26 September 1999
| The Interim Committee statement on behalf of the European Union (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom). |
Introduction
1. The Minister of Finance of Finland, Mr. Sauli Niinistö, submits a statement in his capacity as Chairman of the Council of the European Union on the occasion of the meeting of the IMF Interim Committee. The central issues concern the global economic outlook, challenges facing the EU, the reform of the international financial architecture, debt initiative for heavily indebted poor countries and financial issues related to South Eastern Europe.
World economic outlook
2. Global economic conditions as a whole look now more favourable than when we met last spring, not to mention the situation a year ago. An easing of monetary policy in the key industrial countries together with corrective macro-economic and structural policy actions in many emerging market countries, have contributed to a normalisation of access to capital markets.
3. The short-term indicators for the world economy point towards recovery. The economic situation and outlook, however, vary markedly across the major regions, and important risks still exist. Policy challenges therefore differ considerably.
4. The economic performance of the United States, with strong growth, falling unemployment and low inflation, has been remarkable. This can be largely attributed to a combination of flexibility in labour, financial and product markets, budgetary and monetary discipline. Also, the continued strong stock market developments have contributed to strong domestic demand. At the same time, stock markets remain a source for potential risks. It is important that measures are taken to promote private savings in the medium term. As far as public savings are concerned, the US is in a comfortable position. It is important, however, to avoid overheating of the economy e.g. by substantial tax cuts. The recent interest rate increases will help to ensure sustainable growth over the medium term.
5. While economic activity in Japan shows some signs of bottoming out, the prospects for growth remain uncertain. The restructuring of the financial sector is finally under way, but it will take time before the financial sector has recovered. The stance of monetary and fiscal policy remains supportive. As the public debt is very high and rapidly increasing, the scope for further fiscal stimulus seems limited and its effects are highly uncertain.
6. A revival of domestic demand in Japan can take place only if confidence improves. In this respect the European Union welcomes the efforts to restore dynamism in the Japanese economy and urges the authorities to continue to implement comprehensive structural reforms. Sustained economic growth in Japan is a necessity not only for Japan, but it would also greatly support Asian economies in general.
7. In other Asian economies, recovery of economic activity is under way. Countries which have undertaken significant structural reforms under IMF/World Bank programmes, have recovered particularly well. Although progress has been made, there remain worries that restructuring of the corporate sector may be implemented too slowly or be delayed in some Asian countries.
8. Only a determined full-scale implementation of planned reforms will restore long term confidence. Even if the international community can provide support - financial and technical, only individual countries can implement the necessary reforms. The European Union remains committed, in co-operation with the IFIs and other international bodies, to providing the Asian countries with technical assistance and advice on restructuring their financial sector, for which the ASEM co-operation provides a fruitful framework.
9. The economic situation in Latin America continues to improve, although downside risks persist. The effects of the currency crisis in Brazil have been kept smaller than initially feared. The EU welcomes the IMF programme for Brazil, to the financing of which all the EU Member states fully contributed. The EU and its Member States welcome the increased co-operation of the Latin American countries in the economic field. Sustained growth in Latin America can only be achieved if it is supported by sound fiscal and monetary policies as well as strong commitments to structural reforms. A point of attention for some countries is their relative high external debt ratio.
10. The Russian economy has recently shown some signs of recovery. However, the prospects remain very uncertain. The EU and its Member States welcome the recent agreements between Russia and IMF, World Bank and Paris Club. We hope that the funds made available will be put to good use to help finance the recovery of the Russian economy. The European Council for its part decided in Cologne on a Common Strategy of the European Union on Russia. The goal of this Common Strategy is to promote a stable, open and pluralistic democracy in Russia, governed by the rule of law, which would underpin the development of a market economy. The Russian government should continue to work towards the establishment of a functioning market economy in close co-operation with the IMF and the World Bank. Only stable and predictable policies and strong institutions will help to establish credibility within and outside the country. The European Union is ready to continue to support economic reform in Russia, within the framework of an IMF supported program, together with other countries.
The EU economic prospects and policies
11. In the European Union economic growth lost momentum in the second part of 1998, but stabilised in the first part of 1999. While the situation across Member States is not totally homogeneous, signs of recovery have emerged in recent months. Household confidence and domestic demand remain strong, while business confidence shows signs of further strengthening. On the back of these developments, growth is expected to pick up in the remainder of the year.
