of capacity growth in the fourth quarter of last year and the first quarter of this year. we thought that the gap between the actual

citizens, who appear to have fully accepted the euro as their currency. in terms of european economic integration, the introduction of the euro is often regarded as an end point. however, in my view, this is not the case. in addition to the political dimension of the introduction of the euro, representing as it does a step towards ever closer union, its introduction is also a catalyst for further economic integration in europe. this has already become apparent in the area of financial integration ; here increased integration has been brought about by market developments as well as policy initiatives, in particular the european commission ’ s goal to create a truly integrated european financial market by 2005. i should like to take the opportunity today to address another area where, at least in my view, the introduction of the euro has illustrated the need for more co - ordinated efforts in the european union. i refer in particular to an increased need to enhance the co - ordination of structural policies in europe, i. e. policies which aim to improve the functioning of market mechanisms and the operation of the economy as a whole. in my view, there are three reasons why such enhanced co - ordination of structural policies is necessary. first, the introduction of the euro has made exchange rate fluctuations obsolete as an instrument of adjustment. for instance, before the establishment of economic and monetary union ( emu ), divergent national economic developments could be addressed by a depreciation or appreciation of national currencies. in a monetary union, such adjustment has to take place via other mechanisms, such as price and wage adjustments, labour mobility, or, most unwanted, a temporary rise in unemployment. in order to avoid the latter, and to enhance economic adjustment via wages and prices so that it is comparable to the level of adjustment existing between regions of the united states, policies aiming at increasing the flexibility of the markets are necessary. second, in our monetary union, with increased trade and financial links between the member countries, the significance of spillovers from national economic policies has also increased. in other words, if governments embark on economic policies that are not sound, or hamper the functioning of their economies, the adverse consequences will not be limited to the country concerned, but will also have an impact on other countries participating in the euro area. hence, the increased risk of spillovers from insufficiently effective structural policies warrants enhanced co - ordination of such policies at the european level. finally, it has become increasingly clear - on the basis of both practical experience and