Don’t raise the price of Union admission

Date: 01/03/01

European Central Bank council member Klaus Liebscher says the EU is wrong to change the rules of the financial game for countries hoping to join its ranks. And, he tells Tim Jones, it's too early for Europe to panic over the US economic slowdown

THE German Bundesbank is wrong to want to erect new hurdles for EU candidates hoping to join the euro zone, according to Austria's representative on the European Central Bank's 18-member governing council.

For Klaus Liebscher - having served six years as governor of the Oesterreichische Nationalbank on the Union's eastern border with the Czech Republic, Slovakia, Hungary and Slovenia - such calls are unfair and misguided.

"I'm worried about people suggesting you introduce additional criteria that aren't there now; this is politically difficult," he told European Voice. "On the other hand, I'm strictly against weakening the existing criteria."

Liebscher was reacting to suggestions from Bundesbank President Ernst Welteke that "additional real criteria" be applied to candidates before they are allowed into the 12-member euro area. In a letter to German Finance Minister Hans Eichel and Foreign Minister Joschka Fischer, Welteke warned that failure to do so could put euro-zone price stability at risk.

The rules set at the 1991 Maastricht summit oblige any euro-zone entrant to drive down inflation and long-term interests rates to within 1.5 percentage points and 2 points respectively of the zone's best three performers, get its budget deficit below 3% of national income and achieve currency stability.

"A really important criterion is that for inflation," said Liebscher. "Applicant countries would be well-advised to stick to the inflation criterion and use their pre-accession phase to orient their monetary and fiscal policies to this goal. That combined with structural reform will achieve 'real convergence' so that, in the final stage, they can meet the Maastricht criteria."

Liebscher, who has travelled widely in the applicant states in his current job but also as a private-sector banker and president of the Vienna stock exchange board, counsels candidates against trying to attain 'nominal convergence' with all the criteria right now.

"Due to developments that are different from EU member countries, they must achieve stronger growth," he said. "I think it would be the wrong way to focus on nominal convergence because probably then you wouldn't have enough sustainability."

Turning to recent developments in the euro zone, Liebscher said he could still detect "upside risks" to the ECB's policy goals: annual inflation between 0% and 2% and growth in 'broad money' including banknotes and coins in circulation and easily-cashed debt instruments at 4.5%.

In December, annual euro-zone inflation fell to 2.6% from 2.9% but the latest data are expected to show another rise. Preliminary figures published this week by four big Länder suggest Germany's annual inflation rate will rise in February from the 2.4% rate registered in January while Italian February inflation remained around 3%.

"We still have a rather high oil price situation and, in the euro area, robust growth and those together could create certain pressures on prices," Liebscher said. "And I cannot exclude second-round effects so I cannot say that we don't have any risks on the upside."

So-called second-round effects occur when companies price their products and labour unions demand inflation-plus pay hikes to take account of rising inflation.

He dismissed suggestions that the ECB was wrong to focus on the 'headline' inflation rate since this included volatile items like oil and seasonal foods that could cause the ECB to err in its policy-setting. "Headline inflation is important, not core inflation," he said.

The ECB is under pressure from the financial markets to cut its key interest rate to take account of a potentially recessionary slowdown in US economic growth.

"Our monetary policy has to be carried out on the basis of factors from the euro area," said Liebscher. "We are of course linked into the global economy but we have to focus on our activities here. How long the American slowdown will continue and to what extent it will develop, it's too early to say but I'm not on the side of those who want to panic."

European Central Bank's council member, Klaus Liebscher says the EU is wrong to change the rules of the financial game for countries hoping to join its ranks.