Toespraak Eurocommissaris Almunia over de Euro: Successen en uitdagingen (en)

SPEECH/08/194

European Commissioner for Economic and Monetary Policy

Future challenges facing the euro

Conference "The advantages and benefits of the euro: time for assessment" at the European Economic and Social Commitee

Brussels, 15 April 2008

Ladies and Gentlemen,

It is always a pleasure to be at the European Economic and Social Committee i and I would like to thank the institution for having organised today's conference on the euro. I would also like to thank Mr Burani for his draft opinion on the 'advantages and benefits of the euro'. This document outlines very clearly the challenges we face when communicating the euro to the public.

The Commission i stands ready to cooperate with the EESC to improve the communication of our policies, particularly as we approach a very important juncture in the history of the single currency - the tenth anniversary of Economic and Monetary Union (EMU) i.

The creation of EMU was a defining moment for Europe and the process of European integration. 51 years after the signature of the Treaty of Rome, the euro appears to be the most tangible sign of Europe's determination to forge ever closer union through strong, and mutually beneficial, economic ties.

Today I want to take stock of the euro's first decade, touching on both the successes and areas where we can improve. I will then outline the challenges ahead and indicate how the euro area economy and EMU governance should adapt in order to tackle them successfully.

THE TANGIBLE BENEFITS OF THE EURO

You may recall that before EMU's launch, a number of commentators were quick to cast doubt on the project. Some said it would never exist, others that it would only last a couple of years or that particular member countries would leave the euro area after a period of time.

I am happy to say the euro has proved its critics wrong. EMU underpins prosperity in euro area countries, it drives economic integration and it has enlarged and is set to enlarge further in the next years. All in all, the euro is a huge economic success. It is also a major political achievement, and the most potent symbol of the European integration process to date.

From an economic standpoint, the central achievement of EMU has been to anchor macroeconomic stability in the euro area. It is all too easily forgotten that, before the euro, periods of significant exchange rate volatility - as we are suffering today - would place significant strains on EU economies, disrupting trade and investment.

EMU has put a definitive end to such periods of internal currency strains and has fostered a decade of low and stable inflation. In turn, interest rates have progressively diminished to levels not seen for several decades.

The European Central Bank i, whose core task is to maintain price stability through the conduct of monetary policy, must take considerable credit here. Though a young institution, its track record has been exemplary, anchoring inflation expectations around the 2% goal and firmly establishing the bank's credibility.

EMU's stability is of course a great advantage for businesses. But it also brings important benefits for citizens, protecting the most vulnerable groups from abrupt loss of purchasing power and allowing them to invest securely in the future.

The most tangible economic achievement in the first ten years of the euro area has been massive growth in employment. 16 million jobs have been created since the birth of EMU and the unemployment rate fell to 7% in 2008. On a per capita basis, job growth by far outpaced that in other mature economies, including the United States, largely the result of labour market reforms.

It was also expected that overall GDP growth and productivity performance would be supported by the adoption of the euro, but it is fair to say that these expectations have not yet been fully borne out. The experience, as we all know, is that growth in the euro area has been modest.

True, the resilience of the euro area economy to negative external developments has improved. But progress towards structural reforms has been patchy and has prevented us from fully benefiting from productivity enhancements that new technologies could bring. In addition, persistent divergences in growth and inflation rates between euro area countries reflect the fact that economies have adjusted too slowly to economic shocks and changes in competitiveness.

Notwithstanding some challenges in enforcing the fiscal rules, budget deficits have declined significantly over the past decade. Last year, deficits were reduced to a historically low 0.6% of GDP in the euro area. The reform of the Stability and Growth Pact in 2005 has secured a renewed commitment to sound public finances which is clearly paying off. Nevertheless, it is clear that government debts are still too high in the euro area and that we have some way to go until long-term fiscal sustainability is secured.

Regarding financial markets, the euro has opened new opportunities for their development and has spurred their integration. This is good news, considering that well functioning financial markets are essential for the economic growth and resilience of EMU. The single currency has helped allocate capital more efficiently and created more opportunities for risk sharing.

So all in all, in the first ten years of EMU, the euro area has shown impressive macroeconomic stability and employment growth, but scope to improve economic dynamism certainly exists.

THE CHALLENGES AHEAD

Since the picture is admittedly mixed, we cannot afford to be sanguine about the future, all the more so since the euro area will come to feel more clearly the impact of some evolving challenges over the next decade.

Globalisation is rapidly reshaping the architecture of the world economy. Trade and investment flows have risen to unprecedented levels and emerging economies are fast becoming the engines of world growth.

