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1 Economic and Monetary Union (EMU)

Based on the rationale that macroeconomic stability is conducive to higher real growth and that Member States' economic policies should be consistent within a currency area, the EC Treaty defines several criteria of economic convergence which need to be met in order to participate in the Euro. Having reached a high degree of sustainable convergence regarding price stability, the government financial position (deficit and debt), exchange rates and long-term interest-rates, the Council decided in May 1998 that 11 Member States could adopt the Euro as from 1 January 1999. Among those 11 Member States three are cohesion countries (Spain, Ireland and Portugal) and the fourth cohesion country, Greece, has joined the Euro area at the beginning of the year 2001.

Enhanced stability in the cohesion countries would have been more difficult to achieve outside the framework of EMU. This framework is based on coordination and surveillance of economic policies pursued by Member States, which have the main responsibility for these. The results achieved by the cohesion countries in terms of stabilisation since the beginning of the 1990s have been impressive, in particular in Greece and Portugal where inflation rates in 1990 were 20% and 13% respectively. The historically unique degree of stability in the cohesion countries provides improved conditions for private investment, which have already contributed to above EU average growth rates in recent years. Cohesion countries' performance in terms of nominal convergence, expressed by low inflation rates, and real convergence, expressed in above EU average real GDP growth, have occurred in parallel during the second half of the 1990s(see Graphs 16 and 17). This trend has been particularly strong in the case of Ireland which is a good example of how real and nominal convergence go hand in hand since the mid-1980s when a long-term strategy of a consistent, stability-oriented macroeconomic policy-mix was started (see Box). Catching-up was somewhat slower in Spain and Portugal. In Greece, important achievements in nominal convergence since the mid-1990s have translated into a positive growth differential vis--vis the EU which had not been the case since the 1970s.

In order to ensure that these achievements in terms of stabilisation are not merely temporary, procedures of multilateral economic surveillance and coordination have been reinforced within the EU, which encompass different areas of economic policy, such as budgetary policies, employment policies, structural reform and macroeconomic dialogue with the social partners. Given the achievements in macroeconomic stability, more emphasis has now been put on the smooth functioning of product, capital and labour markets which allow the full benefits of EMU in terms of growth and cohesion to be realised. Although taking place at varying speeds in different Member States, the liberalisation of markets and the privatisation of public enterprises have not only contributed to budgetary consolidation by reducing the need for subsidies, but - even more importantly - have also improved the overall efficiency and competitiveness of these economies. Without sufficiently open and flexible markets, Ireland's high growth rates would hardly have been sustainable. The creation of more efficient product and capital markets in the 1990s has enabled the Portuguese economy to move rapidly towards macroeconomic stabilisation without creating major imbalances. Labour market reforms in Spain in the second half of the 1990s have contributed to higher growth in both employment and GDP. Nevertheless, structural reforms in the cohesion countries, particularly in Greece, need to be further reinforced.

The introduction of the Euro also benefits growth due to increasing market integration through the lower transaction costs achieved from eliminating the need for currency exchange and the associated risk, as well as the costs of comparing prices. An idea of the size of the initial regional effects of monetary union can be gained from the trade-related exchange costs estimated for 1994.1 The estimates were produced by multiplying the trade of each region with other Euro-area countries by the respective bid-offer spreads between currencies participating in the Euro . The results indicate that exchange costs are high in regions where:

  • exchange rate volatility vis--vis the stable core of the Deutschmark area had been high, which means, in particular, for regions in Spain, Ireland, Italy, Portugal and Finland;

  • the share of foreign trade with other Euro-area countries is high, which is especially the case for the six founding members of the European Community;

  • the share of production of manufacturing goods is high, as in the north-east of Spain, the east of France, the north-east of Belgium, the north-east of Italy and the north of Portugal; by contrast, in major cities and peripheral regions, where services predominate, exchange cost savings are relatively small.

These initial or static effects of the introduction of the Euro will trigger dynamic effects on the structure of production as competition increases, economies of scale are realised, products become more diversified and the pace of innovation and growth is accelerated. Accordingly, there are likely to be changes in regional markets for goods, capital and labour. Some specific effects of monetary union on capital and labour market integration are worth mentioning.

Lower transaction costs are likely to affect the price and availability of capital, since interest rate differentials between participating Member States will be reduced because of the disappearance of exchange rate risk premiums and an increase in the efficiency of financial markets which were previously fragmented. Since January 1999, financial markets in the Euro area all trade in Euros, the most visible sign of monetary union. Capital can more easily be transferred within the EU to investment in locations where it yields the highest return, which is no longer subject to the uncertainty caused by the possibility of exchange rate fluctuation. As a result, the specific characteristics of different regions assume more weight in the competition for mobile capital.

A widespread concern regarding the impact of the Euro on labour markets is that by making it easier to compare wages in participating countries, greater transparency could lead to them being equalised. However, wage differences between countries reflect underlying differences in productivity. Regional competitiveness depends not only on labour costs as such, but on costs in relation to labour productivity (i.e. on unit labour costs) among many other factors.

  1. Hallet, Martin 1999: The Regional Impact of the Single Currency; in: Manfred M. Fischer and Peter Nijkamp (eds.): Spatial Dynamics of European Integration - Regional and Policy Issues at the Turn of the Century, Springer-Verlag: Berlin, pp. 94-109.

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