FRANKFURT (MNI) – Countries running current account deficits within
the Eurozone are the ones who need to reform, not the surplus countries,
European Central Bank Governing Council member Axel Weber said in a
speech delivered Wednesday.

Imbalances within the currency union are a serious strain on
monetary union and need to be addressed, the Bundesbank president argued
in remarks delivered to European parliamentarians in Strasbourg and
published on the bank’s website.

Weber also argued that a crisis resolution mechanism in the
Eurozone would be helpful, at least in the medium term.

The Bundesbank head outlined the major dispute over policy options
to deal with imbalances in the Eurozone. While on the one hand,
proponents of a symmetrical approach say that both deficit and surplus
countries must reform, others say only deficit countries need to change
their ways.

Weber made no secret of which side he came down on. “The deeper
causes of the imbalances are domestic factors within the deficit
countries. Hence, it is mainly incumbent on them to act,” he said.

Weber took aim at those who argue that surplus countries must make
domestic changes such as raising wages or boosting domestic demand.
“When taking a closer look at these proposals, it becomes apparent that
they are based on invalid assumptions,” he argued.

“Given the current trade structure, an increase in German imports
by 10% would improve the current account balance in Spain, Portugal and
Greece by a mere 0.25 percentage point. The current account balance in
Ireland would improve by 1 percentage point,” he explained.

“The proposal of raising wages to support domestic demand and
reduce competitiveness does not only neglect that wages are not a
political control variable. Moreover, simulation studies show that the
effects would be confined almost entirely to the home economy in the
form of changes in employment,” he reasoned.

Weber contrasted the current account surplus of Germany to that in
China, saying they are “of a different nature. Germany does not manage
its exchange rate nor does it impose capital controls.”

Germany would, however, benefit from reforms, such as increased
labor market flexibility and deregulated services and product markets,
he said.

Large current account imbalances in the Eurozone are due mainly to
deficit countries’ structural domestic imbalances, he said, and “given
spillover effects in integrated euro-area financial markets, the
imbalances are a serious strain on the monetary union as a whole,” he
warned. “They must therefore be corrected.”

“In the long run, procedures to ensure fiscal policy commitment
will have to be strengthened, for example by enhancing the Stability and
Growth Pact,” Weber argued.

“More effective macroeconomic surveillance and the development of a
crisis resolution mechanism would, at least in the medium term, also be
helpful,” he said.

[TOPICS: M$X$$$,M$G$$$,M$$EC$,M$$CR$,MGX$$$]