12. Sustained non inflationary growth and higher employment continue to be Europe's main objectives. The Broad Economic Policy Guidelines set out the economic policies of the Community to achieve these objectives: a macro-economic policy geared towards growth and stability as well as comprehensive structural reforms at Community and national levels. On the budgetary side, Member States continue the consolidation process in the framework of the Stability and Growth Pact. One pressing issue remains the persistent high unemployment. In this context, the EU established an Employment Pact. The three central elements of the Pact are:
- Co-ordination of economic policy and exchanges of information and opinions on interactions between wage developments and monetary, budget and fiscal policy through the framework of a macro-economic dialogue aimed at preserving a non-inflationary growth dynamic;
- Further development and better implementation of the co-ordinated employment strategy to improve the efficiency of the labour markets by improving employability, entrepreneurship, adaptability of businesses and their employees, and equal opportunities for men and women in finding gainful employment, respecting, at the same time, the autonomy of the various concerned actors in their respective areas of responsibility;
- Comprehensive structural reform and modernisation to improve the innovative capacity and efficiency of the labour markets and the markets in goods, services and capital.
13. With the introduction of the euro on January 1, 1999 the European Union reached its highest level of economic integration so far. The introduction of the euro can help Europe to play a role commensurate with its economic weight in the global economy and was also an important step in the creation of an integrated European capital market. Further reforms are needed to fully utilise the benefits of this market, as illustrated in some of the elements of the Commission's Action Plan for creating a single market in financial services.
14. Europe is preparing for the EU enlargement. The candidate countries are preparing as well. The EU welcomes the constant progress reached in this context and encourages them to continue their reforms and adjustment efforts. The accession negotiations have gathered further momentum and are on track. The enlargement provides both economic and political stability and opportunities for improving living standards more widely in Europe.
International Financial Architecture
15. The EU and its Member states strongly support the ongoing process of strengthening and reforming the international financial architecture so as to contribute to crisis prevention and management. The European Council expressed its views on these matters in its Cologne report. In improving the functioning of the international financial system, our first priority should be crisis prevention. Financial stability is ultimately the responsibility of each individual country, both developing and developed. Each country should therefore strengthen domestic procedures and institutions in order to better counteract disturbances within the domestic as well as in international markets.
16. Surveillance, transparency of both public and private actors, availability and disclosure of data, and technical assistance are of utmost importance in preventing a crisis. It is a matter of urgency to implement relevant international standards and codes of conduct for private sector, public sector and international organisations. The IMF in close co-operation with the World Bank and other standard setting bodies is in a key position to survey the implementation.
17. The EU and its Member States strongly support all efforts to make prudential supervision of the financial markets more effective, especially in emerging countries, and to address the risks posed to the financial system by the activities of highly leveraged institutions. They urge for the adoption by offshore financial centres of internationally agreed supervisory and regulatory standards. Emerging market economies themselves have a responsibility for adequate debt management.
18. If, despite preventive measures, international financial crises do occur, they should be handled in ways that do not create unsound incentives for risk taking by investors. Possible rescue packages should be conditional on economic and financial reform programs. Also, as was stressed by the European Council in Cologne, the EU and its Member States attach particular importance to increased private sector involvement in the prevention and resolution of financial crises. In this connection, it points to the need to step up work to establish effective rules whereby private sector will bear its share of the costs of turbulence on the financial markets. The EU and its Member States urge the IMF to study further the different proposals which are on the table, among which collective action clauses in bond contracts, private contingent credit lines, call options in debt contracts and improved communication.
19. The EU and its Member States welcome the establishment of the Financial Stability Forum. This forum has a broad mandate to discuss all matters related to the systemic stability of international financial markets. The role of the Financial Stability Forum in detecting and preventing problems should be developed, keeping in mind the division of labour between all international financial fora, as well as the need to ensure appropriate reporting to the international community.
20. Recent experiences in emerging markets economies have emphasised the importance of orderly and properly sequenced liberalisation of capital flows. Introducing or tightening capital controls is not appropriate to deal effectively with fundamental economic imbalances. If however, a country resorts to such measures as last resort, it must minimise the negative effects by ensuring that they are exceptional, temporary, non discriminatory, concerted with the IMF, and not a substitute for reform. The IMF should provide guidance for member countries in sequencing the liberalisation of capital flows. In this context, the EU Member States encourage the IMF to continue work on amending the Articles of Agreement in order to create an appropriate legal role for the IMF in guiding the process of liberalisation of the capital account.
21. The choice of an appropriate exchange rate regime is important for emerging economies to achieve sustainable economic development. Although the appropriateness of the specific regime may differ depending on economic circumstances, financial and trading links, and the stage of development. In order to be successful, any exchange rate regime has to be backed by sustainable and credible economic policies. One important issue is the way how to move to another regime. The EU and its Member States encourage the IMF to continue its work on these issues and to enhance the attention it gives to exchange rate sustainability in the context of its surveillance activities.
22. It is crucial that the industrialised countries are committed to assisting emerging countries in reforming and restructuring their economies. EU participates in several ways in this work, for instance through PHARE, TACIS and macro-financial assistance for the European transition economies. The ASEM Trust Fund and European financial expertise supplied by the EFEX mechanism are similarly available for the Asian crisis countries.
23. The EU Member States are of the opinion that reforms of the international financial system must strengthen the Bretton Woods institutions. It is important to be clear about the respective roles of the IMF and the World Bank. These institutions should serve as central fora for the discussions concerning the international financial system. The IMF and the World Bank should sharpen their focus on areas where they have comparative advantage and co-operate very closely in potentially overlapping areas, such as financial markets surveillance and reform. They should also work together to develop a set of policies and practices that can be drawn upon, by donors and borrowers alike, in the design of adjustment programs that ensure the protection of the most vulnerable in societies.
24. The IMF should continue to strengthen its preventive role, including through the availability when necessary of the contingent credit line, and to maintain its catalytic role in crisis management. The World Bank Group should continue its efforts to fight poverty and enhance sustainable economic growth in member countries. The EU and its Member States welcome especially the Bank's work in transition countries, where the Bank and the EU's institutions co-operate successfully. The Bank's strength is its focus on structures and concrete projects, and its engagement in long term work. We look forward to the results from the Bank's Comprehensive Development Framework pilot projects.
25. The EU and its Member States welcome the on-going efforts to improve the functioning of the Interim Committee, and the report from IC deputies and the Fund's Board on these matters. In this regard, the preparation of Ministerial IC at deputy level should be continued on a permanent basis. Also, the use of focused working groups with flexible composition could enhance the effectiveness of the committee. The President of the World Bank should be given a privileged role. In consideration of the areas in which the IMF and the World Bank share responsibility, joint sessions of the IC and the DC could be held when appropriate.
The HIPC Initiative - debt initiative for heavily indebted poor countries
26. The EU and its Member States attach great importance to the HIPC Initiative as a means for finding a lasting solution to the debt problems of the poorest countries pursuing sound economic policies, and support its review and further enhancement. We support the ongoing reform for an enhanced HIPC Initiative in the framework of the Bretton Woods institutions. In that context, we welcome the proposal for an enhanced debt initiative made by the G7 Heads of State and Government in Cologne, and we look forward for their speedy implementation. An improvement of the HIPC should be based on integrated programs that link debt relief closer to the goals of sustainable development and poverty reduction, aim for debt relief to be broader and deeper and for the debt reduction process to be faster. Relevant local actors and Non Governmental Organisations should be involved in the management of the resources freed by the relief. One key aspect, however, is that the financing of the Initiative, even in the current framework, must be resolved urgently without detriment to the financial resources that should be channelled to other developing countries. The EU and its Member States stand ready to take their fair share of the burden.
27. The European Union is prepared to use funds in the framework of existing EDF instruments for the purpose of making a substantial contribution towards attenuating the debt burden of ACP States which are eligible for the HIPC initiative and will approach the ACP States with a positive proposal to that end. The treatment of non ACP states should be a fair one in the global efforts of the international community. This initiative would include contributions for debt cancellation of the order of magnitude of 1 billion euros.
28. In mobilising bilateral and multilateral resources for the HIPC, aspects of fair burden sharing among donors will be of particular relevance. For their part, EU-countries are prepared to support in the Paris Club an increase in the remission percentage on commercial loans to 90% or more if necessary in order to contribute to achieving debt sustainability, and they are prepared to cancel debt from official development aid.
Turkey
29. Turkey was hit by a devastating earthquake on August 17th. The EU has provided immediate humanitarian aid to Turkey. The international community stands ready to support Turkey's efforts in the reconstruction. As the Turkish economy faces huge challenges, a successful conclusion of the IMF programme is all the more important.
South Eastern Europe
30. The crisis in South Eastern Europe has had dramatic consequences, both in human and in economic terms. From the beginning, the European Union has been in the forefront to help and support the people of the region in their strive for recovery from the crises. The EU plays a prominent role as co-chair of the High Level Steering Group. To safeguard peace and stability in the region, the economic challenges of building healthy and prosperous economies are huge and multi-faceted. A crucial part of this process will be integration of the South Eastern Europe with the rest of Europe and the global economy.
31. All actors involved need to aim for consistent actions and strategies. This includes a well orchestrated division of labour. At the same time the countries in the region have also to shoulder their responsibilities.
32. The EU and its Member States will fully support development in the region within the realm of the Stability Pact for South Eastern Europe. All of us should strive for peace, stability and prosperity in, and co-operation between, the countries in the region.
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