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2009 Annual Statement on the Euro Area
The Communication details the euro area’s response to the economic crisis of 2008 and how to improve the functioning of the Economic and Monetary Union. The Commission set out the need for a broader macroeconomic surveillance of financial systems within the euro area so that a faster and more effective coordinated policy response could be established in the future.
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank of 7 October 2009 – Annual Statement on the Euro Area 2009 [COM(2009) 527 final – Not published in the Official Journal].
Following the economic crisis which began in summer 2007 and peaked in 2008, signs of stability are beginning to emerge in the financial system. Throughout the crisis, the euro has effectively protected the euro area from turbulent exchange and interest rate movements that have previously been so detrimental for European Union (EU) countries in times of financial market stress. The ability of the euro area to act quickly and coordinate with central banks has helped to stabilise the whole international monetary system.
The financial crisis has demonstrated benefits of euro membership, increasing its attractiveness for non-euro area EU countries. Benefits include domestic institutions being granted access to euro central bank liquidity.
However the euro is not able to shield the euro area from all economic problems – in particular those related to imbalances. The crisis emphasised certain weaknesses within the euro area. Imbalances within the euro area meant that some economies were left more exposed to the crisis than others. Prior to the crisis many euro area countries ignored the risk of imbalances, but the financial crisis has demonstrated the need for change.
The euro area’s response to the crisis
There was a lack of satisfactory supervisory arrangements, which failed to act quickly and provide a coordinated response when the crisis began. Initial responses tended to be primarily defined by euro area countries’ individual domestic considerations. In October 2008, the first Eurogroup summit helped to generate an EU-level response, whereby the Commission provided a common strategy for the implementation of national banking rescue plans.
The Commission has since presented its formal legal proposals for a new framework of European financial supervision. The objective of these proposals is to heighten the prudential supervision of individual financial institutions as well as the financial system as a whole.
Alongside the internal policies, the EU is also at the head of the regulatory reform of financial markets, helping to form and develop the initiatives and commitments of the G20.
Fiscal consolidation within the euro area, in accordance with the Stability and Growth Pact, meant that most countries were better able to deal with the crisis than before. However, fiscal consolidation was unfinished in some euro area member countries, where levels of public debt remained high and public finances become dependant on fiscal revenues. As a result, some euro area countries were unable to adequately contribute to the joint fiscal stimulus that the European Economic Recovery Plan set out.
As a result of their close economic and financial relationship with a common currency and single monetary policy, coordination is essential for countries in the euro area. The euro area’s response to the crisis could have been quicker and more effective if coordination between the member countries had been more efficient.
The way forward – a broader macroeconomic surveillance
The crisis has demonstrated the need for euro area member countries to progress on and apply the EMU@10 reform agenda. In this communication of 7 May 2008 the Commission proposed a reform policy agenda to improve the functioning of the Economic and Monetary Union (EMU) against the fast-changing global environment, ageing populations and increasing energy and climate change concerns. The external policy area of the reform agenda proposed that the euro area should play a prominent role in global economic governance.
Imbalances within the euro area were not dealt with prior to the financial crisis. A broader surveillance is therefore required to establish a coordinated policy response. This broader surveillance should include financial market developments. Too much debt in the private sector resulted in unsustainable economic trends. Such financial imbalances need to be discovered and treated earlier.
The surveillance must be broadened to ensure sustainable public finances. Low growth together with an increasing debt puts public finances in a precarious position at a time when the impact of ageing is beginning to emerge. A concrete strategic commitment is required to achieve a strengthened fiscal cooperation, which adequately balances concerns of stabilisation and sustainability in accordance with the Stability and Growth Pact.
Coordination across policies and euro area countries must be improved to allow judicious exit strategies. Such coordination must consist of common understandings on the appropriate timing, pace and sequencing of normalisation of policy settings.