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EMU@10I primi dieci anni dell’Unione economica and monetaria

Presentazione di Elisabetta Capannelli, Membro del Gabinetto del Commissario Almunia

Commissario agli affari economici e monetary

Bologna, 9 April 2008

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1.1. IntroductionIntroduction

2.2. Achievements and shortcomings of Achievements and shortcomings of the first ten yearsthe first ten years

3.3. Challenges of the second decadeChallenges of the second decade

4.4. A three-pronged policy agendaA three-pronged policy agenda

1. Overview1. Overview

Part 1 - EMU is More Than the EuroIt also consists of:

The single market (free movement of goods, services, capital and labour)

A macroeconomic policy framework

Reinforced co-operation in a range of policy fields

The unique feature of EMU is its policy assignment – one monetary policy, many fiscal & structural policies

Benefits of Monetary Union CITIZENS: price transparency,

easier travel with no currency exchange, lower interest rates

BUSINESSES: no transaction costs, single market, financial market integration

MACROECONOMY: price stability, exchange rate stability, low interest rates

GLOBAL: greater diversity, stability (even amid crises)

POLITICAL: integration, enhanced global role

The Road to EMU1957 Treaty of Rome1969-70 Werner Plan – feasibility study on

monetary union1971 Breakup of Bretton Woods system1979 European Monetary System and

Exchange Rate Mechanism established

1989 Delors Report (3 Phases)1992-93 Maastricht Treaty signed and ratified1993-98 Convergence criteria met 1994 European Monetary Institute created

(forerunner of the ECB) 1997 Stability and Growth Pact agreed at

Amsterdam

The Road to EMU (con’d)

May 199811 countries to enter EMUCurrency parities established

Jun. 1, 1998 European Central Bank establishedJan. 1, 1999 ECB assumes control of monetary policy.

Euro replaces national currencies as unit of account

Jan. 1, 2001 Greece becomes 12th member of EMUJan. 1, 2002 Euro banknotes and coins come into

circulationJan. 1, 2007 Entry of SloveniaJan. 1 , 2008 Entry of Malta and Cyprus

1 JANUARY 1999EURO LAUNCH

Euro AreaIN: Austria, Belgium, Finland, France, Germany, Greece

Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Slovenia, Cyprus, Malta

OUT (without opt-out): Sweden, the Czech Republic, Estonia, Hungary, Latvia,

Lithuania, Poland, Slovakia

OUT (with opt-out):UK, Denmark

European Central BankMandate Treaty Article 105: “The primary objective of

the ECB shall be to maintain price stability. It shall support general economic policies without prejudice to the objective of price stability.”

Strategy Price stability is defined as an annual increase in consumer prices (HICP) of “close to or below 2%” over the medium term.

Interest rates remained at a historic low of 2.00% from June 2003 until December 2005; the benchmark rate is now 4.0%.

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EMU has delivered EMU has delivered price stabilityprice stability and and low cost low cost of borrowingof borrowing

Sound Sound fiscal positionsfiscal positions Strong Strong job creationjob creation Increased economic and financial Increased economic and financial integrationintegration The euro has become a major The euro has become a major global currencyglobal currency Progressive Progressive enlargementenlargement of the euro area of the euro area

EMU has brought benefits to the EMU has brought benefits to the EU as a wholeEU as a whole

Part 2 - EMU’s achievements

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EMU has delivered price stability

InflationInflation has has come down from:come down from:

• 8-10% in the 8-10% in the 1980s1980s

• 3% in the 1990s3% in the 1990s• to 2% under EMUto 2% under EMU

1980s 1990s EMU (1)0

1

2

3

4

5

6

7

8

9

Inflation

(1) EMU corresponds to euro area-12 countries and covers 1999-2007(1) EMU corresponds to euro area-12 countries and covers 1999-2007

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Graph I.5.1: Inflation in the euro area

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

HICP HICP excluding unprogressed food and energy Break even inflation rate indexed bonds

Price stability ensured

Recent surge in prices expected to be temporary

Inflation expectations remain close to ECB reference level

EMU has delivered price stability

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The cost of borrowing has fallen and converged

Ten-year government bond yields (in percent, annual data)

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101214161820222426

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

BE DE

IE GR

ES FR

IT NL

AT PT

FN LU

SI

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The cost of borrowing has fallen

Interest rates Interest rates have have progressively progressively diminished and diminished and they have they have achieved levels achieved levels not seen for not seen for several several decadesdecades

1980s 1990s EMU (1)0

2

4

6

8

10

12

Long-term interest rate

(1) EMU corresponds to euro area-12 countries and covers 1999-2007(1) EMU corresponds to euro area-12 countries and covers 1999-2007

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Graph I.5.7: Development of fiscal positions

-12 -9 -6 -3 0 3

EL

IT

BE

FI

PT

FR

NL

ES

IE

DE

AT

LU

% of GDP

1992 1998 2007

Impressive fiscal consolidation and sustainability

Historically low deficit of only 0.6% of GDP achieved in 2007 from 2.8% of GDP in 1997

Fiscal consolidation in all countries. With many of them reaching historically low deficits.

