Eurozone’s divergence vexes business chiefs

BusinessEurope, the pan-EU employers’ group, has called for stronger "economic governance" in the euro area and increased efforts by member states to use the current economic upswing to rein in excessive government spending, increase labour market flexibility and curb government spending.

But, in a new report, ‘Fit with the euro’, the lobby group strongly endorses both the independence of the European Central Bank (ECB) and the policies it has been following. BusinessEurope’s report implies that its concept of stronger economic governance would not mean giving the Eurogroup of eurozone finance ministers a bigger say in setting interest rates and influencing the international value of the euro, something which Nicolas Sarkozy, the new French president, has indicated he favours.

The report comes against a backdrop of growing confidence in the vigour of the current economic upswing in the EU and eurozone and expectations that the ECB will soon raise interest rates and tighten the availability of credit more aggressively than expected only a few months ago.

The ECB, at its Governing Council meeting next week (6 June), is expected to increase its key monetary policy interest rate from 3.75% to 4%. Julian Callow, an economist at bankers Barclays Capital, says that he now expects two further rate increases will follow, taking the policy rate to 4.5% by March of next year. Jean-Claude Trichet, president of the ECB, is scheduled to speak in Brussels on Monday (4 June) on the steps he sees as needed to sustain the eurozone’s growth.

Last week (24 May) the inter-governmental Organisation for Economic Co-operation and Development (OECD) raised its forecast for eurozone growth for 2007 to 2.7%, just above the 2.6% expected by the European Commission. It also urged governments to err on the side of caution by raising interest rates to fight the global inflation which is threatening to become more persistent in the face of exceptionally strong growth around the world.

Some of the risks to the strong global economic outlook will be examined at the Brussels Economic Forum today (31 May) and tomorrow, organised by the Commission’s economic and finance department. Leading economists and politicians including Wu Xiaoling, the deputy governor of the Bank of China, and John Lipsky, first deputy governor of the International Monetary Fund, are to address the meeting today. On Friday, Pascal Lamy, the head of the World Trade Organization, returns to the building in which he once worked as European commissioner for trade and will face questions about world trade liberalisation talks.

In its report on the eurozone BusinessEurope says that the ECB’s strong institutional independence and clear mandate have allowed it "to establish its credibility quickly [and] anchor inflation expectations at a low level". As a result, it says, interest rates are low and several eurozone countries have the favourable financing conditions "that only few previously enjoyed". It points out, too, that the euro has "rapidly acquired the status of a global currency".

But the report also expresses concern about "rising competitiveness divergences" in the eurozone saying that "large and growing" external (current account) deficits in Spain, Portugal, Greece, France and Italy are "tightly linked to drifting competitiveness unabated by market forces or active policies".

It also says that in By Stewart Flemingmonetary union "countries with above-average growth and inflation tend to receive stronger support from the single monetary policy [with]…below average real interest rates, strong credit growth and buoyant housing markets". It says that efforts to cut budget deficits in the eurozone "remain excessively dependent on revenue windfalls and generally fall short of the structural adjustments required by the Stability and Growth Pact". It also worries that the economic recovery "is leading to reduced incentives to reform". BusinessEurope concludes that what is required is "an active and forceful role for the European Commission and the Eurogroup, whose role should be formally recognised in discussions on the future of the constitutional treaty".

• Stewart Fleming is a freelance journalist based in Brussels.

BusinessEurope, the pan-EU employers’ group, has called for stronger "economic governance" in the euro area and increased efforts by member states to use the current economic upswing to rein in excessive government spending, increase labour market flexibility and curb government spending.