Europe will need to become economically more dynamic to compete in the world economy and yet the ageing and shrinking of our populations will not make this an easy task. By 2050, the euro area will have 2 workers for every pensioner as opposed to the current four.

Meanwhile, global warming is accelerating and the average temperature is likely to rise by up to 4 degrees by the end of this century if we don't take action soon. Failure to address rising atmospheric levels of CO2 would lead to enormous economic and social costs. In addition, commodity, food and energy supply issues are increasingly fuelling global inflationary pressures.

Facing these challenges will be an uphill struggle. Thankfully, Member States enjoy the benefits of a more stable environment that helps them to prepare for, and better tackle, these challenges. The euro's ever-increasing importance as a world currency has provided the whole EU with greater resilience in the face of these new global trends.

That said, there is no question that these important shifts in our economies and societies will have an impact on the euro area economy.

• • 

  Globalisation offers considerable opportunities. But it also means that competitive pressures on euro-area companies are increasing. To take full advantage, businesses must step up their capacity to move production from activities where they are no longer competitive and invest in those where they can produce at the global technology frontier.

Globalisation will also bring opportunities and challenges for the labour force as new jobs, requiring new skills, will be created. Education and training will be crucial in this drive for excellence and will help people adapt to dislocations in the economy. A flexicurity approach, based on skills provision and active labour policies, will allow people to have access to employment throughout their working lives.

• • 

  Demographic trends will have broad-based adverse effects. The available longer-term projections indicate that potential growth in the euro area would be halved to around 1% per year if current policies do not change. Upward pressure on age-related expenditures, and consequently on public finance positions, reinforces the need to keep fiscal policies in check and maintain a focus on the longer-term sustainability of public finances.

A strong social model, characterised by a commitment to reduce inequality and protect the vulnerable has been the hallmark of most euro-area countries. Safeguarding them will require far-reaching reforms to improve the effectiveness of public spending, so that these safety nets can be funded without compromising macroeconomic stability;

• • 

  As regards climate change, there will be inevitable economic costs to curb greenhouse gas emissions. As a result, European industry should be prepared to adapt its processes and structures. Since the euro area has limited natural resources, commodity and energy supply issues will also be a matter for concern. Increases in global food and energy prices may contribute to inflationary pressures and pose potential challenges for the conduct of monetary policy.

Against this background, we are taking a renewed look at the policy agenda for EMU for the next decade and beyond. We aim to preserve EMU's achievements and tackle the shortcomings of its past performance, all the while preparing the euro area economy for the new economic challenges on the horizon.

For this, we are preparing a three pronged approach addressing the domestic agenda, the external agenda and finally the governance of EMU. Let me start with the domestic agenda.

DOMESTIC AGENDA

The first decade of EMU revealed that recovery from economic downturns has been relatively slow while shocks affecting the euro area as a whole have had diverse effects on individual countries.

So although EMU's current framework has delivered stability and fiscal discipline, it has not fully defused the risks coming from the macro economic side. For instance, some Member States with sound public finances have still managed to accrue current account deficits or experience sustained inflationary problems.

As global trends begin to encroach on euro area economies, we should move to address this challenge in three ways:

First, we clearly need to broaden economic surveillance in the euro area. Surveillance should look beyond the current budgetary analysis so that we can quickly identify and address risks of macroeconomic imbalances, developments in competitiveness or risks linked to financial stability.

Second, deeper fiscal surveillance should ensure that budgetary discipline prevails over the cycle, including in good times. There should also be a greater emphasis on improving the quality of public finances, to deliver better value for public money. This means directing public expenditure towards more growth friendly sectors, with a stronger focus on human capital and infrastructure.

Third, we must improve the functioning of EMU economies through structural reforms. Let me expand on this final point as structural reforms have a very important role to play for the euro area economy.

Structural reforms enhance the capacity of the euro area to adjust to economic shocks that could otherwise cause countries to experience a deterioration of their internal and external competitiveness. And structural policies are also key to raising growth potential.

The telecoms sector, where bold and wide-ranging initiatives have boosted overall productivity significantly, is a case in point. By contrast, in the services sector, which represents 70% of euro-area GDP but is still hindered by a lack of competition and inadequate regulation, productivity is insufficient.

Structural reforms constitute a key priority for EMU countries, as the window of opportunity may close for two reasons.

• • 

  First, while the economy has been able to avoid major upheavals during the first decade of EMU, developments might be less benign in the next decade. The unwinding of global imbalances has been lurking for some time and may now be taking shape with the US downturn;

• • 

  Second, ageing significantly raises the stakes for adjustment. Given that the baby-boom generation will begin to retire in the coming years, we must act swiftly to raise productivity so as to boost growth and ensure the sustainability of our welfare systems.