2020

Employment has received a major boost

16 million jobs 16 million jobs were created in were created in the euro area the euro area since 1999since 1999

Unemployment Unemployment rate has fallen rate has fallen from 9% in 1999 from 9% in 1999 to an estimated to an estimated 7% in 20087% in 2008

1980s 1990s EMU (1)0

2000

4000

6000

8000

10000

12000

14000

16000

Employment creation

Thousands

(1) EMU corresponds to euro area-12 countries and covers 1999-2007(1) EMU corresponds to euro area-12 countries and covers 1999-2007

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Investment has been boosted bysound macroeconomic conditions

Lower cost of Lower cost of financing, less financing, less crowding outcrowding outfrom the public from the public sector, and prospects sector, and prospects of stability and of stability and integrating markets integrating markets have supported have supported investment, which in investment, which in turn helps turn helps productivityproductivity

0

0,5

1

1,5

2

2,5

3

%, an

nual

aver

age

1980s 1990s EMU (1)

Gross fixed capital formation in the euro area

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The euro has boostedeconomic integration

The single currency has increased intra-area The single currency has increased intra-area trade flows (of the order of 5 to 10%)trade flows (of the order of 5 to 10%)

Intra-area trade flows rose from 27.5% of GDP Intra-area trade flows rose from 27.5% of GDP in 1999 to over 31% in 2006.in 1999 to over 31% in 2006.

No trade diversion: gains for allNo trade diversion: gains for all

Intra-area foreign direct investment flows Intra-area foreign direct investment flows increased from 20 to 35% of total FDIincreased from 20 to 35% of total FDI

EMU has boosted financial market integration

Bigger markets, more efficient allocation, greater Bigger markets, more efficient allocation, greater opportunities for risk sharing: opportunities for risk sharing:

• in equity markets in equity markets ‘home bias’ declined‘home bias’ declined from 80% from 80% to 60% since 1999to 60% since 1999

• Cross-border holdings of EA L-T debt securities from around 15 % to 57% of total (2005)

• Cash market for gov. bonds very Cash market for gov. bonds very homogenoushomogenous, , supporting supporting expansionexpansion in issuance of non-gov. in issuance of non-gov. bonds (+50% since 1999, now > 1000bn €) bonds (+50% since 1999, now > 1000bn €)

• Banking sectorBanking sector consolidated and reinforced its consolidated and reinforced its cross-border linkages (assets) during EMU. There cross-border linkages (assets) during EMU. There are now 46 banks in EU with significantare now 46 banks in EU with significant cross– cross–border holdingsborder holdings..

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26% of 26% of global currency reservesglobal currency reserves in in 2007 vs. 18% for legacy currencies in 2007 vs. 18% for legacy currencies in 19981998

Euro-denominated Euro-denominated international debt international debt securitiessecurities 49% of total amounts 49% of total amounts outstanding against 35% in USDoutstanding against 35% in USD

InvoicingInvoicing in € represents more than in € represents more than 50% of the external trade of the euro 50% of the external trade of the euro area and around 60% of that of non euro area and around 60% of that of non euro area and EU candidate countriesarea and EU candidate countries

A growing international role

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European public is overall supportive of the euro but:European public is overall supportive of the euro but:

Euro has suffered from Euro has suffered from abusive price increasesabusive price increases in in some sectors and in some countries, even if overall some sectors and in some countries, even if overall inflation has been contained.inflation has been contained.

Euro used as Euro used as scapegoatscapegoat for bad economic results for bad economic results reflecting inappropriate policies at national levelreflecting inappropriate policies at national level

Euro suffers from Euro suffers from lack of adequate visibilitylack of adequate visibility of the of the economic leg of EMUeconomic leg of EMU

The image of the euro fallsshort of initial expectations

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Inflation indicatorsand inflation perceptions

Inflation perceptions are crucial in determining citizens’ support of the Euro

Gap explained by: Social and economic

issues Psychological issues Complexity of conversion

rate

The quality of the HICP is not called into question

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Potential GDP Potential GDP growth remains too lowgrowth remains too low ProductivityProductivity growth has been lower than in US growth has been lower than in US There have been substantial and persistent There have been substantial and persistent

differencesdifferences across countries in terms of across countries in terms of inflation and growth.inflation and growth.

