ECB economist switches the focus to political failings

The lack of political integration and labour market problems are threatening monetary union, the chief economist of the European Central Bank (ECB), Mr Otmar Issing, warned last night.

Speaking in Luxembourg, Mr Issing pointed to the importance of labour market restructuring and other structural measures if Europe was to achieve ongoing growth with low inflation.

Mr Issing, perhaps the most respected member of the ECB's executive board, also raised some doubt about the future of the project without further political convergence.

He questioned whether monetary union could function in the longer term without political union, particularly as Europeans seem even less prepared than they were in the past for political integration in relations to, for example, agreeing and implementing a European constitution. The recent fall-out over Austria also underlined the difficulties surrounding political integration.

However, he added: "There can be no turning back as the failure of monetary union would not only be extremely costly from an economic point of view, but the political fallout would be unimaginable and would be tantamount to a catastrophe."

Mr Issing outlined several economic threats to monetary union. The most obvious one, he said, was the lack of flexibility in the labour market. "In conjunction with the high level of unemployment at the start of monetary union, this poses an almost lethal threat to monetary union."

Pointing the finger at politicians, Mr Issing said that, to detract attention from their own failures, they were constantly tempted to pass the responsibility for continued high unemployment levels on to European monetary policy, when in fact the responsibility and competency for the necessary structural reforms lay in their own hands. He pointed to the emergence of the so-called new economy in the US, or the co-existence of high growth and low inflation, saying that such an occurrence was also possible in Europe. "The potential is clearly there to be exploited," he said.

"There is considerable scope for the euro area to benefit from these emerging technologies. In a sense, the US economy has served as a kind of a laboratory for the application and testing of these technologies over the last decade or so. By adopting these tried and tested techniques, which is undoubtedly happening at the moment, the euro economy could achieve the US new economy performance more rapidly than it was achieved in the US itself."

He added that the increasing integration of the euro area into the global economy would greatly facilitate this transfer process, while deregulation was already underway in the euro area and its effects were already being felt in a number of areas, such as telecommunications and electricity. In addition, monetary union and the completion of the single market were promoting corporate restructuring and facilitating a reorganisation of economic activity which was improving the efficiency of the economy. "This is already evident in the surge in mergers and acquisitions," he noted.

However, he warned this might not be enough. The euro area was hampered by a number of severe structural rigidities, which would diminish the benefits of new technological possibilities. These include the labour markets, a relatively high tax burden and a regulatory environment, which was much less favourable to entrepreneurial activity than in the US. "Realising the potential for a new economy in Europe will thus depend in a fundamental way on the adoption of a comprehensive process of structural reform."