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

1. EMU@10 I primi dieci anni dell’Unione economica and monetaria Presentazione di Elisabetta Capannelli, Membro del Gabinetto del Commissario AlmuniaCommissario agli affari economici e monetary Bologna, 9 April 2008

2. 1. Overview • Introduction • Achievements and shortcomings of the first ten years • Challenges of the second decade • A three-pronged policy agenda

3. Part 1 - EMU is More Than the Euro It 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

4. 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

5. The Road to EMU 1957 Treaty of Rome 1969-70 Werner Plan – feasibility study on monetary union 1971 Breakup of Bretton Woods system 1979 European Monetary System and Exchange Rate Mechanism established 1989 Delors Report (3 Phases) 1992-93 Maastricht Treaty signed and ratified 1993-98 Convergence criteria met 1994 European Monetary Institute created (forerunner of the ECB) 1997 Stability and Growth Pact agreed at Amsterdam

6. The Road to EMU (con’d) May 1998 11 countries to enter EMU Currency parities established Jun. 1, 1998 European Central Bank established Jan. 1, 1999 ECB assumes control of monetary policy. Euro replaces national currencies as unit of account Jan. 1, 2001 Greece becomes 12th member of EMU Jan. 1, 2002 Euro banknotes and coins come into circulation Jan. 1, 2007 Entry of Slovenia Jan. 1 , 2008 Entry of Malta and Cyprus

7. 1 JANUARY 1999EURO LAUNCH

8. Euro Area IN: 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

11. European Central Bank Mandate 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%.

12. EMU has delivered price stability and low cost of borrowing Sound fiscal positions Strong job creation Increased economic and financial integration The euro has become a major global currency Progressive enlargement of the euro area EMU has brought benefits to the EU as a whole Part 2 - EMU’s achievements 13

13. EMU has delivered price stability Inflation has come down from: 8-10% in the 1980s 3% in the 1990s to 2% under EMU 14 (1) EMU corresponds to euro area-12 countries and covers 1999-2007

14. EMU has delivered price stability • Price stability ensured • Recent surge in prices expected to be temporary • Inflation expectations remain close to ECB reference level

15. The cost of borrowing has fallen and converged 16

16. The cost of borrowing has fallen Interest rates have progressively diminished and they have achieved levels not seen for several decades 17 (1) EMU corresponds to euro area-12 countries and covers 1999-2007

17. 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.

18. Employment has received a major boost 16 million jobs were created in the euro area since 1999 Unemployment rate has fallen from 9% in 1999 to an estimated 7% in 2008 20 (1) EMU corresponds to euro area-12 countries and covers 1999-2007

19. Investment has been boosted bysound macroeconomic conditions Lower cost of financing, less crowding outfrom the public sector, and prospects of stability and integrating markets have supported investment, which in turn helps productivity 23

20. The euro has boostedeconomic integration The single currency has increased intra-area trade flows (of the order of 5 to 10%) Intra-area trade flows rose from 27.5% of GDP in 1999 to over 31% in 2006. No trade diversion: gains for all Intra-area foreign direct investment flows increased from 20 to 35% of total FDI 25

21. EMU has boosted financial market integration Bigger markets, more efficient allocation, greater opportunities for risk sharing: • in equity markets ‘home bias’ declined from 80% to 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 homogenous, supporting expansion in issuance of non-gov. bonds (+50% since 1999, now > 1000bn €) • Banking sector consolidated and reinforced its cross-border linkages (assets) during EMU. There are now 46 banks in EU with significant cross–border holdings. 26

22. 26% of global currency reserves in 2007 vs. 18% for legacy currencies in 1998 Euro-denominated international debt securities 49% of total amounts outstanding against 35% in USD Invoicing in € represents more than 50% of the external trade of the euro area and around 60% of that of non euro area and EU candidate countries A growing international role 27

23. European public is overall supportive of the euro but: Euro has suffered from abusive price increases in some sectors and in some countries, even if overall inflation has been contained. Euro used as scapegoat for bad economic results reflecting inappropriate policies at national level Euro suffers from lack of adequate visibility of the economic leg of EMU The image of the euro fallsshort of initial expectations 28

24. Inflation indicatorsand inflation perceptions • Inflation perceptions are crucial in determiningcitizens’ 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 29

25. Potential GDP growth remains too low Productivity growth has been lower than in US There have been substantial and persistent differences across countries in terms of inflation and growth. In general, structural reforms have been less ambitious and frequent than in the rest of the EU Banking and financial markets predominately nationally organized and supervised Recent global developments increase the strain… Not all expectations have been fulfilled 30

26. The euro appreciated significantly vis-à-vis the USD, but also in effective terms When imbalances are located elsewhere in the world (US, Asia) Implies risk of disorderly developments Global imbalances put exchange rates under pressure 31

27. 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

28. Part 3 :Challenges There are three key main goals for EMU: Raising potential growth and welfare Ensuring adjustment capacity as EMU expands Projecting appropriately its interest in the world … and new challenges have emerged in the 21st century: Globalisation Demographic change Food, energy price rises and climate change

29. Domestic agenda Broadening policy coordination Deepening fiscal surveillance Integrating structural reforms in policy coordination External agenda Considering benefits, responsibilities and risks Enhancing the international role of the euro Effective governance Role of ECOFIN, Eurogroup and Commission in EMU Dialogue with other institutions and partners Accompanying enlargement Part 4 : A three-pronged policy agenda 37

30. The growing international role brings benefits Deep, liquid markets in euro assets help our financial sector International prices in euro and invoicing in euro reduce exposure to exchange rate volatility As well as responsibilities and risks Size of euro area economy means decisions have global impact But also expose the euro area to shifts in portfolio flows Improve coordination, single voice, unified representation Enhancing the international role of the euro 38

31. Conclusions EMUremains a milestone of EU integration 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 important to support the image of the euro among its citizens. A well-functioning EMU is a major asset for the whole EU. 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 years the euro area is set to expand towards the current EU membership. A strong EMU will foster the EU's global leadership role. 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.

32. Reference • Commissioner Almunia website – Speeches on EMU http://ec.europa.eu/commission_barroso/almunia/presscorner/speeches/2008/press_speeches_en.html • ECFIN on Europa http://ec.europa.eu/economy_finance/index_en.htm • The Euro http://ec.europa.eu/economy_finance/the_euro/index_en.htm?cs_mid=2946 • Towards EMU@10 – Research resources http://ec.europa.eu/economy_finance/focuson/focuson12123_en.htm