ETUC fears interest rate hikes are preventing the euro area recovery from shifting into higher gear

Brussels, 08/05/2006

Says John Monks, ETUC General Secretary: “The long run starts now, and it should start with full recovery from slump. The European Central Bank and finance ministers should be working to strengthen growth further in 2007 instead of removing aggregate demand stimulus.”

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Main points of the ETUC report:}}

- After a lengthy slump, euro area growth should move into higher gear. A normal business cycle would see growth accelerate temporarily above 2- 2.5% in order to eliminate the spare capacity that has accumulated over the years.

- This is not happening at all. A best-case scenario is that growth in 2007 remains limited to around 2%. In a worst-case scenario, growth falls back significantly below 2% (1.6% in the IMK-forecast).

- The failure of the recovery to take a strong hold is induced by macro-economic policies. The ECB is engaging in interest rates hikes at the same moment the exchange rate is appreciating again and fiscal policy is tightening.

- The euro area is the victim of a self-fulfilling prophecy. In refusing to allow growth rise above potential in order to reduce spare capacity, the ECB is increasing firms' reluctance to invest. This in turn may actually undermine the economy's capital stock and long-term growth potential itself.

Main ETUC recommendations for a different macro-economic policy package:

- A moratorium on interest-rate hikes.

- Ending self-inflicted stagflation by putting a stop to tax-push inflation.

- Exchange rate management to prevent additional over-valuation of the euro.

- Using the reformed Stability Pact to organise a coordinated European Recovery Initiative, investing 1% of GDP in the Lisbon priorities (networks, research, training and skills).

Full report available on the ETUC website