Making the most of the euro
by Joaquín Almunia
The launch of the euro was both a decisive political gesture and a highly ambitious economic project. Never before in peace time had a group of sovereign nations relinquished their national currencies and committed themselves to a common economic future. In the ensuing decade, Economic and Monetary Union has exceeded all the expectations at the time of its debut. Even its most fervent proponents could not have foreseen how the euro would revolutionise the global economic environment, as well as the economies of European countries. Confounding all predictions of the eurozone’s eventual break-up, its membership has increased steadily so that today the single currency is shared by 320m citizens of 15 countries – soon to be 16 when Slovakia joins.
The euro area is the largest market in the developed world and the euro is the world's second
most important currency. It rivals the US dollar both as a medium for international trade and finance and as an alternative for holding official reserves.
EMU's construction has been built on solid foundations; the independent European Central Bank together with clear rules for promoting healthy public finances have rooted macroeconomic stability in the eurozone. Intra-European currency fluctuations have thankfully become a thing of the past, and until the recent surge in food and fuel prices – a global shock of very major proportions – inflation has been kept firmly in check, with interest rates held at record lows. Indeed, we have over the past decade become so used to stability that we no longer look on it as an accomplishment.
Even under today's difficult conditions, this robust framework is protecting the eurozone from the worst of the economic and financial storms. One can only imagine what the full impact of the oil price hikes would have been without the cushioning effect of the euro. Remember the currency crises of the 1980s and 1990s? You can just picture the havoc that the recent market turmoil would have brought to the eurozone's constituent currencies. Add to this the creation of 16m jobs since the launch of the single currency, the boost in trade and investment and the rapid integration of financial markets and there can be no doubt that Europe has good reasons to celebrate the euro's tenth birthday next January with a sense of pride and achievement.
But we also need to be realistic; the euro remains a work in progress. Critics like to link EMU with low growth and internal divergences. These claims are often exaggerated and tend to ignore some of the facts. For example, GDP growth per head has for the past decade been as fast in the eurozone as in the US. The differences in growth and inflation between the euro’s member states are no bigger than those found inside larger economies such as the US, Germany or Italy. All the same, we can do more to improve the functioning of EMU and reap the full potential of economic integration in terms of growth, competitiveness and jobs.
Needless to say, Europe still has plenty of reasons for raising its game. Globalisation is bringing new challenges that were far from clear 10 years ago. International competition is intensifying, while competition for raw materials and worldwide demand for food are both rising. Meanwhile, Europe’s ageing population will put a severe strain on many national economies and the social models
that we value so highly. EMU therefore offers a unique platform for managing these challenges, but only if we take action now to strengthen our economic performance.
How can this be achieved? The answer lies in greater coordination and surveillance – of budgetary policies, of course, but also of economic policies in a broader sense.
When I say that I am not proposing a radical new policymaking step. On the contrary, it simply means revisiting the key principle, encapsulated in Article 99 of the Maastricht treaty that underpins EMU. This says that "member states shall regard their economic policies as a matter of common concern and shall co-ordinate them." To use a sporting analogy, EMU is a bit like a football team; it relies on all players to be fit, and to perform to the best of their ability. Teamwork is vital and the fact that the number of players is growing all the time only makes improving coordination more urgent.
This is why we need to deepen and broaden the surveillance of economic policies in the eurozone. In other words, euro area members need to discuss their economic programmes ex ante the better to judge the impact on the EU as a whole, and to consider the EMU dimension when formulating national policies.
Political ownership of the euro has been somewhat lacking over the last decade.
European leaders have been more inclined to criticise the euro for being either too weak or too strong and make it the scapegoat for
numerous ills, rather than embrace the full implications and responsibilities that come with life in a monetary union. Up to now, we have been happy to reap the benefits that the euro has to offer – price stability, cheaper credit, new investment opportunities and more efficient markets.
But if we want to cement these gains and build on them for future generations, then we must be ready to commit to the closer coordination of national economic policies.
A greater commitment to sound public finances, for example, would help. Progress is already underway here, thanks to the success of the reformed Stability and Growth Pact. One consequence of that – together with the economic "good times" we enjoyed – government deficits in 2007 fell to their lowest levels in 25 years. This means that many member states now have the necessary budgetary margin of manoeuvre to confront the current downturn. But public debt is still too high in some EU countries when looked at in the context of their ageing populations.
To avoid overburdening future generations and to find the budgetary resources that will increase Europe’s growth potential we also need to put more emphasis on the quality and efficiency of public finances rather than just on budget deficits and public debt.
Budget monitoring, as I’ve already touched on, should be matched by a broader surveillance of economic developments in the euro area. Only through closer scrutiny of, say, trends in unit labour costs or the build-up of current account imbalances will we tackle divergences within the monetary union in inflation and competitiveness.
