For example, in the United States, we have a chronic trade deficit because domestic investment spending exceeds our domestic saving. Foreign capital inflows make up the gap. In this process, the foreign exchange value of the dollar plays an important equilibrating mechanism. If the domestic saving/investment imbalance is unchanged, then any reduction in the trade balance from higher trade barriers will need to be offset by lower exports. The domestic currency will appreciate to cause the trade deficit to widen to accommodate the desired capital inflows. Thus, trade restrictions affect the composition of trade but not the gap between exports and imports, which is determined by the difference between domestic savings and investment. At the end of the day, the protectionist country would produce more goods in sectors protected by higher trade barriers but also fewer goods for export. The expectation that higher trade barriers would save jobs ignores these critical second-round effects. Moreover, the story may not end there. What happens if another country that now faces higher trade barriers responds by raising its own barriers? That would push production even further out of high-value-added exports that are now deterred by the higher foreign trade barriers and into those exports that face lower trade barriers, or into the goods protected by the higher domestic trade barriers. Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world.
If accompanied by continued wage moderation, these factors alone should not be expected to threaten the current outlook for price stability. Accordingly, the results of the wage bargaining round for the year 2000 will play a particularly important role for the further assessment of price developments in the euro area. The only way to prolong a non-inflationary recovery, and hence to substantially re-absorb the still very high unemployment, is for all responsible parties to act decisively, in the near term, to increase flexibility in the labour, product and service markets. This would also be the best way to allow the economy to take full advantage from the present stance of monetary policy. Taking all this information into account, the Governing Council decided to maintain the prevailing ECB interest rates. In addition, it stressed that low inflation and therefore low interest rates should encourage higher investment, helping to prevent the emergence of capacity constraints during economic expansion. At the same time, the expected improvement in economic activity offers greater opportunities to cut fiscal deficits further and to enhance structural reforms. Indeed, the creation of this virtuous circle depends on all policymakers playing their part. Let me now give the floor to the Vice-President to introduce three additional topics which we discussed during our meetings. In addition to reviewing the main monetary, financial and other economic indicators, we discussed issues relating to the transition to the Year 2000. We are now approaching the final phase of testing activities in connection with preparatory work for the Century Date Change.