Greece's third stage on its march towards joining euro - Improvement in productivity enables Ireland to increase wages

Brussels, 01/02/2000 (Agence Europe) - At its meeting on Monday under the chairmanship of Portuguese Finance Minister Pina Moura, the EcoFin Council approved the contents of the revised stability programmes of Finland, Ireland and the Netherlands, as well as the revised convergence programmes of Greece and Sweden. In answer to questions at the final press conference, Commissioner Solbes made the following comments on:

Ireland: As to whether he was concerned by the wage increases that the Irish authorities are said to be on the pint of accepting, Mr. Solbes said that the "Irish model - which was broadly modelled on a Social Pact that had worked well - had been a the basis of a "catching-up process" which characterised Ireland's economic development in relation to that of other member countries. According to him, in these wage increases, one has also to see the share that resulted from an increase in productivity, meaning that workers could be paid better. Finally, Mr. Solbes considered that this increase could have a positive impact on household consumption;

Greece: . The opinion handed down on Monday renders Mr. Solbes "neither optimistic or pessimistic" regarding Greece's possible participation in EMU, the obligation of the Commission and the ECB being to see, once that Greece has put in its request for accession, whether the country "satisfies the convergence criteria". Hoping that that would be the case, the Commissioner explained: "The question the concerns us the most is developments in inflation" and achieving "sustainable inflation", the Greek Government having been insistently asked to "remain very attentive" in the matter.

For his part, Greek Finance Minister Papantoniou regarded that Monday's "unanimous decision" on his country's convergence programme was "very important" in the perspective of Greece's acceding EMU, it being the third significant step forward, following the annulment y the Council of the former decision relating to the existence of an excessive budget deficit and the re-evaluation of the drachma. Mr. Papantoniou confirmed that the request for accession would be introduced early-March, "in view of an answer at the European Council of Oporto in June".

Positive assessment of convergence and stability programmes

• Greece. The Council notes that the updated convergence programme, which covers the 1999-2002 period, "keeps as main goal the respect of the convergence criteria that will enable Greece to take part in Economic and Monetary Union from 1 January 2001". This programme is "in accordance with demands set down by the Pact on Stability and Growth", as the "deficit of the public administrations should give way to a surplus of 0.% of GDP in 2002, whereas the debt ratio should fall to 98% of GDP the same year". Regarding inflation, the Council observes that "considerable progress" has been achieved in the sense of its reduction and the deflator of private consumption "should not deviate from the projected average rate of an increase of 2.5% in 1999", the increase in oil prices, however, slowing down the process of dis-inflation at present. Whence, it considers that "within the high growth environment projected in the convergence programme, particular effort must be made by Greece to ensure that the progress made towards dis-inflation acquires a lasting character". And the Council adds: "such an effort seems to be all the more necessary in view of the convergence of monetary conditions in Greece to those prevailing in the euro zone and the potential implications of such a development on demand and prices". In this context, it welcomes the re-evaluation of the drachma - "which will support the authorities in their efforts to further reduce inflation in Greece - and invites the Greek Government to reinforce the anti-inflationary stance of the policy instruments at its disposal", including budgetary and incomes policies. In this last sector, it considers that the programme's goals are a "minimum" and urges Athens to do its best to achieve better outcomes than planned, the Council considering in conclusion that the "Greek authorities must be ready to tighten fiscal policy further from 2001 if inflation pressures emerge".
• Sweden. Covering the 1999-2002 period, the updated convergence programme was received "with satisfaction" by the Council which regards as appropriate the medium term goal of the Swedish authorities of gradually achieving a budget surplus of 2% of GDP (whereas the deficit reached some 12% of GDP in 1993). According to the Council, the planned surplus provides a "large enough safety margin for the general government not to beach the 3% of GDP reference value in normal circumstances", the requirements of the Stability and Growth Pact thus being respected. Welcoming the stress placed by the programme on macroeconomic stability, the Council also observes with satisfaction that the public debt ratio should fall below 52% of GDP in 2002. As for inflation, it has remained low since 1996, Sweden continuing to "easily satisfy" the convergence criteria. However, given that real growth should cease being below its potential in future, "efforts need to be maintained to keep inflation under control". Regarding this, "continued wage moderation is of utmost importance" and wage negotiations for 2001 "will prove challenging in an environment of recent high economic growth". From that point of view, the Council "notes that the fiscal policy stance followed since 1999 could become too expansionary in the current high-growth environment". Whereas Sweden meets the interest rate criteria, the Council takes a stance over exchange rates: (…) "although the krona has displayed less volatility in recent years, the Council re-iterates that Sweden needs to demonstrate its ability to stay in line with an appropriate parity between the krona and the euro over sufficient period of time without severe tensions". To that end, (….) the Council expects Sweden to decide to join ERM2 in due course".

Finland. The Council welcomed the results in implementing the stability programme of 1998, "where the projections then made for the improvement of the budget balance and the reduction of the government debt have been exceeded". In concrete terms, it notes "with satisfaction that the Finnish general government balance turned into a surplus in 1998 and, after an expected outturn of just over 3% of GDP in 1999, is projected to register a surplus of above 4% of GDP throughout the period 2002-2003", in accordance with the revised programme. According to the Council, the macroeconomic scenario retained "seems realistic for 1999 and 2000, but comprises a "risk that the economy may overheat and threaten price stability if wage moderation weakens", the latter therefore being "essential". Regarding the debt, the Council notes with satisfaction that it could be reduced in proportions higher than expected in the programme "as privatisation measures (with proceeds directed towards debt reduction) are due to be more extensive" than scheduled.

Ireland: Welcoming the results secured in 1999 that ensure that Ireland has acquitted itself of its obligations under the Stability and Growth Pact, the Council notes that that will still be the case for the period 2000-2002 for the "public deficit" aspects and that the debt GDP ratio will reduce gradually over the period covered by the programme. The latter rests on a "realistic" macroeconomic scenario, but the economy is currently in an advanced stage of the cycle and all instruments at the government's disposal must be used to counter inflationary tendencies. The Council this urges the Irish authorities to prepare to turn to budgetary policy to ensure economic stability" stipulating: Given the amount of overheating, the Council considers that such action is justified in the framework of executing the budget planned for 2000 and later planning.

The Netherlands: the Council took note of the fact that the choice of the "minimalist" macroeconomic scenario (growth of 2% in 2001-2002, deficit of 1.1% in 2002) as basis for the budgetary strategy of the Kok Government was dictated through a concern for caution, but noted that "recent economic developments render unlikely the average GDP growth rates underlying the budgetary projections". For the Council, this "Dutch method of using cautious growth assumptions and expenditure targeting and control has been instrumental in achieving the good results registered until now", but " tends also to make it more difficult to assess whether the medium-term outcome of the deficit is comparable with the requirements of the Stability and Growth Pact". According to the Council, the middle and favourable scenarios provide a range of more plausible economic assumptions and therefore a more relevant framework in assessing the public finance projections of the general government in 2002. The Council also welcomes the tax reform announced for 2001 aimed at "reducing the tax burden of earned income". Concluding, the Council recommends that the Dutch authorities strengthen their budgetary position in 2000 and the following years, given, among other things, "the current robustness of of economic growth and the possibility of seeing inflationary pressures appear.".