Danger of reform failure

HELSINKI – The political crisis engulfing the EU after the failure of talks on its budget and the rejection by French and Dutch voters of the constitution is raising eurozone economic uncertainty and is harming its growth outlook, a European Central Bank (ECB) policymaker said yesterday. Without a strong EU commitment to a reform agenda, which is critical to raising productivity in the 12-nation eurozone, the bloc’s already sluggish economy faces a prolonged period of sub-par growth, said ECB Governing Council member Erkki Liikanen in an interview. «I am most worried after last week’s failure that it spells fear, anxiety, uncertainty,» said Liikanen, who is also the governor of the Bank of Finland. «It has increased uncertainty and uncertainty has a negative impact on economic development. If investors are uncertain about the commitment to structural reforms… that has an impact on investment,» and hence growth prospects. Liikanen rejected criticism that six years of the euro single currency has resulted in mainly sluggish growth and differing growth rates between members. The 12-nation bloc is heading for its fifth straight year of less than 2 percent growth and suffers from high unemployment, stirring talk that a one-size-fits-all interest rate policy cannot work effectively without economic reforms that require closer political ties to be accomplished. «The euro and monetary union is here to stay,» he said. However, if political crisis leads to delays in economic reforms there will be economic costs. «It (EMU) can work, and it will accelerate change. But efficient (political) decision-making is very important for the reform process to work.» Risks If political leaders opt for the easy course of delaying reforms to pension, healthcare, social welfare programs and labor markets, uncertainty may increase, Liikanen said. Asked, if this happens, whether an ECB interest rate cut was an option to revive growth, he said, «I find the monetary policy is totally appropriate.» Rates already are at historic lows and are no hindrance to businesses and households, he said. But he added that the ECB would review incoming economic data. In the medium term, he said EU leaders risk slowing growth by delaying EU-wide initiatives that are needed to open up all 25 EU countries to more market competition, which would lower prices and raise productivity and hence growth. Liikanen singled out the EU’s sidelined services directive as particularly important. It was delayed in the face of strong political protests over fears it would allow lower-paid workers from new EU members to displace those in other countries. But Liikanen said competition in the services sector, which accounts for nearly 70 percent of eurozone GDP, is critical to boost productivity and lift eurozone output. «Unless we have it (the political will for reforms), we cannot increase our growth potential in Europe,» he said. Failure to push through reforms, condemns Europe to sub-par growth as its population ages, he said. «Of course. It is mathematically quite clear that if your labor contribution to your growth is smaller, then your output is smaller. If you want to raise that, you need productivity growth. You need more competition, more innovation, more investment.»

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