Editorial: EMU@10

It transferred a core element of national sovereignty – monetary and exchange rate policy – to EU level, with far-reaching economic and political ramifications. For the international monetary system it was the most significant change at least since the end of the Bretton Woods system in the early 1970s. To mark this anniversary, the Commission has produced a report on the first ten years of Economic and Monetary Union that looks at its successes so far and the challenges it faces as it goes forward into its second decade in a changing global context.

One major success of EMU is the distinct improvement in the macroeconomic environment in the euro area as a whole. Since the start of EMU, inflation has been around 2% a year, significantly lower than the average 3.3% in the 1990s, and far below the levels of the 1970s and 80s when average inflation over the decade stood at 9.3% and 7.5% respectively. And even though countries in the euro area have recently seen significant increases in inflation, the euro has to some degree protected its member economies from the worst effects of global increases in food and energy prices.

At the same time, interest rates have fallen to levels not seen for several decades, while intra-European currency crises have been consigned to history. The EMU policy coordination framework has also helped euro-area governments get their public finances in shape, which is key to ensuring that this stability is maintained over the longer term and that national budgets can cope with the burden of ageing populations.

Employment has been another of the success stories of the euro area’s first decade. Sixteen million new jobs have been created since the launch of the single currency while unemployment has fallen to its lowest rate in more than 15 years. Much of this progress is owed to the reforms undertaken under the Lisbon Strategy for Growth and Jobs, the economic policy surveillance and coordination within EMU, and the wage moderation that has characterised most euro-area countries. Moreover, the euro has certainly supported a closer integration of markets, such as for products and financial services. It has encouraged trade within the euro area and helped make EU firms more competitive.

However, more needs to be done in the area of structural reforms. While much was achieved in the preparations for EMU, structural reform efforts since its launch could have been more ambitious: one reason why our productivity growth – and per capita income – remains well behind that of the US. It may even be that the very success of EMU in providing macroeconomic stability has reduced the pressure in some Member States to implement structural reform. Unreformed wage- and price-setting systems in some euro-area countries have contributed to persistent pockets of high unemployment and substantial inflation differences between countries. And the integration of the euro-area economy is unfinished work across all sectors – goods, services and finance – this raises costs and the risks in a financial crisis. Finally, while the euro is gaining a reputation for strength and stability on the international scene, politically the euro area is punching below its weight as it has yet to speak with one voice, and does not have a clearly defined international strategy.

In addition, the euro goes forward into its next decade in an economic setting which is becoming more difficult worldwide. Against a background of globalisation, global current account imbalances and rapidly ageing populations, there is a clear need to boost productivity and further increase employment to provide a basis for higher living standards and sustainable public finances. Europe also needs more flexibility – for example in wages and prices – to improve the capacity to adjust to external disturbances. Rising commodity and energy prices around the world will put pressure on the stability and the quality of public finances, both of which will need careful attention to protect the social safety nets that are the cornerstone of the European social models.

To meet these challenges, the report proposes a three-pillar agenda covering domestic, external and governance issues. On the domestic front, broader and better policy coordination and surveillance is proposed to reduce divergences, including more intensive surveillance of candidate countries for euro adoption and a deepening of budgetary surveillance to ensure that fiscal behaviour does not cause overheating but supports sustainable finances over the cycle. Externally, the euro area’s international role must be enhanced in line with the international success of the euro – eventually this would mean a single euro-area representation in international organisations. On governance, the report calls for the strong involvement of all Member States in the ECOFIN council as well as more active and vocal Eurogroup support for structural reforms.

On balance, it is clear that EMU has been a great success. It remains a milestone in European integration and this is reinforced as the newly acceded Member States prepare their economies to adopt the euro. A strong EMU also fosters the EU’s standing in the world, and a well-functioning euro area forms the foundation for a strong external role for the Union in the global economy.

This landmark date for EMU is also one for me, as I leave DG ECFIN after seven years as Director-General. Having worked on the preparations for EMU and the launch of the euro in Germany, it was a great opportunity for me to move to the European Commission to shape the implementation and development of its operational framework. Its first decade has seen some challenging times, particularly concerning the implementation of the Stability and Growth Pact before its reform in 2005. However, it has also been very gratifying to see progress in the functioning of EMU, to see it develop at the international level as the euro area has increasingly come to be seen as a single economy, and to see the Commission’s role in EMU grow. And although I will not be in such a hands-on role, I will of course continue to follow developments in EMU and the euro area very closely from the very different perspective of the National University of Singapore, where I will be the ‘EU fellow’ during the next academic year.

Thank you for your interest in DG ECFIN’s work over the last few years. It only remains for me to say goodbye, and to hope that the next decade will be as rich in achievement for EMU as the last.

Klaus Regling
Director-General,
Economic and Financial Affairs DG