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Joaquín Almunia

European Commissioner for Economic and Monetary Affairs

Unveiling the priorities for EMU: looking ahead at 10 years of the single currency

The Economist Conference
Athens, 25 April 2007

Ladies and Gentlemen,

It is a great pleasure to be here in the birthplace of European learning and philosophy and home, today, to a thriving, modern economy. These characteristics make Athens the ideal location for reflections on the past, present and future of EMU and for discussing the priorities for policy makers at the euro-area and national level in the coming years.

These reflections seem appropriate as we approach 2008 which marks the tenth anniversary of several landmark decisions in the history of the single currency.

A successful EMU acts as an anchor for economic stability in Europe and provides a fair wind for reform in current and prospective EU Member States. In turn, a strong and effective EU will have positive spillovers for the euro area by encouraging Member States to work together effectively to secure sound macroeconomic policies, implement economic reforms and project a strong voice on the global stage.

In my presentation today, I will take stock of our experience over the last years and highlight areas where we may need to deepen our understanding. I will also discuss the priorities for action in the euro area in order to meet these challenges.


Let me first say that there is much to be positive about. Five key achievements stand out.

First, EMU provides protection and stability in a fast changing global economy. It has increased our resilience to external economic shocks such as 9/11, the Iraq war and rising oil prices and has shielded countries against financial turbulence. Significantly, monetary union has also removed the risks stemming from intra euro area exchange rate volatility, and has de facto made exchange rate developments much less relevant for our economies than it was one or two decades ago, given that a very large share of our trade is now internal to the euro area.

A second success is the low and stable inflation rates that EMU has delivered for businesses and citizens. Inflation in the euro area has fallen from rates of around 7% on average in the 1980s and above 4% in the early 1990s to just around 2% today. This achievement is particularly marked when you look at individual countries, including Greece, where inflation has dropped from close to 20% in the early 1990s to a little over 3% today.

Mirroring price stability, the dramatic fall in interest rates in the euro area represents a third key achievement of EMU. Greece, again, is one of the best examples in this regard, with interest rates that have come down considerably from double figures in 1999 to 3.75% today.

The ECB’s monetary policy has been a key factor. And even after recent interest-rate increases, financing conditions remain favourable, supporting investment plans and also greatly reducing the burden of servicing governments’ debt. The ECB has managed to establish itself as the credible central bank of the second most important global currency from day one. Not an easy task and one that took decades to achieve in the economic history of other countries.

As a fourth accomplishment, EMU has also powered the process of European economic integration. The euro has acted as a strong catalyst for trade and foreign direct investment in the euro area. Although the results of empirical studies vary, a conservative estimate of EMU's short-term boost to intra-euro-area trade lies in the region of 5-15%. There has been less research on the impetus given by EMU to inward FDI but recent estimates suggest it may be as high as 60%.

EMU's positive impact on economic integration has been particularly pronounced in financial markets. Thanks to EMU, European consumers and companies are enjoying the benefits of cheaper mortgages and loans and the elimination of exchange-rate risks within the euro area. The Member States that share the single currency are also benefiting from highly integrated markets for derivatives, corporate bonds and money.

Finally, a fifth, major achievement of EMU is the euro's rapid emergence as the world's second most important global currency. The role of the euro in international trade, in foreign exchange markets and as an official reserve currency has increased substantially and continues to grow in importance. The euro has even overtaken the dollar in the international bond market, with 49% of the total global bond market denominated in euros in 2006 compared to 37% for the dollar.

The euro's growing international role reflects the confidence placed in the single currency and in the economic policy framework underpinning it. It has also served as an anchor for stability and cooperative behaviour in the global economy, particularly in neighbouring regions, and provides the EU with a mandate to show leadership on global economic issues.


However, I do not want to ignore some less positive aspects. In spite of the remarkable achievements of EMU, there is extensive room for improvement. EMU has not been plain sailing from the outset. Let me briefly highlight some key challenges that EMU has encountered since 1999.

The first challenge concerns the euro-area's disappointing growth performance over this period. The euro area's recovery from the 2001-2002 slowdown can only be described as lacklustre both when compared to its past performance and to the performance its main, industrialised, trading partners.

We are now seeing a change for the better and the fact that euro-area GDP grew by 2.7% last year – its fastest growth rate since 2000 – is very welcome news. However, our challenge now is to ensure that that this recovery is sustained. We cannot afford another prolonged downturn.

At the same time, differences in growth across the euro area Member States are pretty significant. For example, the average annual growth rate over the period 2002-2006 has been below 1% in Portugal, Italy and Germany but above 3% in Spain, Luxembourg and Finland, and well above that in Ireland and Greece. These differences in growth rates do not necessarily reflect income levels, and may rather indicate a larger scope in low growth countries to make the economy more dynamic through structural reforms.

