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10 years of Economic and Monetary Union: a resounding success but testing times ahead

The euro is a resounding success. The protection provided by an international currency with a market of nearly 320 million people, supported by sound public finances and stable macroeconomic policies, is particularly welcome in these times of uncertainty and worrying increases in the prices of energy and food. But as we complete 10 years of Economic and Monetary Union (EMU), we must acknowledge that there is still work to be done. The euro area’s governance and coordination of economic policies must be improved. This will involve both deepening and broadening economic surveillance arrangements to guide fiscal policy over the cycle and in the long term and, at the same time, address divergences in growth, inflation and competitiveness. We also need to better project our voice in the global arena, to reflect the euro’s weight as an international currency used well beyond its borders. Only then will the benefits of the single currency become fully apparent to the citizens of the euro area.
"EMU is a solid construction and a remarkable achievement. But the experience of its first decade shows that economic policy decisions in one country may have important effects on others. Therefore we need to keep improving the economic governance of the euro area through strong and binding political commitments. Over the last three years we have revised the instruments of coordination, the Stability and Growth Pact and the euro area dimension of the Lisbon process. We now need to strengthen our coordination of budgetary and economic policies. We also need to step up our international economic strategy. We owe it to the citizens of Europe to ensure that the euro area becomes a vibrant example of growth and dynamism," said Joaquín Almunia, European Commissioner for Economic and Monetary Affairs, adding: "I intend to drive this debate forward with the Member States, the Council and the European Parliament during the French Presidency and to come back with proposals."
On 2 June 1998, almost exactly 10 years ago, EU leaders took the historic decision to launch the euro on 1 January 1999, with the participation of 11 European Union countries.[1] At the same time, they established the European Central Bank with effect on 1 June 1998.
As we mark the 10th anniversary of what EU citizens see as one of the most potent symbols of European reconciliation and integration, the Commission today adopted a Communication – EMU@10: successes and challenges after 10 years of Economic and Monetary Union – that looks at the benefits but also, and more importantly, at the improvements needed to ensure that EMU works even better in the next decade and beyond. The Communication is accompanied by a staff Report, which provides a systematic review backing the policy analysis.
The euro has delivered sustained price stability on a scale that many, if not all, of its members had never previously enjoyed, notwithstanding the recent spurt in inflation caused by soaring global food and energy prices. Interest rates have come down to an average of 5% from around 9% in the 1990s and the abolition of exchange rate costs and risks has spurred internal trade, which now accounts for one third of the euro area's GDP, up from one quarter 10 years ago. Similarly, intra-area foreign direct investment now stands at one third of GDP compared with one fifth before, showing that the area's attractiveness has increased markedly. Lower costs of capital have also boosted total private and public investment levels to 22% of GDP in 2007 – a level unseen since the early 1990s. Public deficits have fallen to a record low 0.6% of GDP in 2007, compared with an average of 4% in the 1980s and 1990s. Together with the Lisbon Strategy for Growth and Jobs, the overall macroeconomic stability and sound budgetary policies have enabled the euro area to create nearly 16 million jobs since 1999, more than in any recent decade, bringing the unemployment rate down to around 7%.
An agenda for unleashing the full potential of EMU
Nonetheless, we can and we must improve the functioning of EMU. Growth has been less than impressive in some countries and productivity trends have lagged behind the United States. Structural reform efforts must be intensified and there remain substantial differences among countries. Despite the growing importance of the euro as an international currency, the euro area is still failing to make its voice heard in international fora. Public perceptions of the euro also do not do justice to its benefits in terms of economic stability, more transparent prices, cheaper credit and easier travel. Finally, the challenges posed by our ageing population and globalisation, which are becoming more pressing and are compounded by the ongoing turmoil on the financial markets and rising food and energy prices, make improving the performance of EMU not just a target but an imperative.
A domestic agenda
Deepening and broadening economic surveillance. Deeper surveillance means improving the Stability and Growth Pact's 'preventive arm' to guide fiscal policies over the cycle and take into account the costs that a shrinking and ageing population will put on future generations. We need to take a harder look at the quality of public finances to ensure taxpayers' money is put to good use. And we also need to extend the existing peer monitoring system beyond fiscal policy, in order to tackle economic imbalances and divergences among euro-area members in a timely manner.
Better integrating structural reforms in the co-ordination process. The euro area has a special interest in the success of reforms, including financial integration and better functioning labour markets. More use could be made of the structural reform incentives built into the 2005 revision of the Pact, without jeopardising its function as an anchor for fiscal discipline.
Enhancing the euro area's international role
The euro area needs to define a strategy regarding the international role of the euro and make its voice heard on global issues. As a rule it must agree, and stick to, common positions in order to speak with one voice. Ultimately it must consolidate its external representation and aim to have a single seat in international financial institutions and fora.
Promoting effective governance of EMU
On the political front, although the euro area does not need any new institutions, it does need better governance. Better coordination and surveillance of national economic and budgetary policies is needed within the ECOFIN Council and the Eurogroup, particularly in view of the progressive enlargement of the euro area, in order to address imbalances and promote structural reforms that foster adjustment, stability and growth.
The Commission aims to promote a frank and forthright debate in the second half of 2008 with a view to finding a consensus on all these issues and will come forward with appropriate proposals.
EMU@ Report http://ec.europa.eu/economy_finance/emu10/reports_en.htm
EMU@10 website http://ec.europa.eu/economy_finance/emu10/index_en.htm