SPEECH/08/20
Joaquín Almunia
European Commissioner for Economic and Monetary Policy Reinforcing EMU after the first decade
20th Anniversary of the Representative Office of the Oesterreichische Nationalbank Brussels, 17 January 2008
Ladies and Gentlemen,
It gives me great pleasure to join you this evening and I would like to thank Klaus Liebscher for his kind invitation. This celebration of 20 years of the Osterreichische Nationalbank office in Brussels precedes another important anniversary in 2008: in May it will be 10 years since the decision was taken to launch the final stage of EMU and introduce a European single currency.
The euro may be a decade younger than this office but the opening of the OeNB in Brussels occurred just as early preparations for the single currency were getting underway. Just one year after you started work here, the Delors Report established a blueprint for introducing EMU in three stages, including the creation of the European System of Central Banks. As a result, in June this year we will also celebrate the 10th anniversary of the ECB.
Many thought the European single currency was an ambitious project that would never materialise. But they were mistaken. Today, the European Central Bank manages the monetary policy of the largest economic and monetary union in the world.
And let me note that the ECB and the Eurosystem have carried out this important task very successfully.
A positive first decade for the euro and its institutions
The euro has fast become the world's second most important currency. In parallel, the institutions of EMU have earned a high degree of respect and recognition. Indeed, the ECB has preserved the high level of credibility it inherited from the most stable legacy currencies by maintaining an unprecedented level of price stability in the euro area and keeping interest rates at low and stable levels since the introduction of the euro.
Its handling of the recent financial turmoil has reinforced the ECB's credibility. By pinpointing threats and reacting to them swiftly, the ECB has won plaudits far beyond the borders of the euro area.
It is with the help of a sound monetary policy that EMU has brought macroeconomic stability to Europe over the last decade, protecting against external shocks and spurring impressive employment creation. More than 15 million jobs have been created in the euro area since 1999 and the fall in unemployment has been significant: from 8.9% in 2000 to 7.3% in 2007, the lowest level in 25 years.
Indeed, our first 10 years with the euro have been a success overall and EMU has brought positive economic benefits to its members. Not only has it anchored stability and protected from external shocks. The euro has also driven closer integration, increasing trade and investment and accompanying the remarkable integration of financial markets.
Future challenges
But a stock take of EMU's performance over the last decade also reveals areas that should be improved in the future. Let's take a look at three in particular.
1. Improve the internal functioning of the euro area economy
The first is the need to improve the internal functioning of EMU. There is no question that the economic picture has improved markedly in the last couple of years compared to the first half of this decade. The economy has been growing at a faster rate and we have recently seen a clear acceleration in productivity. Nevertheless, looking back further at the last 10 years, sluggish growth and low productivity have been a persistent problem for some, although not all, euro area countries.
This contrasts with the rapid productivity growth experienced in the United States in the first half of this decade. So why has this been the case? The key reasons for our increasing productivity gap with the US during that period can be explained by a less efficient use of new technologies and by a more timid exploitation of the benefits stemming from the global division of labour.
Although the productivity slowdown has now been halted, we have yet to see clear evidence of a turn-around. Therefore tackling the root causes of slow productivity growth remains a high priority.
Another issue is worth attention. While our economy has been less exposed than others to deep or protracted recessions, our recovery from economic downturns has been slower and in fact sometimes painfully disappointing. Structural rigidities have prevented a smooth adjustment to shocks and to changes in competitiveness.
Improving the internal functioning of EMU would go a long way to enhancing the euro area's economic performance. It would help euro area countries to face stiff competition from emerging economies and to manage the common external shocks we are likely to face in the future, and which to large extent we are already facing now, such as high energy and commodity prices and exchange rate volatility.
For this reason, euro area countries have a serious stake in implementing the reforms set out in the Lisbon Strategy to promote flexibility and enhance economic dynamism. Many important measures have been taken in the last years to create better functioning labour, product and service markets. But much remains to be done.
For example, to help boost employment and make wages more responsive to labour market conditions, we need tax and benefit systems that make work pay. We need to move further towards a flexicurity model, one that combines active labour market policies with comprehensive lifelong learning strategies and modern, sufficient, social protection systems.
And while bold and wide ranging initiatives taken in the postal and telecoms sector must been praised, and have boosted overall productivity significantly, it is a fact that product and service market regulation remains high in the euro area.
This is especially true in the services sector which, although representing 70% of GDP, cannot be considered to form an integrated market. This implies enormous opportunities in the Single Market which are as yet untapped. In particular, Europe's productivity performance could get a major boost from the integration of markets for financial services. Integrated financial markets also play a decisive role in absorbing shocks and smoothing adjustment in a large currency area, and so the euro area has a special interest in promoting progress in this respect.