The Lisbon Strategy has recognised the importance of structural reforms for the euro area and we should now build on the basis of the specific euro area recommendations. For example, euro area countries should be at the forefront of efforts to create deeper and more integrated financial markets as these have an important capacity to absorb economic shocks. The Eurogroup should also show enhanced leadership in the area of structural reform and complement EU wide efforts to achieve the Lisbon goals of more jobs and higher growth.

THE EXTERNAL DIMENSION OF THE EURO AREA

Let me turn now to the external dimension of our policy agenda. Decisions taken within EMU and their consequences have a major impact beyond the borders of the euro area and this development is creating new risks and responsibilities which cannot be ignored.

To begin with, the euro has rapidly established itself as the second most important international currency. Euro-denominated debt accounts for nearly 49% of the outstanding stock of international bonds and notes, surpassing the share of the US dollar. In global foreign exchange markets, the euro is the second most actively traded currency after the US dollar and accounts for more than 26% of allocated official foreign exchange reserves. Moreover, quite a number of countries in the euro-area neighbourhood are using the euro as an anchor or reference currency in their exchange rate regimes.

This brings a number of advantages. For instance, the international status of the euro benefits the financial industry in Europe. But it also exposes us to new risks, such as shocks originating in other parts of the world or disruptive portfolio shifts between key international currencies. Above all, it means that the euro area, as issuer of the world's second currency but also through its sheer size in the global economy must face up to new responsibilities.

Indeed, EMU has a strong impact on the rest of the world. By promoting macroeconomic and financial stability inside the euro area, EMU is helping to support stability in the global economy, especially in neighbouring countries. Non-EU countries on the European continent increasingly perceive the euro area as a pole of stability, a source of new capital, and also a source of advice and expertise on regulatory approaches.

EMU must set an international agenda to match its international responsibilities. We must make our voice heard in international discussions on current account imbalances, financial sector stability, exchange rate policies and fiscal surveillance. These are issues which directly impact the euro area.

The euro area can increase its influence by strengthening its bilateral macroeconomic dialogues with strategic partners like the US, Japan and China. But we also need to increase our negotiating power in multilateral fora. This means overcoming the current fragmented arrangements in the IMF and the G groups and consolidating our representation.

Ultimately, the consequence is that the euro area should have a single seat in international financial institutions and fora. While this will not be achieved overnight, we have to start moving closer towards this goal, working for greater coordination and dialogue within the Eurogroup and between institutions in order to better form common positions on external issues.

GOVERNANCE OF EMU

This brings me to the third and final strand of our policy agenda – governance in EMU. Given the future challenges I have set out today, we clearly have a strong interest in improving coordination and decision making in the euro area.

The Eurogroup meeting of euro area finance ministers already helps promote a common understanding of the shared policy challenges facing EMU. For example, through the 2007 Berlin orientations on public finances, the Eurogroup underlined the importance of sound public finances and set up objectives for further budgetary consolidation.

Still, participating countries need to show clearer political will and leadership to turn common understanding into concerted policy action. For example, the Eurogroup should take a more active role to encourage structural reforms in Member States.

Looking ahead, it will be necessary to have closer coordination between the Eurogroup's activities and non-EMU Member States, especially as the euro area's borders are set to expand.

Progressive enlargement also means that heterogeneity within the euro area will increase. A successful enlargement process will rely upon an effective system of governance to provide greater guidance and effective monitoring for Member states involved in the convergence process.

CONCLUSION

Let me conclude.

The advantages and benefits of the euro are undisputed. EMU is a huge success. But our economies and societies are undergoing fundamental changes and our policy framework must evolve in order to meet the challenges of the future.

On the 7th of May, I will present to the Commission a Communication entitled "EMU @ 10". This Communication, complemented by a substantial report, will make an in depth analysis of the functioning of EMU over the last decade, and assess the challenges we expect to face in the coming years.

The results of our analysis should stimulate a renewed debate on future policy making in the euro area and the next months offer a chance to exchange frank, yet constructive, opinions on the future of EMU. The EESC, benefiting from its intimate relationship with citizens, social partners and the civil society, can make a valuable contribution to this debate.

For us, the euro remains the most tangible sign of European unity. It is a symbol of our common values and our shared future. So we must ensure that EMU continues to deliver benefits for citizens, by safeguarding stability and opening opportunities in a global economic context that is changing rapidly. These will constitute our guiding principles as we prepare the ground for a prosperous second decade for the euro.

Thank you for your attention.