In general, In general, structural reformsstructural reforms have been less have been less ambitious and frequent than in the rest of the EUambitious and frequent than in the rest of the EU

Banking and financial markets predominately Banking and financial markets predominately nationallynationally organized and supervised organized and supervised

Recent global developmentsRecent global developments increase the increase the strain…strain…

Not all expectations have been fulfilled

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The euro The euro appreciated appreciated significantly significantly vis-à-vis the vis-à-vis the USD, but also in USD, but also in effective termseffective terms

When When imbalances are imbalances are located located elsewhere in elsewhere in the world (US, the world (US, Asia)Asia)

Implies risk of Implies risk of disorderly disorderly developments developments

Global imbalances put exchange rates under pressure

Euro REER and EUR-USD (index, average 1994-2007 = 100)

60

70

80

90

100

110

120

130

140

euro REER

EUR-USD index

The Financial turmoil is having an impact

Excessive volatility in exchange rates Inflationary pressures are re-

surfacing Confidence is deteriorating Financial stability arrangements are

being tested Social impacts of the slow-down

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Part 3 : ChallengesChallengesThere are three key main There are three key main goalsgoals for EMU: for EMU:• Raising potential Raising potential growthgrowth and and welfarewelfare• Ensuring Ensuring adjustmentadjustment capacity as EMU capacity as EMU

expandsexpands• Projecting appropriately its interest in the Projecting appropriately its interest in the

worldworld

… … and new and new challengeschallenges have emerged in the have emerged in the 21st century21st century::

• GlobalisationGlobalisation• DemographicDemographic change change• Food, energy Food, energy price risesprice rises and and climateclimate change change

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Domestic agendaDomestic agenda• Broadening policy coordinationBroadening policy coordination• Deepening fiscal surveillanceDeepening fiscal surveillance• Integrating structural reforms in policy coordinationIntegrating structural reforms in policy coordination

External agendaExternal agenda• Considering benefits, responsibilities and risks Considering benefits, responsibilities and risks • Enhancing the international role of the euroEnhancing the international role of the euro

Effective governanceEffective governance• Role of ECOFIN, Eurogroup and Commission in EMURole of ECOFIN, Eurogroup and Commission in EMU• Dialogue with other institutions and partnersDialogue with other institutions and partners• Accompanying enlargement Accompanying enlargement

Part 4 : A three-pronged Part 4 : A three-pronged policy agendapolicy agenda

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• The growing international role brings The growing international role brings benefitsbenefits Deep, liquid markets in euro assets help our Deep, liquid markets in euro assets help our

financial sectorfinancial sector International prices in euro and invoicing in euro International prices in euro and invoicing in euro

reduce exposure to exchange rate volatility reduce exposure to exchange rate volatility

• As well as As well as responsibilities and risksresponsibilities and risks

Size of euro area economy means decisions have Size of euro area economy means decisions have global impactglobal impact

But also expose the euro area to shifts in portfolio But also expose the euro area to shifts in portfolio flowsflows

Improve coordination, single voice, unified Improve coordination, single voice, unified representationrepresentation

Enhancing the international role of the euro

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Conclusions

EMUEMU remains a milestone of EU integrationremains a milestone of EU integrationEMU has never been solely an economic project, but also a political one. The EMU has never been solely an economic project, but also a political one. The euro is a key symbol for the EU as a whole. This policy agenda will be euro is a key symbol for the EU as a whole. This policy agenda will be important to support the image of the euro among its citizens.important to support the image of the euro among its citizens.

A well-functioning EMU is a major asset for the A well-functioning EMU is a major asset for the whole EUwhole EU..

A thriving euro area economy will reflect positively on the EU, reinforcing A thriving euro area economy will reflect positively on the EU, reinforcing public support for EU integration in and outside the euro area. Over the next ten public support for EU integration in and outside the euro area. Over the next ten years the euro area is set to expand towards the current EU membership.years the euro area is set to expand towards the current EU membership.

A strong EMU will foster the EU's global leadership A strong EMU will foster the EU's global leadership rolerole..A proven ability to strengthen the euro area external role will have positive spin-A proven ability to strengthen the euro area external role will have positive spin-offs for other policy areas where the EU aspires to exert a global leadership role.offs for other policy areas where the EU aspires to exert a global leadership role.

Reference

• Commissioner Almunia website – Speeches on Commissioner Almunia website – Speeches on EMUEMU

http://ec.europa.eu/commission_barroso/almunia/http://ec.europa.eu/commission_barroso/almunia/presscorner/speeches/2008/presscorner/speeches/2008/press_speeches_en.html press_speeches_en.html

• ECFIN on EuropaECFIN on Europahttp://ec.europa.eu/economy_finance/index_en.htmhttp://ec.europa.eu/economy_finance/index_en.htm• The Euro The Euro http://ec.europa.eu/economy_finance/the_euro/http://ec.europa.eu/economy_finance/the_euro/

index_en.htm?cs_mid=2946index_en.htm?cs_mid=2946• Towards EMU@10 – Research resourcesTowards EMU@10 – Research resourceshttp://ec.europa.eu/economy_finance/focuson/http://ec.europa.eu/economy_finance/focuson/

focuson12123_en.htmfocuson12123_en.htm