The Euro: Achievements and challenges 

h. carré

Director - Directorate general economic and financial affairs

Eurokonferansen i Oslo 30. oktober 2001

Ladies and gentlemen,

It is a pleasure for me to be here today to share with you some thoughts on the experience so far with the euro and on the challenges and opportunities ahead of us.

As you all know, although euro banknotes and coins will replace national currencies in the euro area only on 1 January 2002, the euro has been our currency since 1 January 1999. You will not be surprised to hear that my assessment of these first 34 months with the euro is unquestionably positive. The euro area is a much stronger economy, with sounder fundamentals than it was the case ten years ago. The euro has already proved its capacity to act as a factor of stability in times of uncertainty and I am convinced that this role will be reinforced once the euro notes and coins are physically introduced.

Nevertheless, this does not mean that everything is perfect and that we do not have to remain vigilant. We face a number of important challenges that need to be addressed to make sure that all the benefits of the single currency are fully reaped.

Today, I will focus my remarks on three main points:

·        The first is that the euro has already delivered important macroeconomic benefits and will do so also on the microeconomic level.

·        Secondly, I will turn to the several challenges and opportunities facing the euro area. 

·        Finally, I will summarise the state of preparation for the forthcoming cash changeover.

1.      Benefits of the euro

Although all the logistical aspects of the changeover have been carefully planned, risk cannot be completely eliminated. We can never completely know what is waiting around the corner. Unexpected events that hamper operations may occur and we must be ready to face them.

Possible risks include, first, security-related issues in storage and transport of cash. In response Member States are providing extra storage facilities and have drawn up extensive contingency plans.

Secondly, there is the risk of a shortage of cash. The goal to ensure sufficient circulation of cash may be more difficult to attain if retailers are not sufficiently sub-frontloaded. Regrettably, there is still a certain degree of uncertainty concerning the participation of retailers in sub-frontloading. This is due to the fact that the arrangements for it are still relatively unattractive. Several Member States are implementing measures to encourage sub-frontloading. The Commission has invited greater efforts to urge SMEs to take part in sub-frontloading, for instance by offering more favourable debit arrangements.

Thirdly, the public is increasingly concerned that it will be subject to abusive price rises during changeover. There have already been complaints in the public and in the private sector in several countries about it. The risk of price rises is, broadly speaking, very slight. To keep it as low as possible, the Commission has called on the national authorities and traders to honour their promises to keep prices stable when changing over to the euro. It has also warned consumers to remain vigilant and solicited Member States to publish appropriate price indications as frequently as possible in 2002. The Commission considers it critical that prices already be set in euro and be displayed with the equivalent in national currency units. Together with the ECB and the Council, the Commission will keep a close watch on prices.

Fourth, particular effort has been devoted to minimise the risk of counterfeiting. Euro banknotes and coins are provided with the most modern and effective security features available. In addition, important progress has been made in establishing a comprehensive framework for protection against counterfeiting of euro banknotes and coins but Member States will have to move ahead more quickly on the implementation of Community measures to combat counterfeiting.

In the subsequent years of preparation for the euro, this situation was transformed. A new culture of economic stability has been established in Europe, based on a strong commitment to low inflation and budgetary discipline. The euro-area inflation rate fell close to 1% in 1998 and 1999. Mainly due to a surge in import prices, headline inflation rose to 2.3% in 2000 but underlying, or domestically generated, inflation remained lower. The euro-area budget deficit in 2000 was below 1% of GDP.

The benefits have been evident: the euro area enjoyed high growth and strong employment creation in 1999-2000. More than 5 million new jobs were created during these two years. In 2001, the deceleration in output growth world-wide has caused a slowdown in the expansion in Europe affected. But I will come back to the current economic situation later.

Many of the macroeconomic benefits of the euro which I have just mentioned were being felt already before the launch of the single currency. However, a key contribution of the euro is that it has removed the most important remaining barriers in the EU single market: the co-existence of multiple national currencies. Now that the euro is in place, Member States have started to reap the benefits also on the microeconomic level:

·        First, the euro is bringing increased transparency and more intense competition in the market place. This, in turn, leads to a more efficient allocation of resources, and eventually to lower prices for goods and services, to the advantage of all European citizens. 

