Issing: more effort needed for reforms to bear fruit

By Stewart Fleming

Date: 18/11/04

As a former board member of the German Bundesbank and now chief economist of the European Central Bank (ECB), Otmar Issing has seen governments losing their way all too often on their tortuous route to economic reform.

The faltering Lisbon strategy aimed at improving the EU's competitiveness is just another measure of the gap between rhetoric and reality.

So he is not going to get carried away by either the good news from some small EU countries or early signs that the pace of reform elsewhere in the eurozone, particularly in the corporate sector, could be speeding up. But neither is he going to ignore positive signs of change.

"We have several small countries that have made tremendous progress," Issing told European Voice. "Our growth champion is Ireland, our technology champion is Finland [which] in the application of information technology is at least as advanced as the United States," he said.

And the tentative signs of reform, such as corporate restructuring elsewhere in the eurozone, notably in Germany, are intriguing him.

"Even the laggard in growth, Germany, has seen some reforms which would have been unthinkable a few years ago. We have seen, at the company level, results which, even a year ago, would not have been imaginable."

Issing would not be drawn into discussing specifics. But private sector economists are watching closely recent labour agreements at Siemens, DaimlerChrysler and Volkswagen, under which trade unions have agreed to major changes such as reductions in fringe benefits and longer working hours for the same pay. Are we witnessing the long awaited turning point in Europe's labour market flexibility?

"I do not think this is a movement which is confined just to the big corporates," said Michael Heise, chief economist at Allianz, Europe's biggest insurance company and the owner of Dresdner Bank, Germany's second-largest banking group.

"These reforms are spreading through the whole German economy. This is the message which we get from the main employers' associations," he said.

"The pay cuts are broadly based and will have further strong effects on costs and profits."

Some of "the more spectacular" labour packages which have been negotiated this year could lead to reductions in wage costs of up to 20% per hour, he suggested.

Behind trade unions' agreement to accept what are in effect real wage reductions are competitive pressures not only from China and Asia, but also from closer to home.

"It is the eastern part of the EU, the countries that have just joined with the enlargement in May, which are the source of the most severe competitive pressures," said Heise. This explains why German companies are responding first.

Heise is in no doubt that, as a result of the improvement in Germany's competitive position as it lowers its cost base, "other countries in Europe will have to follow suit or risk losing market shares and profitability".

These developments are encouraging for those policymakers who believe that Europe's trade unions, citizens and politicians are only belatedly waking up to the challenge of global competition. But they are coming too late to allay fears about the immediate economic outlook.

"We have had a quite strong first half of 2004," said Issing. "On this basis we expected an acceleration [in the second half]. But it has not materialized. Risks have increased and the data is becoming mixed.

"Our main proposition is still that we will have a continuation of growth in 2005."

The slowdown in the eurozone in the second half of 2004 is already leading many private sector economists to trim back their growth forecasts for next year to under 2%. This is close to the figure at the bottom end of the ECB's own 2005 forecast range of 1.8-2.8%, which was set in June and is due to be revised next month.

One of the causes of the slowdown, the recent rise in the value of the euro on the foreign exchange markets back towards &036;1.30, is causing controversy. The crucial question is how will the eurozone's economy, which has been too dependent on exports, cope with this renewed pressure?

Following reports that the French and German economies expanded by only 0.1% in the third quarter, Silvio Berlusconi, Italy's prime minister, called on 10 November for "supranational intervention that alters the euro's value".

Ludwig Stiegler, a senior member of Germany's ruling Social Democrat Party, called for the ECB to "intervene massively and in a coordinated fashion and sell euros for dollars".

Issing refuses to comment on the value of the euro. But in a sign that tensions are rising, ECB President Jean-Claude Trichet has signalled his concern about "the recent moves, which tend to be brutal, on the exchange markets between the dollar and the euro".

Policymakers' anxieties about the impact which further sudden surges in the euro's value could have on the eurozone economy are not surprising. As the dollar has fallen in recent weeks, Washington has been silent on its exchange rate policy. This has fuelled eurozone suspicions that President George W. Bush has adopted a "malign neglect" stance and wants a further dollar decline to help US exports and to reduce America's ballooning trade deficit. They fear the eurozone economy will have to bear the weight of the burden.

• Stewart Fleming is a Brussels-based freelance journalist.

Article is based on interviews with the chief economist of the European Central Bank (ECB), Otmar Issing, and Michael Heise, chief economist at Allianz. Areas covered are the EU's competitiveness, the value of the euro against the dollar as well as recent reforms of labour markets and companies.