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[email protected] I 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. 1. Overview. Introduction

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[email protected]

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

1 overview
1. Overview
  • Introduction
  • Achievements and shortcomings of the first ten years
  • Challenges of the second decade
  • A three-pronged policy agenda
part 1 emu is more than the e uro
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
benefits of monetary union
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 emu
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

the road to emu con d
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

euro area
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

european central bank
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%.

part 2 emu s achievements
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

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emu has delivered price stability
EMU has delivered price stability

Inflation has come down from:

8-10% in the 1980s

3% in the 1990s

to 2% under EMU

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

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EMU has delivered price stability
  • Price stability ensured
  • Recent surge in prices expected to be temporary
  • Inflation expectations remain close to ECB reference level
the cost of borrowing has fallen
The cost of borrowing has fallen

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

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

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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.
employment has received a major boost
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

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

investment has been boosted by sound macroeconomic conditions
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

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the euro has boosted economic integration
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

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emu has boosted financial market integration
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.

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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

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the image of the euro falls short of initial expectations
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

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inflation indicators and inflation perceptions
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

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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

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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

the financial turmoil is having an impact
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
part 3 challenges
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

part 4 a three pronged policy agenda
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

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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

conclusions
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.

reference
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

http://ec.europa.eu/economy_finance/focuson/focuson12123_en.htm

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