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The eurozone is living through lean times, but there is light at the end of the tunnel... The progress made reflects important decisions at both the national and European levels. These decisions have begun to rebuild confidence, calming markets and countering fears of a collapse of the euro. Far-reaching structural reforms are helping to rebalance the eurozone economy. Progress is tangible: current account imbalances among eurozone members have fallen markedly, as competitiveness lost by some members in the decade before the crisis is regained.
The European Commission has said surplus countries should implement reforms to strengthen domestic demand. Germany could do this by opening up its services market and by encouraging wages to rise in line with productivity, two of the recommendations made to Berlin by the EU Council last July...
The principal beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains. Our analysis suggests that a 1 per cent increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05 per cent of gross domestic product. This would not get us very far, which is why policies to enhance competitiveness – both structural and cost-related – remain crucial for the adjustment and rebalancing of the eurozone.
In spite of persistent misperceptions to the contrary, the EU’s reformed stability and growth pact takes full account of evolving economic conditions. Each country’s consolidation effort is specified in structural terms, removing the effects of the business cycle and one-off measures, and takes into account the country’s fiscal space and macroeconomic conditions. If growth deteriorates, a country may receive extra time to correct its excessive deficit, provided that the agreed consolidation effort is being made. Such decisions have been taken this year for Spain, Portugal and Greece.
We also intend to explore further ways, within the rules of the stability and growth pact, to accommodate public investment in our assessment of national fiscal plans.
In order to overcome the crisis and restore confidence, we must continue to remove structural obstacles to sustainable growth and employment; pursue prudent fiscal consolidation; and turn bold thoughts into convincing actions when redesigning and rebuilding our economic and monetary union. In short, we need to stay the course and pursue decisive reforms in our Member States and deeper integration in the eurozone.