·        Second, by reducing the burden of managing exchange-rate risk, the euro has lowered transaction costs for financial services.

·        Third, companies and individuals have improved opportunities for financing in the deeper and more liquid euro-denominated financial markets. The pace of progress in this field has surprised many observers.  Money markets, where monetary policy operations take place, are now completely integrated. European securities markets have become much broader and more liquid. International bond issuance in euro has increased dramatically, with euro-denominated issues now almost on par with dollar-denominated ones.  In the first quarter of 2001 bond issuance in dollar amounted to USD 265 billion while in euro it was USD 220 billion. Moreover, the euro has triggered a significant restructuring and consolidation of the financial sector in Europe.

More integrated and efficient capital markets and a stronger financial sector improve the allocation of capital, and hence increase our growth potential. The new financing opportunities offered by these developments are particularly important for small and medium-sized enterprises (i.e. enterprises which employ less than 250 employees), which in Europe account for more than 60% of total non-agricultural employment.

2.           Challenges and opportunities ahead

Let me now turn to challenges and opportunities ahead.  The shift to EMU has created a new economic entity whose day-to-day management is highly demanding and which, in addition, is in continuous evolution.

This applies first to its institutions. The EMU economic policy framework in which the various actors at national and euro area level interact has performed well so far. Yet, with the passing of time and the accumulation of experience, it becomes possible to identify areas for further improvement. Second, it also applies to the geographical composition of EMU. There has already been a first enlargement from eleven to twelve countries when Greece adopted the euro on 1 January 2001. Further enlargements to current or future EU member states will occur in the future.

But let me be more specific about some of the main issues with which we are confronted, starting with the current economic situation. 

2.1    Policy response to the economic downturn

Even before the terrorist attacks in the US, in 2001 the unpleasant combination of decelerating output growth world-wide and, until recently, accelerating inflation, was providing a tough test for EU policy makers. Six month ago we were expecting GDP growth rates in 2001 of 3.4% for the world and 2.8% for the euro area. Now, we are looking at growth rates below 2.5% for the world and below 2% for the euro area. While  there is still hope of a recovery in the course of 2002, following the tragic events on 11 September, uncertainty on future developments is at its highest.

What is the appropriate policy response to this dramatic shift in the economic outlook? The ECB started easing monetary policy in May, as inflation risks have progressively receded. Inflation is still above the 2% ceiling of the ECB’s definition of price stability, but the fall in oil prices and the moderate strengthening of the euro exchange rate have, together with lower demand growth, considerably reduced inflationary pressures.

Some observers have lately criticised the ECB because monetary easing in the euro area has not been as aggressive as in the US. However, one should bear in mind, first, that economic conditions in the US and in Europe differ (the downturn is not as pronounced in the euro area as it is in the US) and, second, that the ECB has a different mandate from the Federal Reserve. The Treaty assigns the ECB the primary objective of guaranteeing price stability. The ECB has time and again repeated that achieving this objective is the best contribution it can make to long-term growth. I can ensure you that the Council and the Commission fully share this view.

Fiscal policy is also providing support to the economy through the working of the automatic stabilisers. An additional, discretionary, fiscal expansion is not considered desirable.  Past experience tells us that discretionary fiscal policy is not an efficient stabilisation tool. Moreover, it could even be counter-productive if it were to jeopardise the soundness of public finances which has been regained during a decade of efforts.

In these difficult circumstances, the euro is contributing to limit the consequences of the downturn in the international economy. In support of this view, I would point to the following:

·        First, thanks to the adjustment carried out in the 1990s, the economic fundamentals of the euro area economy are sound. There are no major imbalances in either the public or the private sector. Macroeconomic stability provides a favourable climate for investment and consumption. Moreover, the macroeconomic adjustment realised in the 1990s has allowed us to regain room for manoeuvre in monetary and fiscal policy. 

·        Second, with the euro we are no longer exposed to the intra-European exchange rate tensions which in many past episodes have aggravated the consequences of negative external shocks. Not only has this factor been eliminated, but EMU Member States have now a strong incentives to co-ordinate their economic policies so as to find the most appropriate policy response for the area as a whole.

