Reden und Präsentationen

Ladies and Gentlemen!

It is always a great pleasure to participate at the Annual CSI Conference in Innsbruck. My appreciation goes especially to Professor Chen and Professor Socher for organizing this highly interesting and valuable conference. The topic you have chosen for this year’s conference is very timely in an age where international institutions and multilateralism are the only way forward to secure the political achievements and the economic gains made in the 60 years following World War II and to ensure that we will continue to benefit from a comparatively stable international environment.

One major achievement in the field of international institutions in that period has been -and continues to be – the extraordinarily political integration process in Europe. Progressing in a consistent direction, the Member States of the European Union have pooled increasing areas of policy authority and have introduced prominent collective institutions. The creation of these institutions initiated a process which has transformed the nature of European politics. The very fact that virtually no attention is paid today to prevent the outbreak of hostilities among European countries indicates that the Member States have achieved and transcended their original objectives. 

Problems and conflicts arise among states that, on the one hand, retain control of their national currencies and are able to pursue different monetary and exchange rate policies and, on the other, have economies that are not only highly interdependent but are in fact being transformed into a single market. For the EU Member States that meant extending the domain of responsibility and the institutional capacity of the European Union.

Next to the amended Constitutional Treaty which has been signed by EU heads of state only recently, Economic and Monetary Union (EMU), was probably one of the most significant extensions of supranational authority since the Treaty of Rome, which had established the European Economic Community. The creation of EMU was the credible remedy to an enduring European problem – i.e. how to create a single market for capital, goods, services and persons among Member States with highly interdependent economies in a world with multiple currencies, volatile exchange rates and fragile exchange rate regimes. As we know, currency instability was eliminated by irrevocably fixing the exchange rates among the Member States’ currencies. However, maintaining irrevocably fixed exchange rates required the creation of a single currency and a supranational institution in charge of conducting monetary policy, that is the ECB.

The stability architecture of Economic and Monetary Union as set out in the Maastricht Treaty and now reconfirmed in the Constitutional Treaty rests on four distinct but mutually supportive pillars: 

1. Price stability as the primary goal of monetary policy, based upon the principle of central bank independence, 
2. sustainable public finances, 
3. economic policies supporting growth and global competitiveness and
4. institutional stability.         

Price Stability

Price stability is the overarching pillar in this edifice because it is at the very foundation of a functioning free market economy. Price stability has thus been enshrined as one of the objectives of the European Union in its Constitutional Treaty. 

You may wonder: “Why price stability?” In economic governance where different policies such as monetary and fiscal ones affect one another, ex ante policy coordination is generally insufficient to realize all possible welfare gains as severe information, incentive and enforcement problems occur. It is also virtually impossible in the presence of independent central banks. 

Appropriate institutions which assign objectives and instruments and clearly divide responsibilities will achieve implicitly coordinated actions and in the end a positive outcome ex-post. In the euro area, up to now the Maastricht Treaty and the secondary legislation, including the Stability and Growth Pact (SGP), have been providing for such an efficient assignment of objectives with a sound and clear allocation of responsibilities to the individual policymakers. The scope for additional policy coordination is rather limited. The legal framework clearly defines the ECB’s role as the guardian of price stability and provides rules for other policymakers’ contributions to economic stability by factoring into their objectives the ECB’s mandate for price stability. 

The ECB’s monetary policy strategy incorporates many elements of the successful monetary strategies employed by the national central banks of the euro area before 1998. The strategy – safeguarded by independent central banks – makes unambiguously clear the commitment to maintaining price stability and establishes a quantitative definition of price stability and the policy aim. The independence of central banks enhances the credibility of monetary policy, increases its transparency and also facilitates its accountability. Successfully sustaining price stability provides both a firm anchor for inflation expectations in the euro area and a yardstick for holding the ECB and the Eurosystem accountable. Furthermore, the ECB’s monetary policy strategy is forward-looking and has a medium-term orientation.

In the current environment, stability has become an even more precious asset. As is well known, the Eurosystem’s primary objective is to maintain price stability over the medium term, since price stability unambiguously represents a precondition for sustainable economic growth and rising employment in the long run. Moreover, in times of severe tension, it is of the utmost importance that policymakers do not lose sight of their primary responsibility, so as to reduce uncertainty and strengthen confidence. Consequently, the Governing Council of the ECB stands ready to act if necessary. And financial markets can rely on the provision of sufficient liquidity even under exceptional circumstances, as was demonstrated in the past.

