EMU@10: successes and challenges after 10 years of Economic and Monetary Union
A decade ago, Europe's leaders took the decision to introduce the single currency, the euro. In this communication, the European Commission evaluates experience gained in the first decade of Economic and Monetary Union (EMU), identifies goals and challenges facing the euro area and puts forward a policy agenda for EMU's continued success.
Communication from the Commission of 7 May 2008 to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank : EMU@10 - successes and challenges after 10 years of Economic and Monetary Union [COM(2008) 238 final - Non published in the Official Journal].
At the end of its first decade, the euro is a success story and represents the most tangible result of European integration. Low and stable inflation and interest rates over the past ten years have boosted investment in the euro area. Fiscal consolidation has continued and job creation has been at record levels. However, output and productivity growth have been lower than in other developed economies, and concerns about income distribution have grown. In the future, EMU faces challenges linked to ongoing globalisation, an ageing population, rising food and energy costs and the effects of climate change. .
Ten years of monetary and economic stability and integration
EMU has fostered economic and market integration by removing exchange rate risks and lowering cross-border transaction costs, helping to develop the single market and integrate product markets. Establishing itself as the world's second currency after the US dollar, the euro is a powerful catalyst for financial market integration. The Single Euro Payments Area (SEPA) will eliminate differences between national and cross-border retail payments.
A record 16 million jobs were created during the first decade of EMU, while unemployment fell to around 7 %, the lowest in more than fifteen years. In addition, EMU has brought significant benefits to European Union Member States engaged in a catch-up process, by providing an environment of macroeconomic stability and low interest rates coupled with the support of the Cohesion Policy and Structural Funds.
A single monetary policy, conducted by the European Central Bank (ECB), combined with national yet coordinated fiscal policies ensures macroeconomic stability. Currency fluctuation and exchange rate realignments within the euro area have become a thing of the past. Furthermore, monetary policy has cemented long-run inflation expectations: inflation averaged around 2 % in the first decade of EMU, falling from 3 % in the 1990s and 8 to 10 % in the 1970s and 1980s. This has contributed to improving the euro area's resilience against adverse external developments.
The Stability and Growth Pact (SGP) improved budgetary discipline and the euro-area economy has pursued a faster track of economic and financial integration than the rest of the EU. Supporting macroeconomic stability, fiscal consolidation has been impressive over the past years and has culminated in a deficit of only 0.6 % of GDP in 2007 compared to an average of around 4 % in both the 1980s and 1990s.
EMU's remaining challenges, amplified by new global trends
Although the first decade of EMU has been a positive picture overall, there are still unfulfilled expectations and remaining challenges, such as globalisation, rising food and energy prices and the ageing population. At around 2 % per annum; potential growth remains too low and there are still substantial differences across countries in terms of inflation and labour costs. At the international level, a clear strategy is needed so that the euro area can project a strong voice in international economic fora in an increasingly globalised world. Finally, the public image of the euro does not fully reflect EMU's successful economic performance. In some countries, citizens believe that prices have increased significantly because of the euro. Indeed, even if overall inflation was only marginally affected at the time of the changeover, occasional abusive price increases in specific sectors and countries have tarnished the image of the single currency.
To address the challenges for the next decade, it is necessary to build on existing macroeconomic stability while raising potential growth and furthering the welfare of euro-area citizens, ensuring a smooth adjustment capacity as EMU expands to take on new members and protecting successfully the interests of the euro area in the global economy. To do this, the Commission has outlined a three-pillar agenda:
- Domestic: deepening and broadening macroeconomic surveillance and better integrating structural policies into the overall policy co-ordination process within EMU;
- External: enhancing the euro area's role in global economic governance by developing common positions on international issues and by consolidating representation, with the ultimate objective of a single seat for the euro area in the relevant international financial institutions and fora;
- Promoting effective governance of EMU: putting into practice both agendas requires a more effective system of economic governance.
In May 1998, the Council took the decision to move to the third and final phase of Economic and Monetary Union (EMU) and to introduce the single currency, the euro. Used since 1 January 1999 as book money, euro banknotes and coins were introduced on 1 January 2002 in 12 Member States. At present, 17 out of 27 are part of the euro area.