POLICYMAKERS IN troubled euro zone countries must be “courageous” in tackling “vested interests” and getting their economies back on track, the European Central Bank has said, adding to official pressure for further reforms.
Deep cuts to labour costs were particularly urgent if peripheral countries such as Greece and Spain were to boost their competitiveness, the central bank said, in a message that will fan public anger in some countries at the perceived price to be paid by wage-earners for restoring economic health.
The ECB said there was still “a substantial need for rebalancing” in Greece, Portugal, Spain, Ireland and Cyprus, despite measures already implemented to cut fiscal and current account deficits and improve competitiveness.
In an analysis published in its monthly bulletin, the ECB said adjustment processes had started in the five countries, but a big effort was needed if they were to become more competitive, cut unemployment and make budgets sustainable.
Much of the ECB’s analysis of required reforms focuses on the need to bring down labour costs, boost productivity and improve the business climate.
The bank said it expected a “strong decline” in wages in Greece and Spain, which have the highest levels of youth unemployment in the euro zone, with more than 40 per cent of under-25-year-olds in the labour force out of work. A Spanish labour market reform approved in February was “far-reaching and comprehensive” but was too late, the ECB implied.
The bank said there were still “excess profit margins” in some parts of these economies, particularly in domestic services. Several peripheral countries have been urged to stimulate job creation by opening up some professional sectors.
Countries with high unemployment also needed to abolish wage indexation, relax job protection and cut minimum wages.
All five countries had current account positions that were better than in 2008, the ECB noted, with Ireland having reached a balanced position in 2010. But the central bank said a large current account deficit would persist for Greece in 2013 and would be too high in Portugal and Cyprus.
Overall ratios of debt to gross domestic product were expected to rise in all programme countries next year, the ECB said.
The bulletin also noted “a sharp deterioration in markets’ assessments of businesses’ credit risk”, particularly in Italy, provoking criticism from Codacons, an Italian consumers’ association, that the ECB had not solved this situation.
Coldiretti, the Italian agricultural association, estimates that 60 per cent of companies in the sector risk being starved of credit as they face interest rates that are 30 per cent higher than the average of other sectors.
Angelino Alfano, secretary of Silvio Berlusconi’s People of Liberty party, said Italians should not be asked to make more sacrifices and the ECB “should change track”.
“The party will not be a European doormat, on its knees at the German boundary,” Mr Alfano said. – (Copyright The Financial Times Limited 2012)