Since the start of EMU the Eurosystem has achieved its primary objective of maintaining price stability over the medium term. Despite difficult and challenging circumstances the ECB managed to achieve low inflation and historically low interest rates, which ultimately will encourage further investment and contribute to sustainable growth in the euro area. Thereby, the euro also contributes to a more balanced global growth and to more stability in the international financial system.


Public Finances

Price stability is a necessary but not the only pillar of the stability architecture of EMU. Sound and disciplined fiscal policies are similarly required. The SGP sets out the rules and provides the right incentives for implementing sound fiscal policies, while it leaves sufficient room for automatic stabilizers without infringing the ceiling of the deficit-to-GDP ratio.

Fiscal rules are important to contain the deficit bias of governments. They can act as a commitment device to prevent short-sighted political considerations which lead to excessive spending and deficits and to limit discretionary fiscal policy. Sound budgetary positions also give governments room for manoeuvre when asymmetric shocks hit their economies, which can no longer be addressed by monetary policy. 

In a monetary union undisciplined fiscal policies may impede a stability-oriented single monetary policy by pressing for an undue relaxation of monetary policy or monetization of government debt, which would lead to negative spillovers. Excessive deficits complicate monetary policy due to demand effects on prices and entail significant medium- and long-run costs such as higher real interest rates and tax burdens. Therefore, it is a matter of concern to the European System of Central Banks that large fiscal deficits have persisted in some of the Member States.

In preparation for EMU, Member States had to meet the fiscal debt and deficit criteria as specified in the Maastricht Treaty in order to participate in EMU. These requirements contributed to a fiscal consolidation and convergence process in the 1990s and became a building block of the Maastrichtconsensus. This Maastrichtconsensus is still valid today and forms an integral part of the European stability architecture. It was set up to guarantee the long-term sustainability of EMU and should not be put at risk because of short-term political considerations.

Safeguarding the soundness and discipline of fiscal policies that largely remain within the competence of national governments in a monetary union is a particular challenge. The SGP states certain institutional provisions on how to control national budgets and provides for a certain allocation of responsibilities and a balance of power among the Commission, the Ecofin Council and the Eurogroup. 

The Commission is responsible for effectively assessing national budgetary positions and for conducting effective multilateral surveillance, for formulating recommendations for decisions by the Council and for ensuring the correct application of the SGP. 

The Ecofin Council is exclusively responsible for taking decisions and has the ultimate responsibility for enforcing the SPG. These two principles of surveillance and enforcement form the basic idea of the EU’s fiscal framework and should not be questioned. While I agree that a rule-based system remains a good guarantee for commitments to be enforced and for all Member States to be treated equally, we have to find ways of ensuring compliance with these rules and ofincreasing peer pressures to enforce the rules. 

Recently compliance with these rules has been weak. Half of the euro area countries have found themselves close to or in breach of the 3% ceiling in 2003, when the economic situation deteriorated and when most governments had to consolidate their public finances. The situation has not improved much and implementation of political commitments has fallen short of public announcements. 

Today’s discussion about making the SGP rules more flexible as a short-term remedy to the fiscal problems occurring in some Member States is counterproductive and at odds with the Maastrichtconsensus. The Commission has made proposals on how to strengthen and clarify the implementation of the SGP. The proposals go in two directions – the preventive and the corrective arm. 

I clearly support measures such as adjusting budgets in so-called good times, having a more stringent approach to the general debt criterion, increasing transparency and improving the dissemination of consistent and homogeneous statistics in order to strengthen the preventive arm of the SGP. 

But it is on the corrective side that I have problems. Talking about balanced budgets or surpluses on a specific country basis is, in my mind, a threat to the SGP and will lead to a non-equal treatment of Member States. Moreover, to say that a long period of low growth is a kind of exceptional circumstance and that the excessive deficit procedure should not be introduced, sends the wrong signal. Low growth results from the lack of structural reforms, but cannot be remedied with excessive government spending.

