Brussels, 07 October 2009
Crisis highlights urgent need for deeper and broader macroeconomic coordination and surveillance in euro area
The euro acted as a crucial shield against the shock waves inflicted by the worst economic and financial crisis in post-war history. But the crisis also shows the importance to address competitiveness divergences as a matter of common interest and without further delay. Ensuring an efficient internal adjustment that puts the euro area on a sustained and balanced growth path and restores the long-term sustainability of its public finances is the way pointed by the 2009 Annual Statement on the Euro Area.
"The euro acted as a crucial shield in the crisis, including for non-area members. But, alone, it does not solve internal and external imbalances. The euro area, and the Eurogroup, must make a bigger effort to look at economic and budgetary policies as a matter of common concern and at tackling divergences in competitiveness," said Joaquín Almunia, Economic and Monetary affairs Commissioner, adding: "The launch of a new Framework for growth decided by the G20 leaders in Pittsburgh raises the stakes for the euro area to speak effectively with a single voice to ensure that its interests are duly defended at the global level.
The euro has protected the euro area from the exchange rate and interest rate turbulences that proved so damaging during past crises. It has also played a valuable role as an anchor of sound macroeconomic policies for Member States actively pursuing the adoption of the euro, or whose currencies are linked to the euro. The ECB's capability to act swiftly in collaboration with major central banks has contributed to the stability of the international monetary system as a whole.
But the crisis also exposed the vulnerability of some Member States that have accumulated macroeconomic imbalances. The same benign macroeconomic conditions that facilitated the expansion of credit worldwide, allowed some euro-area Member States to finance fast, but increasingly unbalanced economic growth, as the inflowing capital was not always channelled to its most productive uses. Conversely, countries in current account surplus were faced with an immediate fall in growth as soon as global demand faltered, given that the engine of domestic demand never really kicked in. Unfinished business in fiscal consolidation, financial supervision and the way Member States coordinate their economic policies in EMU further amplified these vulnerabilities and weighed on the euro area's capacity to respond to the crisis.
G20 raises stakes for euro area
As already highlighted in the Commission's Communication on 10 years of Economic and Monetary Union, to make the most of the single currency euro area members need to better coordinate their macro-economic policies, to broaden the surveillance to include macro-financial stability and competitiveness aspects and to increase their ability to speak with one voice.
Meeting these challenges is particularly crucial at this juncture to ensure a smooth transition from the still fragile recovery to self-sustained, balanced growth, and to put public finances back on a sustainable path. Increasing the growth potential, including by finding new and more balanced sources of growth, and reducing the crisis-inflated debt levels is not something particular to the euro area. But because it shares a currency and the same interest and exchange rates it has more to gain from coordinating its policies, and addressing the underlying causes of harmful competitiveness developments between its Members must be an integral part of the area's exit strategy from the crisis. A well-designed and coordinated withdrawal of fiscal stimulus and business support measures when time permits accompanied by credible structural reform plans would improve the outlook for price stability and facilitate the conduct of the single monetary policy. Co-ordination should essentially take the form of common understandings on the appropriate timing, pace and sequencing of the normalisation of policy settings.
The Annual Statement also argues also for a more effective representation in international financial and economic organisations and fora. With the G-20 being firmly established as the new platform for global economic policy coordination, the euro area's unique economic and institutional identity must be recognised. In this context, the Eurogroup must strive to develop a common position contributing to the implementation of the global Framework for Strong, Sustainable and Balanced Growth, agreed by the G-20 in Pittsburgh.
The Commission calls on Member States to show the political will and leadership to turn common understanding into concerted policy action. The Lisbon Treaty will, hopefully, provide further impetus for improving euro area economic governance, by formally recognising the Eurogroup and its President and by strengthening the surveillance role of the Commission.
The economic issues raised in the Annual Statement are explored in more detail in an accompanying Annual Report that, among other things, analyses in detail the policy response to the crisis and the emergence of the G-20 as the critical forum in global economic governance.