02 December 2011

Jürgen Stark: Economic situation and fiscal challenges

ECB's Stark argues that the current sovereign debt crisis is primarily in the hands of governments. He says that its root cause lies in lax fiscal policies and associated deteriorating public finances in some euro area countries.

"Stability criteria were violated, fiscal rules ignored and statistics tweaked. Growth dividends were not used for necessary consolidation in good times. In the same vein, competitiveness positions worsened in many euro area countries, due to a lack of structural reforms. These developments have raised doubts in financial markets on the political will and capacity to live up to their commitments and to do whatever is needed to comply with the rules of the game within a monetary union. To solve the crisis requires determined fiscal consolidation and ambitious structural reforms. These must be the prime answers for tackling current challenges. At the same time, it has to be recognised that sovereign debt issues are not confined to the euro area but have become an important issue for all advanced economies.

"Let me also emphasise that all the non-standard monetary policy measures taken by the ECB are temporary in nature and complementary, rather than supplementary, to our interest rate instrument.

"The severe imbalances that came to the forefront in the wake of the financial and economic crisis – to a significant extent – are related to past policy mistakes. In this context, one needs to bear in mind that the euro area constitutes neither a fully-fledged federation nor a political or fiscal union. While monetary policy is centralised, budgetary sovereignty remains to a large extent at the Member State level. The Stability and Growth Pact has been put in place to ensure a sufficient degree of fiscal coordination. However, this rules-based framework, which is built on peer-pressure, was not sufficient to ensure a smooth functioning of the monetary union.

"In European countries, the correction of excessive deficits is on its way. The pace of fiscal adjustment has been set by the European Council in a way that reflects country-specific imbalances. Most countries will have to reduce their deficit ratio to below 3 per cent of GDP by 2013 at the latest. Accordingly, euro area Member States have presented medium-term consolidation strategies in their Stability Programmes which point to a strongly expenditure-based adjustment. Such an approach is warranted in view of strong increases in government spending during the crisis in most countries. Moreover, past experience suggests that successful consolidations typically have a strong expenditure component.

"In addition, case study evidence from previous consolidation episodes indicates that ambitious expenditure reform was typically carried out in the context of a broader economic reform programmes, comprising structural reforms to promote potential growth and institutional reform, e.g. to strengthen the budgetary framework. In fact, many euro area countries, notably the ones subject to EU/IMF programmes, are following such a strategy which I would like to call the European approach to fiscal adjustment. If effectively implemented, such reform programmes would enable countries to address their sustainability risks and, at the same time, limit potential short-term costs of fiscal tightening through growth-enhancing structural reform. Especially in the current environment of heightened market sensitivity, ambitious reform efforts should quickly trigger positive confidence effects and be conducive to macro-economic stabilisation.

No country is immune any more to a loss of market confidence in its public finances. With fiscal imbalances and deteriorating competitiveness in euro area countries at the root of the current crisis, there can, in my view, be no discussion which policymakers should make a move. Ambitious fiscal consolidation and structural reforms by national governments in the euro area are required now – or actually, yesterday. Only if the course of national policies is the right one can an accompanying financing scheme such as the EFSF play a useful role to bridge the period when market access remains restricted. Monetary policy in the euro area was and will remain an anchor of confidence and stability. It will remain dedicated to its mandate of maintaining price stability. This is the necessary and central contribution that monetary policy can make to fostering sustainable growth, job creation and financial stability.

Full speech

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