Indeed, I would like to emphasise that the cause of the euro-area's overall subdued growth performance is not macroeconomic policy, but the insufficient progress in the reform of product, labour and capital markets. This is not to overlook the important initiatives taken by several Member States in recent years. They lie behind the current recovery and will help it to endure. However, the overall pace of reform is too slow.

Our estimates indicate that comprehensive product and labour market reforms in all Member States could add almost half a percentage point to the annual growth rate.

The euro area should not forego these gains, especially in view of unfavourable demographic projections for Europe. The EU's old age dependency ratio is projected to double in the next half-century. It means that 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.

A second key challenge facing EMU is that of enhancing adjustment to country-specific developments.

In the 2006 EU Economic Review, published last November, the Commission analysis found that adjustment in the euro area can be relatively long-lasting and is characterised by large and persistent swings in the level of economic activity. It is also associated with persistent differences in inflation and large current account imbalances. Within the euro-area, Germany and Austria have experienced a steady improvement in competitiveness vis-à-vis other countries, while Spain, Ireland, Italy, the Netherlands, Portugal and Greece have suffered a sustained loss in competitiveness.

Pro-cyclical fiscal policies, financial markets that amplify economic cycles and poor functioning labour and product markets that hinder adjustment through the competitiveness channel are just three factors at work here. While we may have benefited from a number of positive spillovers in the past, as the euro area enlarges and world competition grows more intense, cohesion of the euro area will become vital.

An overarching policy message emerges from this analysis. Member States that share the euro must, without further delay, address the spillovers arising from economic developments and policy choices within the euro area, and improve the capacity to adjust to country-specific developments.

There is a growing awareness of this challenge among policy makers. At this year's Spring European Council, EU leaders endorsed a new set of euro-area specific recommendations in the context of the 2007 update of the Integrated Guidelines on Growth and Jobs. 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 wage setting mechanisms that reflect the full implications of being in a monetary union and an accelerated pace of financial- market integration.

Well-developed, integrated financial markets are important for raising the euro-area's growth potential and for smoothing adjustment to country-specific developments through, inter alia, cross-border risk sharing. The euro provided much welcome impetus to financial market integration, now euro area policy makers should consider how to move the process further forward. We need to discuss, in particular, whether supervisory arrangements in the EU can do more to promote efficiency and stability.

A third challenge facing euro-area members concerns their continued efforts to put public finances on a sound footing. Three considerations lie behind the drive for fiscal discipline in the euro area.

The first has been learnt from bitter experience. In retrospect, the original Stability and Growth Pact did not do enough to lock in sound budgetary policies over the medium-term in all Member States. In particular, some euro area Member States failed to consolidate their budgetary positions in 1999-2000, when growth was strong, leaving little room for budgetary stabilisers to take effect during the subsequent downturn.

On the other hand, our initial experience with the revised SGP that was agreed in March 2005, has been very encouraging, with euro-area members making a sustained effort to reduce budget deficits below the 3% threshold.

However, it is questionable whether all Member States are doing enough to further consolidate their public finances and to avoid pro-cyclical loosening of the fiscal stance at a time when tax receipts are buoyant and the growth outlook is positive. In their latest Stability Programmes, several euro-area members plan improvements in their structural balance that fall well short of the 0.5% envisaged in the revised SGP.

Acknowledging the considerable economic impact of our ageing societies should also drive euro area members to put their public finances in order. Member States need to step up their budgetary consolidation efforts to cope with the impact of ageing populations and the rising dependency ratios that this implies. Indications are that this impact could be severe. In a scenario where current policies are left unchanged, age-related public expenditure in the euro area, which includes spending on pensions, healthcare and long-term care, can increase by around 4% of GDP by 2050.

As we discussed a week ago in the ECOFIN, ensuring the quality of public finances is another important challenge in the budgetary sphere. Adapting tax structures and directing government expenditure towards items such as education and R&D can increase productivity growth and growth potential and bring important social and economic benefits in terms of innovation and human capital accumulation. Such policies can also help to put Member States' public finances on a more sustainable footing and improve the functioning of social models within the euro area.

In view of these challenges to public finances, last week's meeting of euro area Finance Ministers represented an important step forward. In this meeting, the Eurogroup adopted orientations for fiscal policies in euro area Member States, recalling the commitment to actively consolidate public finances in good times and to use unexpected extra revenues for deficit and debt reduction. With a view to improving the coordination of fiscal policies in the euro area, euro area Finance Ministers discussed national budgetary developments in 2007 and the preliminary policy outlook for 2008 and their implications for the euro area.