2.2          Progressing with structural reforms

Beyond carefully managing macroeconomic policies, it will also be crucial at this juncture to keep the momentum for structural reforms to improve the working of our economies and increase the growth potential of our economy. Most estimates of the potential annual growth rate for euro-area GDP are around 2-2.5%. Even after years of expansion, the unemployment rate remains unacceptably high, above 8%. The slowdown in 2001, driven largely by external shocks, has been a strong warning signal that our economies do not have sufficient internal dynamism.

The euro has already contributed to improving the efficiency of the European economy, notably by acting as a catalyst for the integration of financial markets and by stimulating reforms in products, services and labour markets.  Yet, there is a wide consensus in Europe that we need to do more. Structural issues have gained a prominent position on the EU policy agenda, as shown by the commitment of Heads of State and Government to the follow-up of the Lisbon process and its strategic goals.

The main areas where progress is needed are labour markets, where reforms introduced by Member States have often been piece-meal, network services (i.e. energy, telecommunications and transport), public procurement and state aids, financial services.

The extent to which responsibility lies at the national or the EU level differs. Labour markets are mainly under the responsibility of national governments. In other areas, such as financial services, there is a more important role for the EU. There are several initiatives at EU level to remove all remaining regulatory obstacles to integration, while guaranteeing the stability of the financial system. The European Commission has put forward a Financial Services Action Plan, which comprise about 40 measures to be implemented by 2005. A specialist committee (chaired by Lamfalussy) has called for a new approach to speed up and facilitate the creation of an EU regulatory framework for securities markets. The aim is to have all the measures concerning securities markets adopted by 2003.

2.3          Strengthening economic policy co-ordination

To guarantee the best possible management of all these issues, we will need to periodically review the framework for economic policy co-ordination on the basis of experience. In a Communication issued last year, the Commission has proposed to strengthen economic policy co-ordination within the euro area by reinforcing the analysis of the economic situation and the policy mix at the euro area level, increasing the transparency of the process and introducing some relatively minor modifications to the working of the institutions.

As the realm of co-ordination has expanded from macroeconomic policies to other areas such as structural policies and labour markets, the number of procedures and policy actors involved has grown dramatically over the last few years. There is mounting concern that the co-ordination framework has become too vast and complicated and that it is in need of some rationalisation. While every effort is deployed to ensure overall consistency, a simplification of the current framework appears desirable.

In this context, I would like to stress that the growing interest in the aggregate euro area dimension does not come at the expense of the country dimension. The Commission has a specific responsibility for the surveillance of individual countries’ economies. We attach the highest priority to this activity, as in our view the proper functioning of EMU depends crucially on the pursuit of appropriate economic policies at the national level.

2.4     Enlargement of EMU

In the longer term, the biggest challenge will be enlargement of EMU. We hope that the three current EU Member States that have not yet adopted the single currency - Denmark, Sweden and the UK - will one day decide to join. Such enlargement would be relatively easy to accommodate.  However, the enlargement of EMU to future EU Member States will be much more challenging.

How do we go from the enlargement of the EU to the enlargement of the euro zone? Two aspects are crucial in my view:

First, we must make sure that candidates countries follow the right “sequencing” towards economic and monetary integration. The criteria for accession to the EU require candidate countries to be functioning market economies able to cope with competitive pressures and market forces within the Union at the time of accession. By furthering the process of structural and economic reform and building up the appropriate administrative and institutional capacity, candidates will increase their capacity to grow faster and to close the large income gap with current Member States. In the meantime, their financial systems also need to develop and become more resilient to shocks. In addition to that, before adopting the euro, future EMU members will have to have achieved a high degree of sustainable nominal convergence in terms of fulfilling the Treaty convergence criteria. Needless to say, the equal treatment principle will be applied in full to the candidate countries.

Secondly, it will be important to make the necessary changes to our institutional framework so as to guarantee an efficient management of economic policy even with a greater number of participant countries.  The European Council in Nice addressed this issue and introduced modifications in the way the Commission, the Council and the European Parliament will work after enlargement. An “enabling clause” will permit changes to the institutional features of the ECB Governing Council without requiring a Treaty revision.