There are serious challenges ahead for the single currency zone, according to the European Central Bank (ECB), which published its first monthly report yesterday. However, it downplayed the prospects of an imminent interest rate cut.
In the dominant message running throughout the extended document, the ECB repeatedly insisted that it could not bow to political pressure and target cutting unemployment or boosting growth through its policies. These issues must be tackled by national governments and the ECB can only ensure so-called "price stability".
The January report summarised the ECB's position on a whole range of topics, ranging from the outlook for economic growth in the euro area to the outlook for price developments and an explanation of the ECB's monetary policy.
The first and foremost problem facing the euro area was the high level of unemployment, the ECB said. While it states that it "is highly concerned about the current high level of unemployment", it lays the blame and the remedy firmly at the door of euro zone governments.
According to the ECB, the problem is "overwhelmingly structural in origin. It is caused mainly by the inflexibility of the euro area labour and goods markets resulting, in part, from excessive or inappropriate regulation in these markets". And "structural economic reforms aimed at reducing these inflexibilities are the appropriate policy response".
Mr Colin Hunt, chief economist at Goodbody Stockbrokers, pointed out that the whole report placed an emphasis on structural and tax and spending changes and very little on the ECB's area of control on monetary policy terms in terms of what it could do to improve the health of the European economy. "It is quite clearly passing the buck in terms of responsibility."
Politicians, notably German Finance Minister Mr Oskar Lafontaine, have insisted that the central bank should lower interest rates in order to kick start growth and create jobs. But the central bankers have been keen to kick this idea into touch. The repeated thrust throughout the monthly review was that any such action could jeopardise its credibility and undermine the stability of the euro.
"It is widely recognised that a central bank lacking independence is susceptible to short-term pressures that may be prejudicial to the maintenance of price stability," the ECB stated. It added that if the ECB were to bow to political pressure and attempt to reduce unemployment "by implementing an inflationary monetary policy, that would ultimately be self-defeating, since such a policy would only undermine price stability over the medium term, which is the basis for lasting and sustainable employment growth."
In a very two-handed approach, the ECB pointed to counterbalancing arguments on both sides in relation to the outlook for interest rates. One challenge, it said, came from the prospects of lower economic growth in the euro zone as a result of global economic developments. The latest economic data available "suggest slower growth in the second half of 1998, following robust growth throughout the first half of the year'.
On the upward side, wage demands that exceeded growth in productivity and a relaxation of the fiscal stance "could represent sources of inflationary risk in the future", the ECB said. "Overall, however, the outlook for price developments in the euro area can be regarded as being broadly balanced."
The ECB also appeared to take on the politicians on the issue of currency policy. The Japanese, French and Germans have all been talking in recent week of some form of currency co-operation which would make life more difficult for the speculators, particularly following the crisis in Brazil.
However, the ECB noted that in the report to the European Council in December, 1997, it was agreed that the Council of Ministers would only issue orientation on exchange rates in "exceptional circumstances where there is a clear misalignment."
