European Commissioner for Economic and Monetary
10 years of Economic and Monetary Union: time for assessment
Brussels Economic Forum 2008 – Economic and Monetary Union: 10 years
Brussels, 15 May 2008
Ladies and Gentlemen,
It is with great pleasure that I welcome you to the Brussels Economic Forum 2008.
I must start by congratulating Klaus Regling and DG Ecfin for organising an excellent event and by thanking all the participants and speakers who have joined us here in Brussels.
This year's conference has a special significance since it coincides with the tenth anniversary of the launch of Economic and Monetary Union, at the EU Summit of May 1998.
The creation of the euro was a defining moment in the history of European integration. And with the benefit of hindsight it has proven a major economic and political success. The Commission analysis of EMU's performance during this past decade, is very clear in this respect.
The EMU@10 Report also shows that there is still much to be done to reap the full benefits of our single currency. EMU is a work in progress and as such, we should focus attention on improving the policy framework around the single currency.
But first of all, to mark this anniversary, it is worth pausing for a moment to look at the many achievements of EMU and the euro, which largely confounded the predictions of its early critics.
Major successes of the first decade
The euro's launch was the culmination of years of detailed preparation. It also crowned four decades of European economic integration. And today, it continues to be a crucial stepping stone towards "ever closer union". We can see, together, the political vision of the founding fathers of the monetary union and its significant economic achievements.
EMU has created a zone of macroeconomic stability in Europe. From day one, the euro put an end to traumatising exchange rate realignments. Were we without the single currency today, the present dollar weakness would be placing enormous strains on the euro area economies- for some more than others- and would be having a serious impact on trade and investment. We ought to recall this simple fact, for those who forget our past monetary turbulences.
Indeed, we are much more resilient to external shocks thanks to EMU. This has enabled us to withstand the economic consequences of, among other events, the 9/11 terrorist attacks and the bursting of the dotcom bubble. And let there be no doubt that without the shielding effect of the single currency, we would be feeling much more strongly the impact of the current financial turmoil and soaring energy and food prices.
Inflation has remained pretty stable over the last 10 years and interest rates have declined to their lowest level in decades.
True, HICP has been pushed up recently by soaring oil and commodity prices, but it is forecast to return closer to the ECB's objective in the coming quarters.
Our Central Bank deserves to take its part of the credit here. Its conduct of monetary policy over the last decade has been very proficient, earning it a high level of confidence and keeping inflation expectations stable.
The significant improvement in fiscal policies is also helping to underpin macro-economic stability. Thanks to important consolidation efforts, the euro area managed to reduce its average budget deficit to just 0.6% last year, the best result since 1973. The 2005 reform of the Stability and Growth Pact –that was accused by some of relaxing budgetary discipline- has clearly strengthened the commitment to sound public finances of all members of EMU.
In fact, as we have just recommended to the Council to close the last two open procedures against Italy and Portugal, for the first time since 2002 no euro area country is presently in excessive deficit, and the majority enjoy either surplus or balanced budgets.
Admittedly more remains to be done. Several countries have still to achieve balanced budgets over the medium term. But we are making progress towards eradicating pro-cyclical fiscal policies, reducing government debts and ensuring that public finances are more sustainable in the long term.
The euro has also fostered economic integration, creating more efficient markets and greater opportunities for businesses. Ten years ago internal trade accounted for one quarter of GDP – today it accounts for one third. Intra-area FDI has also risen. And at a level of 22% of GDP, total private and public investment has reached levels unseen since the early 90s.
In addition, the euro has had a powerful impact on the financial sector, driving the integration of interbank money markets, bond and equity markets.
And EMU's successes extend beyond the euro area. We can be proud to share a currency that is now the second most important in the world. This international status, plus the economic weight of the euro area, with its credible macroeconomic framework, has allowed EMU to become a pole of stability in the global economy, particularly during the recent period of turbulences.
Last but not least, citizens have been among the first to benefit from EMU's achievements. Price stability has shielded more vulnerable groups from abrupt loss of purchasing power. Moreover, the combination of enhanced stability, deeper integration and reforms taken under the Lisbon Strategy has had a striking impact on the labour market. 16 million jobs have been created since 1999 in the euro area- substantially more than in previous decades - while unemployment has decreased to around 7%
New global challenges drive the future agenda
All together, EMU has left the European economy stronger and in a better position to weather the kind of global economic disruption that we are facing today.
