RIGA (MNI) – The current sovereign debt crisis in Europe is at
bottom a reflection of macroeconomic imbalances and poor fiscal policies
of Eurozone member states, European Central Bank Executive Board member
Juergen Stark said Wednesday.

Speaking at a conference of the Latvian central bank, Stark — who
has resigned from the ECB and awaits confirmation of his proposed
successor — avoided reference to current interest rates and relevant
economic or inflation developments.

“The key point I want to make here is that macroeconomic imbalances
and unsustainable fiscal policies are the root cause of the sovereign
debt crisis in the euro area,” he said. “The existing economic
governance framework has not been able to prevent the emergence of
excessive macroeconomic imbalances. Moreover, fiscal policy coordination
in the euro area turned out to be completely insufficient.”

The ECB “repeatedly” sounded the alarm about these imbalances, he
pointed out, observing that labor remuneration had significantly
outpaced productivity in some countries, usually driven by relatively
generous wage increases in the public sector.

“Wage and income policies were not sufficiently geared towards
preserving competitiveness in a monetary union,” he criticized, while
governments did not address related structural rigidities.

And although “instruments and procedures” to deal with imbalances
were available, he said, these were “either not implemented or ignored,
or they were watered down.”

“Peer pressure among the member states — potentially a strong tool
of mutual fiscal surveillance — fell short of what was needed as
countries did not attach sufficient importance to their joint
responsibility for the stability of the euro area,” he charged.

In the future, he said, those already using as well as those
planning to adopt the common currency should realize that membership in
the area “requires the transfer of sovereignty to a central institution
with much stronger powers” as well as stricter constraints on national
budgetary policies.

Moreover, social partners should ensure that wage setting considers
labor market conditions and does not put at stake job creation or
competitiveness, he urged.

“Governments should also be aware that wage setting in the public
sector can serve as a role model for the private sector,” he affirmed.

The agreement of the Parliament and the Council on economic
governance was a “step in the right direction,” according to Stark, but
not the quantum leap needed. Particularly regrettable is the
insufficient automaticity envisioned, he said.

The Latvian experience in dealing with the crisis, he said, shows
that a country can reduce major macroeconomic imbalances without nominal
exchange rate adjustment, Stark said.

Still, the Baltic state needs to implement additional reforms, and
the economic catching-up process here may influence medium-term
inflation and make it hard to prevent renewed macroeconomic imbalances,
he said.

Euro area candidates should practise “very careful preparation” to
ensure sustainable convergence, he said. “The decision to adopt the euro
is a very fundamental one and should not be taken lightly.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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