Removing wage and price rigidities, improving labour market functioning and introducing competition into important sectors of the economy are nothing new. This is not the first time we have called for such reforms and the economic gains are well known.
But as growth is slowing, inflation is on the rise and uncertainty in financial markets persists, it is important to give clear signals that our policy agenda is not to remain on paper.
In particular, let me draw your attention to three key elements which are affecting the growth and inflation perspectives: the acceleration of commodity prices, including oil and food prices; the distress in financial market and the increased risks of a US recession.
There are of course, other developments which are more supportive, such as the fact that emerging economies have remained surprisingly resilient, or that the European labour market is very dynamic. Also the euro area appears to have decoupled considerably from domestic developments in the US.
However, tighter financing conditions, reduced confidence in the aftermath of the financial market turmoil, rising inflation as well as a cooling-off of the global environment will weigh on euro-area growth in the coming quarters.
These developments provide an additional argument that should drive euro area members to act fast. We need to strengthen our economies and ensure that EMU is working well, ready to face a potentially challenging new decade where the effects of globalisation, accelerated technological change and ageing populations add economic, social and political pressures.
Of course, the lessons we are learning from the first ten years of EMU are valuable for all countries of the European Union and not just the euro area. Especially since more and more Member States will join EMU in the coming decade. So managing the future enlargement of the euro area is the second challenge I want to talk about.
2. Manage a smooth enlargement of the euro area
Cyprus and Malta's recent adoption of the euro is a reminder that EMU is expanding. All countries save those that have secured opt-outs will eventually join the euro area and probably, during the next 10 years, this process will be completed. Euro area enlargement will bring advantages for new and old members alike, given the greater trade and investment opportunities, and will mean reduced vulnerability to shocks for new entrants.
But this process also brings challenges. For recently acceded Member States in the midst of catching up, thorough preparation is paramount. Of course, any new members must meet the Maastricht Criteria before joining. But to ensure a robust performance inside EMU in the long term and avoid risks of boom and bust cycles, sound economic policies must continue after euro area entry. This will also favour continued real convergence.
Fiscal policy should be geared to counter overheating and contain current account imbalances. Countries preparing for euro adoption should also implement structural reforms to boost flexibility and resilience and prevent a loss of competitiveness occurring once in EMU. We have to keep in mind that good preparation is a great deal more important than timing.
3. Reinforce the euro area's global role
But EMU's challenges are not limited to the domestic scene. The international economy is evolving fast and the euro's place within it is growing. Already the euro has risen to become the world's second most important currency and a major reserve currency.
These new circumstances bring risks and responsibilities. Responsibilities, because the euro increasingly plays a part in supporting the stability of the global economy. And risks, because we have a greater interest in ensuring that stability is maintained. So making sure that the euro can project and defend its interests and properly assume its responsibility on the world stage is a third challenge to face EMU.
The context of today's global economy has changed a great deal since the euro was launched. Financial liberalisation has spread the world over and linked to this, large and persistent global imbalances have developed. And it is impossible to forget in the present climate that the global economy is much more vulnerable to disruption resulting from changes in market expectations. Clearly, as the issuer of the world's second largest currency, the euro area cannot afford to stand back from international economic and monetary affairs.
But developing adequate external influence requires several preconditions. First, we need to coordinate and streamline our policy positions within the euro area if we are to speak with one voice in the international arena. Next, the interests of EMU can only be represented externally if euro area countries grant a clear mandate to do so. Third, for effective EMU external action to be possible, the euro area needs representation in international fora such as the IMF and the G7.
No question this constitutes an ambitious agenda. Achieving a single euro area chair in international fora has so far been considered an objective for the longer term. But the world is moving faster and we need to reconsider our timetable. The first step is to work for greater coordination and dialogue within the Eurogroup and between institutions in order to better form common positions on external issues, but we cannot avoid pressing Member States to move forward on this issue.
I will come in the spring with more specific proposals on all of these areas when I present the report on 10 years of EMU for the anniversary in May.
Conclusion
Ladies and Gentlemen,
Having been invited to celebrate the presence of the central bank of Austria in Brussels, let me conclude by recalling that national central banks play a crucial role in supporting a stronger and better functioning EMU.
You have already been vital in executing a stability oriented monetary policy during the last 10 years. I believe it is very important that central bankers now show the same courage in bringing together their knowledge and expertise to collaborate with economic authorities and market participants to tackle the present turmoil.
A stronger EMU calls for a new approach to economic and financial issues, one that better combines the national perspective with the euro area interest. Central banks have demonstrated such symbiosis in the monetary field. They can now help develop this change in mindset in other crucial fields of European economic and financial policies.
Thank you for your attention
