Brussels, 12 July 2006
The euro: a currency in search of a deeper market, enhanced economic reform and a stronger voice on the world stage
Some euro area Member States are adjusting too slowly to economic shocks, which creates the risk that the gap between fast and slow growth countries could become entrenched over time unless the pace of structural reform is stepped up. This is one of the conclusions of the first Annual Statement on the Euro Area. Another is that despite the powerful “one market, one money” argument of the 1980s the European Union’s single market is still largely unfinished business. Tackling these weaknesses will allow euro area members to realise the full benefits of the single market and raise their growth potential and job creation. Finally, although it accounts for a fifth of world trade and 25% of world reserves, the euro area lacks a coherent voice on the world stage. Projecting itself more strongly would allow the euro area to show economic leadership and to promote stability in the world economy and financial markets.
“Seven years after its creation, the euro has brought huge benefits, the most significant, perhaps, being the induced resilience to external shocks – from soaring and now persistently high oil prices to the emergence of competition from China. But the euro alone cannot solve Europe’s economic problems: it needs the support of structural reform, the completion of the single market – especially in the services sector – and a stronger voice on the world stage”, said Economic and Monetary Affairs Commissioner Joaquín Almunia.
The Commission today adopted a first Annual Statement on the Euro Area which calls on Member States to step up efforts to increase the growth potential and deliver more jobs to bring the number of unemployed down more rapidly.
The challenges for the euro area members, which have a particular responsibility towards the 310 million people who share the euro, are to speed up the pace of economic reform, promote prudent macroeconomic policies, complete the single market and show leadership on the world stage.
At 2.1% this year, growth is expected to be slightly above potential in the euro area and create over a million new jobs. The three million already created in the last four years have brought the unemployment rate down to 7.9% in May, the lowest level in nearly five years, but not enough for the 12 million who remain jobless in the euro area.
Although structural reform benefits all EU countries, euro-area members have an added incentive to step up the pace of reform because in a monetary union, well-functioning product, labour and capital markets would ease economic adjustment and could raise potential growth from 2% to 3%.
The action that needs to be taken across the EU is identified in the Integrated Guidelines for Growth and Jobs for 2005-2008 and in the National Reform Programmes. Key priorities remain increasing the pace of R&D, promoting competition in services and network industries and making labour markets more adaptable.
These priorities are particularly acute for euro area members. If they are not realised, the differences in growth and inflation may become more entrenched within the euro area, require even more significant adjustment efforts to recover lost competitiveness and act as a brake on the economic growth of the whole area.
Promoting prudent macroeconomic policies by consolidating public finances now that the euro area is experiencing the most robust recovery since 1999 is equally crucial. Steps could be taken to increase the effectiveness of economic policy coordination in this field, for example by submitting Stability and Convergence Programmes before the summer i.e. when the national budgets are typically still in formation stage.
One money, one market...
In the 1980s, Member States decided that the single market in the making required a single currency. The euro was created, but in many aspects lacks the support that would arise from a complete and well-functioning single market.
The importance of promoting greater integration in the services sector cannot be overstated given that it accounts for around 70% of total jobs and value added in the euro area and holds the key to lower prices and productivity increases for the economy at large.
Financial market integration, in particular, would contribute to a better functioning of the euro area and would increase the level of the euro area’s GDP by between 0.5 and 1.1% over time.
...one voice ?
Projecting a strong voice on the world economic stage would also clearly help the euro area better represent its own interests and address the challenges faced by the global economy.
Today, the euro area represents about one sixth of world GDP and one fifth of world trade. The euro accounts not only for a substantial and increasing part in the denomination of the international debt market (31.5 % versus 44 % for the US dollar by mid-2005), but also for a large part of international bank liabilities and foreign exchange transactions.
And yet the euro area's external representation in international financial
institutions and fora lacks coherence – in spite of the agreement at
the European Council in Vienna in December 1998 to address this issue. This
shortcoming makes it difficult for the euro area to promote the shared interests
of its members and show leadership on global economic issues, including,
crucially, how to avoid a disorderly unwinding of global imbalances.
 See Annex II to the Commission's White Paper on Financial Services Policy (2005-2010), Brussels 1.12.2005 SEC(2005) 1574.