We also need stronger incentives to implement structural reforms, which are not only crucial for success in a monetary union but are essential if Europe is to compete in today's fast moving global economy. So far, there has been a lack of delivery in a number of key, growth-enhancing areas.
Eurozone countries would profit immensely from driving forward liberalisation measures in the labour market, the services sector and financial markets. The potential benefits from coordinating such reforms are high and so far unexploited.
Eurozone nations must also strive harder to find common positions on international issues and to speak with a single voice in the global arena. The world economy has evolved dramatically over the last decade and we have yet to take hard decisions about how best to promote and defend the euro’s economic interests worldwide.
A consolidated representation would allow EMU countries to wield the sort of political clout that matches both their combined economic weight and also the global status of their common currency. This will be hard to achieve, but it is high time we recognise the risks of doing no more than just maintaining the status quo. The financial turmoil and exchange rate volatility triggered in the late summer of 2007 should be seen as a wakeup call. In a world where the challenges are increasingly global – and where size matters – we need to make sure that common interests prevail over national differences.
A decade ago, European countries embarked on a pioneering journey, uniting to create a European currency and forge a prosperous future for their citizens.
That voyage is still far from over, and arguably has only just begun. Europe now faces a time of greater uncertainty, we must approach the euro's second decade in a redoubled spirit of ambition, determination and cooperation.
Joaquín Almunia is the EU’s Commissioner for Economic and Monetary Affairs.
These views should be a warning to EU states considering euro-zone membership
by Petr Mach
The euro’s tenth anniversary could offer an occasion to look back and assess whether the common currency has been a success, or whether it should instead be seen as a politically-driven project that has made little economic sense. Instead, Joaquin Almunia has taken it as an opportunity to suggest that the European Union should acquire even more control over the economic policies of its member states. I must therefore disagree with the commissioner on both his main claims.
The euro has not been a great triumph, and Economic and Monetary Union does not justify even greater intrusion by the EU into the democratic decisions of member states.
I also believe that the underlying tensions within the eurozone will one day lead to its break-up. And if Brussels does succeed in stripping the member states of their sovereign powers over economic policies, that day will come sooner rather than later.
To start with, you cannot measure the success of a currency simply by the fact that it has survived its first decade. There are plenty of world currencies in a dire state and yet they still exist. Also, the economic benefits of the euro were meant to outweigh its costs. But the long-term statistics on economic growth and price stability in the eurozone do not corroborate this political justification for the abolition of national currencies. Between 1999 and 2007, those western European economies that retained their own currencies grew by 30% in real terms, while the euro area grew by 23%. At the same time, eurozone inflation rates differed widely. In Germany, consumer prices grew cumulatively by 13% between 1999 and 2007, while in Ireland retail price inflation amounted to 35%.
The introduction of any common currency will clearly entail benefits that encourage growth, such as savings in transaction costs and other costs that slow down growth. The latter include balance of payments rigidities as problems in national accounts can no longer be corrected by exchange-rate adjustments. It should not be surprising, therefore, that the EU bureaucracy wants more power over national economic policies on the pretext of smoothing out trade imbalances between eurozone states. After all, economic theory implies that when a monetary union is created somewhere that is not an "optimum currency area", the resulting setbacks can only be offset by a common fiscal policy.
Joaquin Almunia’s call, however, for more coordination and surveillance of "economic policies in a broader sense" would only deepen the democratic deficit already built into the Union. Member states today take half of their legislation from the EU, so if "economic policy in a broader sense" were dictated by Brussels too, why bother holding national elections at all? Economic policy is a political issue par excellence and as such it must remain with the member states.
Commissioner Almunia also believes that the euro provides a platform to manage challenges such as ageing populations or increased demand for raw materials. This is wrong. These things must be coped with whether a country has adopted the euro or not. He also put forward the truly monstrous idea that the EU should drive the economic policies of individual member states in order to manage "unit labour costs" and "current account imbalances". In a way, this is understandable. With market-based exchange rates no longer available to help restore balance, the bureaucrats have to invent artificial regulatory measures to compensate.
But market forces can only be replaced with socialist regulation and central planning at a very high price!
The euro-federalists managed to add economic, employment and social policies onto the list of powers that the Lisbon treaty would grant the EU. Fortunately, the treaty was defeated in Ireland, so neither the Irish nor the rest of us will have these policies dictated from Brussels. Instead of calling for new economic powers, Almunia should have acknowledged that the euro causes new problems which cannot be tackled without drastic new regulations. For members of the EU who are still thinking about joining the euro, this contribution by the commissioner should serve as a warning. It is not sensible to jettison your national currency and join an Economic and Monetary Union that is bent on depriving your country of the remaining sovereign powers that are still subject to democratic scrutiny.
Petr Mach is executive director of the Center of Economics and Politics, a think tank based in Prague, and is also as an advisor to the President of the Czech Republic, Václav Klaus.