But let's be honest. Not all the results from the last decade have been positive. Nor have all our initial expectations been fully met.
First, economic growth has been too low in some of our member countries. The average potential growth of the euro area is around 2% per annum. And although we find that EMU has had a beneficial impact on productivity, it slowed to around 1% this decade. Ten years ago, we expected better than this.
Second, there have been lasting divergences between euro area countries in inflation and unit labour costs. Slow adjustment of prices and wages mean that certain countries are suffering a loss in competitiveness or have built up large external imbalances. Contrary to expectations, efforts to implement structural reforms after euro adoption slackened, rather than intensified.
Third, we have yet to develop a clear international strategy to match our growing international role. In a globalised world, failure to define and promote our interests on the world stage is neither wise nor responsible. Yet this is sometimes the reality we face when we eschew speaking with a single voice and being represented by a single chair.
These shortcomings reflect negatively in the image many citizens have of the euro, an image which does not do justice to the benefits it has brought over the past decade.
We can, and we must, improve the functioning of EMU. Not least because today's economic environment is substantially different from that of ten years ago. We live in an age of rapid change. And new global challenges are emerging, that will impact the functioning of EMU.
Euro area economies will need to become more adaptable and dynamic if we want to grasp the opportunities offered by globalisation. Emerging economies are stepping up competitive pressures not just at the low skilled end but also at the high technology end of the global market, and we cannot get left behind.
At the same time, the rapid growth of global demand is pushing up prices for goods such as oil and food. We don't have to look far to see how rising global prices contribute to inflationary pressures in the euro area. Meanwhile climate change is a reality and the need to tackle this challenge grows more urgent. The transition to a low carbon economy may imply some costs. But there is compelling evidence that the costs and the consequences of inaction would be many times higher.
Finally, the ageing of Europe's population will have far reaching consequences for our economies and for our social model. Productivity is projected to halve to 1% per annum over the next four decades on current polices. And without wide ranging reforms to pension and welfare systems, public expenditure will increase by 4% of GDP.
These major trends were not, and perhaps could not, be anticipated when the architecture of EMU was being designed. And although EMU provides us with a solid base from which to address these developments, they present us with particular challenges. Low growth, internal divergences, high public debt and increasing interdependence of our economies mean that inaction is simply not an option.
On this basis, it's worth having a frank debate on the future of EMU.
How do we secure the well being of euro area citizens in the future?
What should be the building blocks of this agenda?
How can we generate the consensus and ownership necessary to implement it?
These, among others, are questions that deserve clear answers.
To launch this debate, we are proposing an agenda based on three pillars: a domestic strategy, an external strategy and a strategy to strengthen EMU’s system of economic governance.
The first pillar: a domestic strategy to strengthen coordination and surveillance
Let me begin with the domestic pillar of our proposed strategy, which is rooted in the knowledge that euro area economies are becoming steadily more interdependent. Economic policies are increasingly a matter of common concern for EMU members. As a result, we need to reinforce coordination and surveillance.
There are two strands to our proposals:
First, we propose to deepen and broaden macroeconomic surveillance.
What do we mean by deepening surveillance? We must improve the effectiveness of the preventive arm of the Stability and Growth Pact and make sure that our budgetary surveillance guides sound fiscal behaviour over the whole cycle. On top of this, surveillance must be geared to securing sustainability in the face of ageing and put greater emphasis on enhancing the quality of public finances.
But to maintain macroeconomic and financial stability, budgetary surveillance alone will not suffice. We know that some Member States with sound public finances still manage to build up large current account deficits or experience inflationary problems.
By broadening our surveillance beyond the fiscal side, we would be able to quickly identify risks coming from macroeconomic imbalances, changes in competitiveness or those linked to financial stability and address them before they become entrenched.
In particular, we need a broader surveillance of prospective euro-area members to help them prepare for monetary union. .
The second element of our domestic strategy aims to better integrate structural policies within the coordination process in EMU.
Structural reforms play a central role in improving the performance of euro area economies. On the one hand, they increase potential growth. On the other, they enhance the capacity of euro area countries to adjust to economic shocks and thereby reinforce macroeconomic stability.
Clearly, reforms should be a top priority for EMU members. Measures should specifically target removing the remaining barriers to product market integration, enhancing competition, fully implementing the Services Directive as soon as possible and promoting better-functioning labour markets. Euro area countries draw particularly large benefits from good functioning financial markets. They should, therefore, be at the forefront of further financial integration and efforts to enhance financial stability arrangements.
