One in the eye for ECB’s critics

It is not hard to see why Italy’s finance minister, the redoubtable Tommaso Padoa-Schioppa, was reportedly furious when he heard about the Centre for European Reform’s paper ‘Will the Eurozone Crack?’ The London-based CER is supposed to be a critical supporter of the Union and not one of those Eurosceptic British outfits bent on undermining it.

Padoa-Schioppa must know what think-tanks are about (he used to be head of Notre Europe), but he cannot have been happy, particularly since in an earlier life he was an executive board member of the European Central Bank (ECB).

It is not just that the report fingers Italy as the country most likely to trigger the break-up of the EU’s currency union because of its "dramatic loss of competitiveness".

There is not much new in that analysis but the report goes on to pay scant attention to the successes of the single currency and make some proposals which would arguably damage not strengthen it.

It is difficult to see the merits of, for example, the CER proposal to hand over to the Eurogroup, the eurozone finance ministers, the decision to set the ECB’s inflation ‘target’ of "below but close to 2%" and to raise it to 2.5%.

If openness and democratic accountability is what you are looking for, the secretive Eurogroup is the wrong place to turn to. The ECB is a paragon of transparency by comparison.

The Eurogroup is also a body too strongly influenced by France, Germany and Italy - the very countries which the CER singles out as being the worst backsliders when it comes to making a success of the single currency. There is more to be said for the CER’s idea that the ECB should encourage financial markets to exercise more discipline on profligate governments and it should have noted that the central bank has already dropped a hint that this is on its agenda.

As for the CER’s pleas for the ECB to tolerate a higher inflation rate in order to facilitate faster growth, because Germany’s stability-orientated economic performance is making life too tough for eurozone stragglers like Italy, we have heard similar criticisms of Germany’s economic policies before - through most of the 1960s and 1970s in fact. At present, the odds are that if you cut Italy any slack it will simply say "thank you" and carry on as before, becoming less and less able to compete globally.

Anyway, there is precious little evidence that the ECB’s policy decisions have been ill-judged and damaged growth, rather to the contrary according to the Organisation for Economic Co-operation and Development (OECD), the Paris-based economic think-tank, in its latest survey of the euro-area.

The single currency is off to a far better start than most would have predicted. The ECB has helped to construct a solid foundation for the euro’s long-term international credibility - its share of international foreign exchange reserves has risen steadily to 25%, significantly higher than that of its legacy currencies, if still a long way behind the historically dominant US dollar. Critically, the euro-area and German economies seem to be on the edge of a sustained recovery - fully justifying the ECB’s decision (attacked, incidentally, by Eurogroup President Jean-Claude Juncker at the time) to start cautiously raising interest rates in December 2005.

In short, swingeing structural reforms, not institutional tinkering, are the key to improving the eurozone’s performance. If the argument is that these are difficult to carry out in tough economic conditions then let us remember that too many of Europe’s leaders blew their last opportunity to take tough corrective action in ‘good times’, at the end of the 1990s.

They are now getting a second chance and this time the stakes are even higher. As the OECD report warns, without a transformation in the eurozone’s productivity performance its underlying long-term rate of growth will, in large part because of its demographic ageing, fall to 1% in the next decade and 0.5% in the 2020s, compared with perhaps as much as 2% now.

• Stewart Fleming is a freelance journalist based in Brussels.

It is not hard to see why Italy’s finance minister, the redoubtable Tommaso Padoa-Schioppa, was reportedly furious when he heard about the Centre for European Reform’s paper ‘Will the Eurozone Crack?’ The London-based CER is supposed to be a critical supporter of the Union and not one of those Eurosceptic British outfits bent on undermining it.