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IP/07/592

Brussels, 3 May 2007

Commission calls on euro-area members to strike while the iron is hot

Over the last twelve months, the euro-area economy has gone from strength to strength. The euro-area grew by 2.7% in 2006, its fastest growth rate since 2000, and well-above its long-term average. Employment growth accelerated to around 1.5% in 2006, yielding an increase of close to 2 million new jobs and inflation remained around 2%. These undoubted achievements put EMU on a strong footing to face the challenges which still lie ahead. These include raising potential growth, enhancing adjustment to economic shocks, putting Europe's fiscal house in order and ensuring a successful enlargement of the euro area.

"The euro-area economy's buoyant performance reflects the current cyclical upturn but also the beneficial effect of the EMU's stability-oriented macroeconomic policies and Member States' commitment to structural reform. Policy makers must strike while the iron is hot. They should put public finances on a firmer footing, implement reforms that will increase the euro-area's growth potential and show leadership on global issues", said Economic and Monetary Affairs Commissioner Joaquín Almunia.

More budgetary consolidation and structural reforms

The robust growth performance last year, combined with the consolidation efforts of Member States, particularly those with excessive deficits, led to a greater than expected fall in the euro-area's budget deficit. The average deficit was 1.6% of GDP in 2006, down from 2.5% in 2005.

The Commission welcomes the recent agreement by the Eurogroup to build on the better-than-expected budgetary outcomes in 2006 by pursuing more ambitious budgetary targets than those set in the Stability Programmes. Eurogroup ministers have committed to avoid expenditure overruns and use unexpected revenues to reduce government deficit and debt. They also agreed to carefully design fiscal policy plans for 2008 so as to accelerate adjustment towards their medium-term budgetary objectives,[1] for those that have not reached yet them, and for those which have reached them to avoid fuelling macroeconomic imbalances. By honouring these commitments, most euro-area members that have not yet reached their medium-term budgetary objectives would do so by 2008 and 2009 and all members should aim to do so by the end of the decade.

There are growing signs that reforms by euro-area members are bearing fruit. The employment effect of recent growth has been particularly intense. In December 2006, the unemployment rate dropped to 7.5%, its lowest level in 15 years. These signs of progress notwithstanding, there is a need for further structural reforms to raise the area's growth potential and ensure the smooth functioning of EMU. Raising the growth potential is important in view of the challenge posed by an ageing population in Europe. In the next half-century, we will have only two persons of working age for every senior citizen. If the current trends and policies continue, potential growth in the euro area will be reduced from above 2% in the period up to 2010 to around 1% on average over the period 2031-2050.

There is increasing awareness that being a member of the euro area means confronting common challenges and responsibilities. At this year's Spring European Council, EU leaders endorsed a new set of euro-area specific recommendations in the context of the renewed Lisbon Strategy. The recommendations emphasise the need for prudent fiscal policies, improvements in the quality of public finances and greater adaptability in the markets for goods and services. They also call for a better alignment of wage and productivity developments and an accelerated pace of financial-market integration. Progress in all these areas is essential to improve the functioning of EMU and the smooth adjustment of the euro area as a whole and of individual Member States to economic shocks and trends.

Euro area enlargement

On the 1st of January, Slovenia became of the 13th member of the euro area and the first of the 10 countries that joined the European Union in 2004 to adopt the euro. In February, Cyprus and Malta asked the Commission to carry out an assessment on their readiness to join the euro area in 2008. Slovakia wants to adopt the euro in 2009. Regardless of when Member States plan to adopt the euro, policy makers should maintain macroeconomic stability while sustaining the growth necessary to increase living standards. Pursuing policies in line with the economic framework of the Maastricht Treaty and the Lisbon guidelines will allow Member States to adopt the euro and to prosper in the longer run within the euro area.

Showing leadership on global issues

The euro now accounts for a substantial share of foreign-exchange transactions andacts as a reference currency in the managed exchange rate regimes of about 50 countries. The share of the euro in the gross issuance of short-term international debt securities also reached 38.3% in the third quarter of 2006, thereby surpassing the share of the US dollar.

As the euro's global weight grows so too must its role in global economic governance. Euro-area representatives have actively participated in the IMF's multilateral consultation process on global imbalance, along with those from the USA, China, Saudi Arabia and Japan. This process of consultation on global imbalances has delivered positive outcomes and there is a now a broad consensus among policy makers on the policy agenda required to tackle the problem of global imbalances. The priority now is for the relevant actors to implement the agreed policy agenda in a timely manner in line with the IMF's multilateral and bilateral consultations.

Full document available on :

http://ec.europa.eu/economy_finance/publications/european_economy/2007/euro_area2007_en.htm


[1] Medium-term budgetary targets for euro-area members and for those in ERM2 range between – 1% of GDP and balance or surplus, in cyclically adjusted terms, net of one-off and temporary measures. Most Member States aim for a position of balance.


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