The economic recovery in Europe is expected to continue. GDP in the euro area is forecasted to grow by 2.0 per cent in 2006, remaining lower than in most other parts of the world. Inflation in the euro area is expected to reach 1.9 per cent this year. The labour market situation will only improve marginally. Macroeconomic policies in the euro area are heading towards an undesirable mix of monetary and fiscal policies. The ECB is likely to tighten monetary policy, whereas the stance of fiscal policy will probably remain more or less unchanged. Such a mix is inimical to growth. For reasons of long-run sustainability, structural budget deficits in the euro area should be reduced. This would leave room for a looser monetary policy than would otherwise be possible. Key to a better policy mix is a restoration of incentives for fiscal discipline, which were watered down by the 2005 reform of the Stability Pact. One way of achieving this could be for the ECB to reform its monetary policy framework, involving a rise in the inflation target, conditional on a strengthening of fiscal policy institutions. A small group of fiscally responsible EU states could also take the lead by entering into enhanced fiscal policy co-ordination.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: