After the European Central Bank (ECB) only reluctantly reacted to the synchronous world-wide economic downturn, a further reduction in interest rates has become even more unlikely against the backdrop of the beginnings of an economic upturn in the Eurozone. Financial markets even expect an increase in interest rates. In its current weekly report 12/2002, the DIW Berlin warns against the repetition of former mistakes. Upswings in the economy have been repeatedly curbed by an anticipatory tightening of the monetary course whilst still in their infancy and thus preventing an improvement in the labour market through more growth. This negative experience should induce the ECB to stick to its current expansive monetary course. All the more so as there are no signs that inflation rates will increase in the Eurozone. In order to be able to maintain this course, unions and management in the Eurozone have to continue with their policy of moderate wages.
Following the 1.5 percentage point cut in interest rates by the European Central Bank last year, key interest rates have remained unchanged since October. At 1%, real short term interest rates are almost two percentage points below their long-standing average and are below the real economic growth rate in the Eurozone. They should therefore stimulate the cyclical trend in the Eurozone. Although subject to fluctuations, long term interest rates also decreased last year in the Eurozone.
The DIW Berlin stresses that monetary policy, which has a high and steady growth rate as its aim, can have a positive effect on the increase in productive capacity. It can, in particular, prevent an increase in natural rate of unemployment; the current level of unemployment, which is only partly structural, could also thus be reduced. An increased employment quota due to improved labour market conditions would also stimulate productive capacity. Yet, a moderate increase in wages remains a precondition for this positive and self-developing mechanism. The ECB should make clear that it is willing to honour a moderate wage policy by an expansive monetary policy, thus encouraging the creation of employment.