The euro-area economy: a statement with intent
Spring in the air
The euro area is experiencing a sustained recovery in economic activity after several years of below par growth. Regular business and consumer surveys have tracked the growing confidence of industry and consumers in the economic outlook, and this is now translating into growth. Businesses in particular are showing greater optimism – in fact, industry confidence is at its highest for five years. Consumers too are slowly becoming more optimistic, with consumer spending expected to pick up – in line with growth in employment. These positive elements are recognised in the latest economic forecasts prepared by DG ECFIN, which predict GDP growth of 2.1% in 2006 (Chart 1).
Continued expansion of world trade, the strong performance of trading partners, and a pick-up in domestic demand are supporting factors for this more positive outlook. However, there are downside risks – such as further oil price rises – that could stall the recovery.
The twelve euro-area members face a set of shared economic challenges, and while a collective pat on the back may be in order, rising economic growth should be seen as an opportunity to go forward rather than a chance to relax. The euro area must not rest on its laurels but protect what it has won by adjusting macroeconomic policies to promote long-term sustainability and go further with structural reforms to boost productivity, raise potential growth and create more jobs.
Chart 1: A brighter economic outlook: GDP and its components in 2006 |
| © Commission services |
Protecting the gains
Monetary policy in the euro area has spurred economic confidence through historically low interest rates. National fiscal policies – taxing and spending – have also supported growth. However, in a time of rising growth, euro-area governments have a responsibility to ‘recharge the economic batteries’ by doing more to reduce deficits and debts. The revised Stability and Growth Pact (SGP), which provides a blueprint for fiscal discipline in the euro area, specifically calls for efforts to secure budgetary stability to be stepped when economic conditions are more favourable. In view of the more favourable economic outlook, now is the time to make extra effort. Failing to take corrective action at this juncture could be very costly in that it would postpone budgetary adjustment until economic conditions are less favourable and reforms are harder to implement.
“After seven years, there is a growing sense of the euro area as a single economic entity whose members are facing shared challenges that require common solutions", explains Joost Kuhlmann, Head of Unit for the Economy of the Euro Area and EMU at DG ECFIN. "For this reason we need a real debate on the euro-area economic priorities among a broad range of actors. To this end, the Annual Statement, and the technical report which accompanies it, was written in a light accessible style. The Annual Statement was presented by Commissioner Almunia to the European Parliament on 12 July – the same day as its adoption by the College of Commissioners".
Room for manoeuvre, room for reform
While appealing for macroeconomic prudence, there is less caution in calling for action on unemployment, as the Annual Statement reiterates the need for economic policies to improve the functioning of EMU and promote higher growth and more jobs. Moreover, the challenges of an ageing population must be met and the opportunities offered by technological advances and globalisation should be seized to create opportunities for all Europeans. The single currency is not to blame for past low growth and unemployment – the real cause lies in the insufficient progress in reforming product, labour and capital markets.
EU leaders have recognised that economic reforms are needed as properly functioning markets play an important role in cushioning the impact of economic shocks. They now need to match words with deeds – the current economic upturn provides the opportunity and the Integrated Guidelines for Growth and Jobs provide the way’ with ‘by stepping up the pace of implementation for the structural reforms envisaged in the Integrated Guidelines’.
Chart2: The burden of ageing if nothing is done: EU25 gross debt (% of GDP) |
| © Commission services |
Dispelling the myths
The Annual Statement makes a point of addressing some ‘persistent myths’. ‘Economic reform,’ it explains, ‘is not about giving up a standard of living that Europeans can no longer afford’. Evidence presented in a recent study suggests comprehensive reforms of product, labour and capital markets could increase potential growth from 2% to 3% – bringing more jobs, and higher disposable incomes. Fears that reform mixed with globalisation will make Europe ‘less European’ also receive short shrift. Economic reform, it argues, is consistent with the Treaty of Rome's commitment to economic openness and greater competition.
Policies for all Europeans
Completing the single market is vital if the 300 million people who live in the euro area are to reap the full benefits of the single currency. Fragmented retail markets must be opened up to give consumers a wider choice of savings plans, insurance policies and pension plans. A European response is also necessary to safeguard the sustainability of energy supplies. While calling for solidarity and action to complete the single market, the Annual Statement warns of the dangers of ‘economic patriotism’, and calls for today's generation of Europeans to choose economic policies to sustain the Internal Market and foster tangible economic benefits for all.
A strong single currency, a strong single voice
The Annual Statement also considers the global economy and the euro area’s growing influence. ‘The euro has led to a seismic shift in international financial markets,’ it says, citing evidence of the widespread and growing use of the euro for international debt, foreign exchange transactions, trade and currency reserves. Such seismic shifts bring influence, responsibilities and opportunities. Global economic imbalances, caused by the record US current account deficit, are a major concern and the euro area can contribute to global economic stability by showing leadership in the international arena. However, leadership requires common positions among euro-area authorities, a scarce commodity at present. Better coordination is needed, for example, through a unified representation for the euro area in the International Monetary Fund. This commitment to global leadership would help project the euro area’s voice on the world economic stage for the benefit of both global economic stability and the euro area.