These Eurogroup commitments are a very positive development. Following these orientations in 2007 and 2008, taking advantage of the favourable cyclical conditions would mean that most euro area members would achieve their medium-term budgetary objectives in 2008 or 2009 and all of them should aim for 2010 at the latest.

However, challenges to EMU do not only originate within the euro area. The rapidly changing landscape of the global economy can present its own external risks. For example, the continuation of global imbalances remains a source of concern and the EU will continue to work at promoting an orderly unwinding of these imbalances.

The final challenge for EMU concerns citizens' perceptions of their single currency. While people are becoming increasingly accustomed to using the euro, there are also signs that misperceptions about the euro's economic effects, particular as regards its impact on prices, can affect public support.

Thus we need to develop understanding of how policy makers at the European and national level can promote continued confidence in EMU and address popular misperceptions about the euro. This is a concern that goes well beyond economics. After all, the euro is not only a currency but also a symbol of Europe, of what the European project can achieve and a tool for further integration within the Union. Therefore, it is in the interest of European politicians to support our currency in the face of unmerited attacks, and to address common misperceptions rather than fuelling populist debate.


Meeting these and other challenges requires an effective system of economic governance for the euro area. Effective economic governance, in turn, requires clear and strong political leadership.

Since its launch in 1998, and particularly since the election of Jean Claude Juncker as a stable President, the Eurogroup has played an important role in this respect. It has shown genuine value-added as a forum for bringing together the euro-area's principal macroeconomic policy-makers to discuss their shared policy challenges. The Eurogroup has also developed a common understanding among Finance Ministers on a number of important policy issues, including, as I have just mentioned, fiscal policy. The challenge now is to transform this common understanding of policy challenges into a common will to take policy action.

Regrettably, Eurogroup discussions have sometimes lacked the collegiality that was hoped for when the body was established. Some participants have found it difficult to combine the national and European hats that their membership of the Eurogroup demands. Even as EMU approaches its first decade, there remains a tendency to view some euro-area developments through a national lens. At times, a propensity to deflect criticism rather than engage in cooperative solutions has hindered policy discussions. Therefore it will be important to consider how to overcome these limitations.

The continuing enlargement of the euro area is another challenge for the euro-area economic governance. Two issues are at stake here. Firstly, the EU's newest Member States have committed themselves to adopt the euro once the necessary conditions are met. Thus a key concern for these countries is to choose an appropriate path for real convergence. In turn, the euro area must work closely with prospective members, providing guidance and support for countries to undertake the necessary reforms and budgetary consolidation on the road to the euro. Building trust between current and future euro-area members is therefore vital. This links to the second issue; the strengthening identity of the euro area should never become a barrier between euro area and non euro area countries. In this respect, the Eurogroup must never symbolise division or represent a closed club.

Turning to international issues, the euro area’s international role and identity are a key priority. The euro shields the euro area from external shocks and financial turbulence. It also acts as a catalyst for stability in the world economy, particular in the euro-area's neighbouring economies. However, further steps are needed before the euro-area's external representation is commensurate with its growing importance for the global economy. A stronger external representation would also allow the euro area to show leadership on key issues, such as promoting the need for an orderly correction of global imbalances.

The best option for representation of the euro area in the key international financial fora and institutions remains the creation of a single euro-area chair, even if I am well aware of the difficulties to achieving this in the short term, due, in part, to divisions among Member States. In the meantime, we will continue to develop common European positions regarding the reform of the Bretton Woods institutions as well as in the G7 and G8. We will also continue to establish strong bilateral contacts for achieving effective cooperation on key international issues.


In conclusion, EMU has been a European success story. The positive impact of the euro on macroeconomic stability and economic integration are among the many tangible benefits derived introducing the single currency nearly ten years ago.

These achievements notwithstanding, it is clear that the euro and EMU as a whole face challenges. Raising potential growth, enhancing adjustment to economic shocks, putting Europe's fiscal house in order and ensuring a successful enlargement of the euro area will be key issues for the coming years.

Understanding these challenges is the first step to overcoming them. As monetary union approaches its first decade, the Commission will intensify its analysis of EMU's past, present and future, with a view to identifying the priorities for action in the years ahead.

This project will run in parallel to concerted efforts in Europe to find a solution to the current constitutional impasse. As all parties continue to work towards an institutional settlement, meeting the economic challenges facing the euro area will not only ensure the continued success of EMU but will also guarantee that the euro remains a driver of ever closer union among EU Member States.

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