Issing sees eurozone recovery ahead

Nobody can claim they know when the euro will rise above the US dollar, Professor Otmar Issing, a member of the executive committee at the European Central Bank, admits in an interview with Kathimerini. He says, however, that what counts for Europeans is what the euro can buy, and in recent months this has depended on inflation. Therefore, it is crucial to try to achieve the ECB’s goal of inflation lower than 2 percent, an objective which is feasible, he says. Issing says this, along with a return to high growth rates, will ensure a moderate recovery in the eurozone in the first half of the year, with the pace picking up in the second half. In the last few months, European bankers have been more optimistic than ever. «The recovery will continue and the average growth rate this year will exceed last year,» said the head of research and projections at the ECB. Issing says a recovery, low inflation and higher productivity are the keys to better incomes and not an arbitrary increase in wages which «is a very dangerous development.» What are your predictions for the eurozone? We believe the economic slowdown reached its lowest point in the last quarter of 2001. We expect the eurozone economy to see a controlled recovery in the first half of this year and speed up in the second half. We also foresee declining inflation. What will be the sources of this recovery? I don’t think there is only one source. First, we have confirmed that companies have exhausted their inventories and are now restocking, which will be good for growth. Secondly, domestic demand which stayed at low levels last year due to high inflation – it peaked at 3.4 percent last May – will recover as inflation falls. This will have a positive impact on disposable income. We also expect an increase in exports without depending exclusively on external factors. You don’t expect the European recovery to result from the improved US economy? The two will occur at the same time as happened with the downturn. Nevertheless, the US economy is not the steam engine on which we depend. The European rally will be led by domestic demand. The ECB at one time said the problems of the US economy will not be transmitted across the Atlantic. Today, would you say that the repercussions of the tragic events of September 11 were the cause that led to the US problems being transferred over here, or is it logical and foreseen that they would cross the Atlantic? First, the consequences of September 11 on the US economy were significant, but limited, in respect to its size and their duration. The US recession had begun long before that. The September 11 events only made things worse. Second, the simultaneous slowdowns in Europe and the USA were the outcome of common factors, such as the sharp hike in oil prices and overcapacity from IT and telecommunications producers. Our estimate is that the eurozone as a whole remained less exposed to the resulting shock than each member state on its own. So you admit that there is a connection between the eurozone and US economies and that exports could play a principal role? It was not the chief factor but it had a serious impact on the slowdown. It must be noted that the ratio of eurozone exports to gross domestic product amounts to 17 percent, much lower than the ratio for the individual countries before the creation of the eurozone. Do you reiterate your forecast that the eurozone economy will recover to a growth rate of 2 percent this year? What we expect is a mild recovery in the first half of the year and an acceleration in the second half. Thus, at year end, the annual growth rate should be consistent with the rate of growth in production potential. On average, the growth rate this year will be smaller but this should not lead to the wrongful conclusion regarding the strength of the recovery. What are the dangers that could threaten recovery? First, the eurozone is in very good shape. There are no serious imbalances. The current account is balanced, household and corporate debt do not create any concerns. Also financial markets are very stable and financing terms support a recovery. Real disposable income benefits from falling inflation. Fiscal restructuring is expected to continue. Subsequently, the basic macroeconomic factors favor a recovery without any inflationary pressures. Dangers would come principally from the international environment. As US authorities have noted, the US rally might not come without a hitch. There is still danger from developments in energy prices. We have seen an increase which is not worrying at present but a recovery could lead to a higher demand for oil. On top of this, the political uncertainties in the Middle East create serious concerns. Should we expect inflation to fall below 2 percent in the course of the year? Certainly, if nothing unexpected comes up and oil prices remain steady. Does the «compromise» in the European Union regarding the fiscal deficit in the end reflect a «German problem?» I am satisfied with the agreement. Following the European Commission’s initiative and pressure from partners, Germany will need to speed up its fiscal reforms this year and in coming years. How will the enlargement process affect the decision-making process in the ECB? Based on proposals at the Nice summit, we have discussed possible changes and have settled on an appropriate timeframe when these proposals will be discussed at the European council. What is your opinion on the euro’s current value? You must be aware of the concerns regarding the euro’s declining value since its introduction. How do you explain the euro’s fall against the US dollar and how long will this last? Indeed, Europeans are concerned, as they see the external value of the currency fall. It is not easy for many to see the difference between the domestic and the external values of the euro. For 330 million Europeans, the euro is a steady currency. It should be noted that studies have shown that the euro remains significantly undervalued. There is, of course, the question as to when this will change but the answer is that no one knows. Nobody can foresee short-term currency developments. We are of course convinced that the euro has the potential to appreciate. In Greece, there is concern about the rise in inflation in recent months. Do you believe it is acceptable for a country like Greece, which expects a growth rate above 3 percent, to have inflation higher than the average eurozone level? As long as the Greek average inflation rate exceeds the average eurozone level, there is the danger that it will affect the country’s competitiveness. This is a worrying development. This is an issue which must be dealt with economically as the ECB’s monetary policy is drafted with the overall needs of the eurozone. Dealing with high inflation is closely linked to wage developments and fiscal policy. Do wage negotiations endanger a recovery? Wage negotiations could endanger price stability and simultaneously, employment and attempts to reduce the number of jobless. This constitutes the principal domestic uncertainty for the start and the strength of an economic recovery. What do you consider a satisfactory level of wage increase that does not pose a danger to inflation? The guide to any wage increase must be an increase in productivity, which differs from country to country, region to region and sector to sector. Wage negotiations must take into account these special factors, especially within the framework of the monetary union. What do you think of the argument, especially popular in countries with low capita income, that an accelerated increase in wages will bring about convergence with other eurozone countries faster? If the divergence, in nominal terms, is radically reduced, then unemployment could go up and this could be a dangerous development. We can learn from the German experience. There was a similar discussion before unification. The fact that the different wage levels in East and West Germany converged faster than productivity led to a hike in the number of jobless in East Germany. The view that for the same job, there should be the same pay is misleading. Especially in the framework of the monetary union, where we can’t use the tool of currency exchange. If a country wants convergence in this way, it must bear the consequences.