ECB raises rates

Turning to fiscal policies, it is essential that all governments achieve the consolidation targets for 2011 that they have announced. Moreover, the announcement of fully specified consolidation measures for 2012 and beyond would help to convince the general public and market participants that the corrective policies will be sustained. Strengthened confidence in the sustainability of public finances is key, as this will reduce interest rate risk premia and improve the conditions for sound and sustainable growth.

At the same time, it is crucial that substantial and far-reaching structural reforms be urgently implemented in the euro area to strengthen its growth potential, competitiveness and flexibility. In the case of product markets, policies that enhance competition and innovation should, in particular, be further pursued to speed up restructuring and to facilitate advances in productivity. On the labour market, the priority must be to enhance wage flexibility and incentives to work, and to remove labour market rigidities.

Finally, the Governing Council is of the view that the package of six legislative proposals on economic governance, adopted by the European Council at its summit on 24-25 March 2011, goes some way to improving economic and budgetary surveillance in the euro area. However, in our view, the proposals fall short of the necessary quantum leap in the surveillance of the euro area which is needed to ensure the smooth functioning of Economic and Monetary Union. Therefore, the Governing Council, in line with the ECB’s opinion of 17 February 2011 on these proposals, urges the ECOFIN Council, the European Parliament and the Commission to agree, in the context of their “trialogue”, on more stringent requirements, more automaticity in the procedures and a clearer focus on the most vulnerable countries with losses in competitiveness. All this would help to ensure that the new framework is effective in the long run.

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