In my mind, the SGP works as it is. The problem has been in its implementation. It is not the Pact itself which has disadvantages or which has failed. It is the missing will of several governments to fulfil their responsibilities and obligations - they failed. Thus, should the rules be made exceedingly complex and contingent on too many exceptional economic circumstances, this will clearly weak the SGP in its implementation and credibility.

Austria, for example, has embraced the provisions of the SGP and fully supports their strict application. I am personally convinced of the necessity and the soundness of the rules. Therefore, I do not think that it would be appropriate to change the wording of the Treaty or the regulations of the SGP.

There is widespread consensus that the rules and procedures of the SGP are better and more flexible than commonly perceived. They are based on the nominal anchor of 3%. The rules are simple and transparent to facilitate effective monitoring and they principally provide for an efficient deterrence against unsound policies. The provision for budget deficits to be close to balance or in surplus is intended to create room for automatic stabilization and thus supports rather than limits the stabilization function of fiscal policy. In the end, the SGP provides an anchor for long-term expectations and for sustainable debt developments. 

Therefore, I would like to stress that a return onto a path of long-term sustainable public finances is necessary in order to foster the public trust in this pillar of the EMU stability architecture and to cushion possible effects of the Lisbon structural reform agenda as well as to moderate the challenges of ageing societies in Europe.


Economic Growth

The recent decision to leave the key ECB interest rates unchanged reflected the Governing Council’s assessment that the overall economic outlook remained consistent with price stability over the medium term. The level of interest rates continues to be very low by historical standards, in both nominal and real terms.

As regards economic growth, while short-term indicators have become more mixed, the basic determinants of economic activity remain consistent with continuing economic growth in 2005.

Looking at price developments, high oil prices have had a visible direct impact on inflation rates this year. While the risk of second-round effects still seems to be contained, strong vigilance is warranted with regard to all developments which could imply risks to price stability over the medium term.

As already mentioned above, since the start of EMU, the ECB and the Eurosystem have been very successful in providing price stability. But so far, policymakers in the euro area have not been able to fully exploit the advantages of price stability for a sustainable growth and lower unemployment. 

Structural reforms to overcome frictions in the service sector, labor and product markets – as also pointed out in the recently published Kok Report – are of utmost importance to make the economy more flexible, thereby improving its resilience against detrimental shocks and raising the euro area’s non-inflationary growth potential. 

EU policymakers are well aware of the importance of structural reforms. They committed to policy action when the European Council adopted the Lisbonstrategyfour years ago. 

On that occasion, and in the years since, the European Council has identified a considerable number of measures to improve the functioning of product, capital and labor markets.

And there is no doubt that some progress has been made. But there is also no doubt that we are confronted with an implementation gap. There is a gap between rhetoric and real action that needs to be closed if the goals of the Lisbonstrategy are to be achieved. 

To fill the Lisbon Agenda with meaning, clear policy priorities for policy reform have to be set, which have to be sequenced in an intelligent fashion. Responsibilities have to be allocated clearer with a commitment by Member States to concrete reform steps that will be implemented until 2010. 

Finally, the lack of communication with the public must be overcome. Each Member Stategovernment needs to convince its citizens of the enormous potential and opportunities released by structural reforms. After all, what we aim at is higher per capita income, replacing redundant activities with more welfare-generating ones, investment in skills and education, a knowledge-based society, more innovation and sufficient research and development. I would think that these objectives are of such a genuinely positive nature that it should be possible to convince people of the reform steps necessary to reach them.

The lack of clear and decisive progress in implementing structural reforms weighs on confidence. Policymakers and social partners need more farsightedness and resolution to drive forward the implementation of structural reforms. It is high time to reassure businesses, investors and consumers by delivering overdue structural reforms. 

This is especially true when looking at the problem of ageing in our societies. Policymakers have been very slow in addressing the substantial contingent costs of the growing numbers of retirees in both the industrialized world but also in many emerging markets. Pension reforms are all the more important because without such reforms government borrowing and taxes could increase dramatically, which could disrupt financial markets and slow worldwide growth. 

Austriahas already made important steps in reforming its pension system, which should not only reduce pension expenditure over the medium-term, but also have a positive impact on labor supply and labor demand. Thus, our pension reform may have a positive effect on employment and output growth.

