Tuesday, 27 May 2008

Planning the future of the euro

On the tenth anniversary of the euro, the European Commission has called for better coordination of economic policies, to strengthen co-ordination of structural reform in the euro area and for a single seat in international financial institutions. On 7 May, the European Commission adopted a communication “EMU@10: successes and challenges after 10 years of Economic and Monetary Union” which assesses the first ten years of EMU highlighting its achievements while identifying the goals and challenges facing the euro area. The Commission has described the euro as “a resounding success.” The Commission has referred to the main benefits of the euro such as price stability, job creation, low interest rates, reduced costs for travellers, lower costs for businesses and increased trade. The Commission has highlighted that the “euro area has become a pole of stability for Europe and the world economy.” However the euro has not fulfilled all expectations. There were not many changes concerning economic growth have stood at around 2 per cent per year since the inception of euro which is roughly the same rate as in the previous ten years. The Commission has pointed out that “the euro area’s per capita income has stalled at 70 per cent of that of the United States.” Nevertheless, the Commission believes that “the public image of the euro does not fully reflect EMU's successful economic performance.” According to the Commission the euro is “used as a scapegoat for poor economic performances” which it believes is the “result from inappropriate economic policies at the national level.” The Commission has denied the beliefs of citizens that the euro increased prices when it was introduced. The Commission has stressed that the next decade will be marked by new global challenges which will have an impact on the EMU weaknesses such as globalization, the rising of food and energy prices, climate change and an ageing population. The Commission has put forward a three pillar agenda to address the challenges facing the EMU. The Commission has stressed that the euro area’s governance and coordination of economic policies must be improved which involves deepening as well as broadening economic surveillance arrangements to guide fiscal policy over the cycle and in the long term and, at the same time, address divergences in growth, inflation and competitiveness. The Commission has called for a deeper budgetary surveillance. The Commission believes that public debt developments in the euro-area should be closely monitored whereas “medium term budgetary objectives should be strengthened to address implicit liabilities.”

The second element of the Commission domestic strategy intends to better integrate structural policies within the coordination process in EMU. The Commission has pointed out that low growth has been more marked in Member States where structural reforms have been lagging behind and so the Commission recommends strengthening the co-ordination of structural reform in the euro area. According to the Commission, “reforms should be a top priority for EMU members.” The Commission has stressed that such measures should be addressed to remove the remaining barriers to product market integration, enhancing competition, fully implementing the Services Directive and promoting better-functioning labour markets. According to Joaquín Almunia, Commissioner responsible for Economic and Monetary Affairs, in order to achieve stronger incentives for reforms the Eurogroup should closely monitor the implementation of the specific euro area recommendations of the Lisbon Strategy. Such a recommendation would have political and economic implications. Mr Almunia has already stressed that “the Eurogroup should take a more active role in monitoring and coordinating structural reforms.” There will be further policies at EU level. It would represent a further impetus for Member States to carry out economic policies as a matter of the EU’s common concern. Moreover, the Commission has stressed that the euro area “has to play a more active and assertive role both in multilateral fora and through its bilateral dialogues with strategic partners.” The Commission is calling for the euro area “to speak with a single voice on exchange rate policies.” The Commission believes that “the most effective way for the euro area to align its influence with its economic weight is by developing common positions and by consolidating its representation, ultimately obtaining a single seat in the relevant international financial institutions and fora.” Presently, Member States still represent themselves in front of financial institutions such as the International Monetary Fund and the G7 group. Obviously, it would be quite difficult for several Member States to accept such a suggestion, whether that be Germany, France or Italy as they do not want to lose their influence in those institutions. The third pillar of the Commission policy agenda aims to improve the EMU’s system of governance. According to the Commission, “better coordination and surveillance of national economic and budgetary policies is needed within the ECOFIN Council and the Eurogroup … in order to address imbalances and promote structural reforms that foster adjustment, stability and growth.” Further coordination of Member States’ economic policies within the Union might harm the economic interests of several Member States. Presently, there are no binding instruments for the EMU’s economic coordination. The Commission believes that better use can be made of the institutions and instruments governing the EMU in order to tackle emerging policy challenges. The Commission has called for a closer coordination between the ECOFIN and the Eurogroup, especially taking into account the expansion of the euro area. According to the Commission, the “Eurogroup should continue to serve as a platform for the deepening and broadening of policy coordination and surveillance in EMU.” The Commission has recalled that the Lisbon Treaty formally recognises the Eurogroup strengthening its role on questions affecting the functioning of EMU. Unsurprisingly, the Commission wants to play a stronger role to ensure the effective functioning of EMU. The Commission wants to promote further economic and financial integration. Moreover, it wants to enhance its role in international dialogues. The Commission has pointed out that the Lisbon Treaty provides the necessary basis to “adopt measures specific to euro-area Member States” as well as “to strengthen the coordination and surveillance of their budgetary discipline” and to set out economic policy guidelines for euro area Member States whilst ensuring that they are compatible with those adopted for the whole of the Union. The Commission is provided, under the Lisbon Treaty, with the power to issue direct warnings to a Member State, therefore it does not have to wait for the EU finance minister’s approval when Member States economic policies are not consistent with the broad guidelines or risk jeopardising the proper functioning of EMU. At the moment, the Commission wants to promote discussion on the several issues raised in this communication yet Almunia has already said “Then, in time, the Commission will come back with appropriate, concrete proposals.” The Commission suggestions will have far reaching implications for Member States’ structural, financial and economic policies and so the Commission might not achieve the level of consensus that it is hoping for between the EU institutions on further policies for the EMU.

The discussions will take place during the French EU Presidency. France has already announced that it wants to look at the eurozone governance during its presidency. In the meantime, according to the EUobserver, Dutch finance minister, Wouter Bos, has recently spoken at the Brussels Economic Forum pointing out that “high-debt states may undermine the stability of the whole monetary union.” According to Mr Bos, such Member States “will be forced by political pressure to borrow more and increase their budget deficit, with consequences for interest rates and inflation.” He believes, therefore that the “long-term chances of survival of the euro should be questioned.”

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