Practically speaking, how can we achieve stronger incentives for reforms?
For a start, the Eurogroup could monitor more closely the implementation of the specific euro area recommendations of the Lisbon Strategy. We should also make greater use of the structural reform incentives that were built into the 2005 revision of the Stability and Growth Pact. Finally, a better sequencing of reforms could help bring forward their longer term benefits. For example, prioritising progress in financial markets would boost incentives for more structural reforms to follow because capital would flow more easily to the new investment opportunities created.
The second pillar: developing a clear international strategy
The second pillar of our strategy relates to the external agenda.
There is a strong case for the euro area to increase its presence in the global arena. Our currency is the second most important in the world. Our policy decisions have a global impact and increasingly the euro area is helping to support the stability of the global economy and financial system.
This role brings undoubted advantages, ranging from seniorage revenues and a capacity to place securities among foreign investors at lower interest rates, to certain competitive advantages for euro area exporters and financial institutions.
But it brings risks and responsibilities too. It raises the exposure of the euro area – including its financial system – to shocks originating in other parts of the world and to disruptive portfolio shifts between key international currencies. In a world of economic and financial globalisation, such shocks are likely to become more frequent. Moreover, the transition from the current situation to a new, steady state characterised by a wider international role of the euro may not be a smooth one.
Therefore, the euro area must build an international strategy so that it can play a full part in pursuing global stability and project and defend its interests in the world.
This means first developing common positions on international issues so that we can speak with a strong single voice. Once accomplished, the logical next step will be to consolidate our representation and obtain a single seat in international fora.
No single country has the sufficient strength to defend its interests on its own. The global context has changed significantly and the need for progress in this area is pressing.
The third pillar: more effective governance of EMU
Let me now move to the third and final pillar of our policy agenda; improving EMU's system of governance.
The current set of institutions and instruments which govern EMU are sound. But we can make better use of them to tackle emerging policy challenges.
A fully effective system of governance should have the ECOFIN Council firmly at its centre, with the Council integrating issues related to EMU in its work. Indeed, a closer coordination between the ECOFIN and the Eurogroup will become even more important as the euro area's borders expand and these two fora gradually overlap.
The Eurogroup should retain its position as a forum for frank exchanges among EMU members. Its first permanent president – Jean Claude Juncker - will share his experiences in this role later this morning. Since Jean Claude was appointed, the Eurogroup has increased its visibility and become an effective channel to develop understanding on common policy issues. What is more, the new Treaty is set to formally recognise the Eurogroup and further enhance its legitimacy.
In the future, we will have to deepen the agenda and strengthen debates within the Eurogroup if we want to achieve the level of policy coordination and surveillance that EMU requires. In particular, the Eurogroup should take a more active role in monitoring and coordinating structural reforms.
The Lisbon Treaty will also offer additional means to strengthen coordination and surveillance. For example, it provides for new economic policy measures specific to euro area members to be adopted and then monitored. Indeed, the entry into force of the Lisbon Treaty is a unique occasion to make full use of the instruments available to us and enhance overall governance. Given the challenges ahead, it would unwise to let this opportunity pass us by.
Ladies and Gentlemen, let me conclude.
Ten years ago, the EU leaders gave the green light to launch EMU and today, we are reaping the rewards of that truly bold decision. The euro has created an area of macroeconomic stability that shields Europe from economic and financial turmoil; it has confounded predictions of a break up and enlarged from eleven to 15 members; and it has become a major new pillar in the international monetary system, transforming the landscape of the global economy. The euro is a huge success and we have every reason to be proud our single currency.
But we have a responsibility to ensure that the benefits of the single currency continue to be felt from now onwards. EU citizens face a future of rapid changes and greater uncertainty. Economic and Monetary Union must provide stability, prosperity and a platform to represent their interests in the wider world. In the next years we must update our vision of EMU and re-focus the policy framework to achieve this goal.
I expect a vigorous debate on all the issues I have touched upon today to take place during the coming months. Drawing on this discussion, I hope we will build consensus between the Commission and its partner institutions, stakeholders and interlocutors on the right policies for a stronger EMU in the future. Then, in time, the Commission will come back with appropriate, concrete proposals.
This Brussels Economic Forum, a unique gathering of economic experts from all over Europe, is the ideal setting to launch this debate. I wish you a fruitful and constructive conference and I look forward to hearing your contributions.