Structural measures must be geared toward more flexible labor markets and higher labor participation rates, the full implementation of the EU single market, free and sound competition along with further cutbacks in state aid, and consumer-friendly retail market regulations. Furthermore, a strengthening of technical and scientific capabilities is necessary in addition to improvements in human capital – a challenge also for universities. This would enhance productivity and would therefore make the euro area more attractive for domestic and international investment, promote economic activity and raise the non-inflationary growth potential of the euro area. Moreover, it would enhance employment and thus boost consumer confidence and private consumption. Indeed, it is up to us to set in motion such a virtuous circle!

 
Institutional Stability

Let me explain this fourth pillar of stability with reference to the enlargement of the European Union. One of themost important effects for countries that have joined or will join the EU has been the institutional reform process set in motion by preparing for membership in the EU and at a later stage for membership in EMU. 

Dysfunctional institutions limit a country’s productivity and potential growth. Douglass North (1990) has suggested that it is the incentive structure embedded in the institutional structure of countries that must be the key to solving the mystery of unequal and unpredictable economic growth. Indeed, institutional constraints that foster distortionary policies and worsen economic vulnerabilities account for a significant part of cross-country differences in economic growth and output volatility. 

The prospect of EU accession is a robust catalyst for institutional makeover. Institutional change is typically incremental, but the EU accession process entails a rapid transformation of every aspect of society. New Member States as well candidate countries must meet certain standards as set out in the Copenhagencriteria in terms of political, economic, administrative and legal institutions as well as civil society to become a member of the EU. 

Needless to say, the prospect of EU accession encourages broad-ranging institutional reforms that assist candidates to develop a well-functioning market economy and institutional capabilities to deal with legal obligations of EU membership. This is why the EU anchor is overwhelmingly stronger, compared to all other arrangements, in facilitating institutional change. 

This institutional makeover is all the more important because it will assist countries in their preparation for the next step of European integration, the adoption of the euro. The Treaty with its convergence criteria provides the appropriate framework to assess whether a country is on a sustainable convergence path toward the euro. Together these criteria form a coherent package based on a set of economic indicators that is neither negotiable nor subject to change. From a legal perspective, this ensures continuity and equal treatment, from an economic perspective, the logic of lasting convergence has not changed and is all the more important when countries are at different stages of economic development.

As was pointed out in the last Convergence Report of the ECB, new Member States still have some way to go and nominal and real convergence with the Euro area differs considerably in some of the new Member States. Therefore, reform efforts and implementation of sound policies, especially in the fiscal field, are still required on the way to monetary union.

Finally, let me point out one additional essential requirement, which – because it is taken for granted today – is often neglected. All new Member Statesand prospective candidates have to establish the proper institutional arrangement for monetary policy, in particular central bank independence and the prohibition of monetary financing of budget deficits. The Maastricht Treaty explicitly states that the central banks of the Eurosystem as well as the ECB be fully independent. This has also been reconfirmed in the Constitutional Treaty. Together with the mandate to maintain price stability, these provisions were designed to ensure the long-lasting credibility of the euro. Research has shown that sheltering the decision-making body of a central bank from interference by governmental institutions and pressure groups is crucial for ensuring the credibility of the central bank, for securing its public trust and therefore for creating the conditions for inflation expectations which are firmly anchored upon the announced definition of price stability. Whether the institutional independence of the central bank is sufficiently strong, therefore remains an important convergence criterion for EMU.

 
Conclusion

Economic and Monetary Union is a very successful example of an international institutional arrangement. The primacy of monetary policy is the overarching ordering principle of EMU, with the independent ECB supported by the ESCB being the institution to safeguard price stability. The principle of price stability facilitates the convergence of expectations of other domestic EMU as well as international actors. The rules and decision-making procedures governing public finances are less strictly enforced and build upon voluntary commitment by the Member States to comply with these rules. Here, we notice certain shortcomings and ways have to be found to enhance the enforcement of these voluntary commitments. 

The international attractiveness of this stability architecture becomes obvious when looking at the efforts of the new Member Statesas well as candidate countries to build institutions which are compatible with EU standards. While I do not wish to suggest that the experiences of the EU are easily replicated elsewhere, the stability architecture we have been establishing and continue to foster, could very well guide policymakers in other parts of the world.

Thank you for your attention!