ECB pressures struggling eurozone members
Policy makers in troubled eurozone countries must show courage to tackle “vested interests” and get their economies back on track, the European Central Bank has said, adding to official pressure for further reforms.
More deep cuts to labour costs were particularly urgent if peripheral countries such as Greece and Spain were to pep up their competitiveness, the ECB said, in a message that could 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, in spite of measures to cut fiscal and current account deficits and improve competitiveness.
All five countries have received or asked for international financial help from the EU in the wake of the sovereign debt crisis.
In an analysis published in its monthly bulletin on Thursday, the ECB said adjustment processes had started in the five countries, but a big effort was still needed if they were to become more competitive, cut unemployment and make budgets sustainable.
Much of the ECB’s analysis of required reforms focused on the need to bring down labour costs, boost productivity and improve the business climate, with the central bank calling for “courageous policy action . . . and boldness in the face of lobbying by privileged groups and vested interests”.
The bank said it expected further wage declines in Greece and in Spain, which have the highest levels of youth unemployment in the eurozone, 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, saying it “could have proved very beneficial in avoiding labour shedding if it had been passed some years ago”.
The ECB said there were still “excess profit margins” in some parts of the economies, particularly in domestic services. Several peripheral countries have been urged to stimulate job creation by opening up some professional sectors, where regulations have created barriers to entry.
Countries with high unemployment also needed to abolish wage indexation, relax job protection and cut minimum wages, the ECB said.
All five countries had current account positions that were better than in 2008, the ECB noted, with Ireland having reached a balanced current account position in 2010. But the central bank said a large current account deficit would persist for Greece in 2013 and would also 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, although Portugal is expected to record a primary surplus – that is, before interest payments on its debt – next year.
The bulletin also noted “a sharp deterioration in markets’ assessments of firms’ credit risk”, particularly in Italy, provoking criticism from Codacons, an Italian consumers’ association, that the ECB had not found a solution to this situation.
“If companies are insolvent it’s because banks are strangling them, denying them credit,” Codacons said.
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.
The analysis comes against a gloomier economic backdrop for the entire eurozone. The ECB’s quarterly survey of professional forecasters on Thursday showed a significant drop in expectations for GDP growth next year, with survey participants now forecasting growth of 0.6 per cent, compared with a forecast of 1 per cent growth in the last quarterly survey.
Angelino Alfano, secretary of Silvio Berlusconi’s People of Liberty party, said that Italians should not be asked to make further sacrifices and that the “European Central Bank should change track”.
“The party will not be a European doormat, on its knees at the German boundary,” he added.