Brussels, 22/02/2007 (Agence Europe) - Michael Deppler has outlined his support for the European Commission's recent forecasts (EUROPE 9368) and proved to be optimistic about economic growth in Europe. On Thursday, in an interview to EUROPE, the Director of the International Monetary Fund's European Department, presented his vision of the developing situation of the eurozone and called on member states to continue structural reforms and moderate wage claims. Without wishing to interfere in a subject that is, above all, a domestic matter for Europeans, he made no comment about the possibility of the Council intervening in a more proactive fashion in the formulation of the Economic and Monetary Union's currency policy orientations (Article 111 in the Treaties) and would only say that dialogue between ministers and the European Central Bank (ECB) needed improving. He was also cautious about the question of the eurozone's external representation, preferring to leave it up to EU member states to make the necessary adjustments for enacting IMF reform, which is expected to lead to enhanced awareness of emerging economies.
Agence Europe: What is the view of the IMF on the economic situation in the euro area?
Michael Deppler: Clearly things are going well. The recovery, which was very strong in 2006, was expected to soften somewhat very significantly at the turn of the year, but the evidence of that is not very supportive right now. The IMF is preparing its forecasts, but the European Commission forecast is basically where we would be at right now. I have always thought that once the recovery gets on the way, it would continue and that the risks would be on the upside. I wasn't too worried about a moderate downturn in the USA. This thing is a cyclical process which is set to continue - absent huge shocks.
AE: To what extent can the current positive economic outlook of the euro area be explained by reforms carried out by member states?
MD: Reforms in Europe have paid off and you can see it very visibly in the employment statistics.
My favourite example is that business sector employment in Europe has grown more than in the USA over the past ten years. And then what you see now, is in fact a recovery that is based on employment. We have to be careful about thinking too much of this being due to reform. There is an element of reform but also a strong element which is simply cyclical, and we need to be somewhat careful when looking at the exact split. But I do think Europe has been making reforms and these reforms have been paying off and are continuing to pay off. The real concern is: is this momentum of reform, that we have seen for the past few years, going to continue ? There I think one has to worry about the political dynamics that are going on today, whether that commitment of reform, particularly in the most politically sensitive areas is going to be there.
AE: How are growth and inflation differentials affecting the well functioning of the euro area?
MD: There are clearly things to worry about here, because countries have long cycles within the euro area. We see this in France, between the 80's and the 90's, Germany between the 80's and the 90's in the opposite direction and now Germany after a bad ten years, is rebounding and I expect Germany to do quite well. The problem for all countries in the euro area, is to look forward and make sure they run their policies with a view to sustaining the growth. Take for instance the Netherlands, which is a country that has done very well but has clearly relaxed their guide, sort of late 90's early 2000, and then faced a shock downturn, before getting back on their feet now. So it is very important policies be set in a forward looking way and I do worry that in an environment where things are going well, whether policies will maintain this forward looking perspective.
AE: What is the role of wages in influencing inflation differentials, and is the evolution of wages in line with current productivity and competitiveness trends in the euro area?
MD: In most countries I would say that that's the case. Spain is doing quite well, but there are concerns about Spain, particularly because unlike in some of the very successful countries where exports are a strong component of the performance, in Spain we have a large current account deficit. But more generally wages in Europe have surprised by how well behaved and moderate they have been, and I think this is part of the reason why we have seen a recovery and an employment based recovery. To my mind so long as we stay on that track, things will turn out well.
AE: Turning to exchanges rates. Is the euro area in any way suffering from the strength of its currency?
MD: the euro has been fairly valued from a medium term perspective. We are looking here not just at bilateral rate vis à vis the yen or the dollar, but at the average of exchange rates. We see that the euro area is back more or less at average real effective exchange rates historically. We look at the current account. It is close to zero. We look at exports. They are doing well, and so we don't quite see where the problem is.
AE: Regarding the reform of the IMF, should countries belonging to the euro area opt for a single representation?
MD: We think Europe needs to have a view on what the reform of the IMF has to be. In general Europe is very positive with this reform from a global point of view. It does involve issues within Europe as well, but how Europe solves these problems is a European problem, it's not the IMF problem. We do think the IMF has a legitimacy issue in the global sphere, regarding the representation of the emerging economies, and this requires some adjustments elsewhere, but how these adjustments are made, particularly within Europe, is not an area for us to comment.