Transcript LAF application for Estonia

EMU@10
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
1. Overview
1.
Introduction
2.
Achievements and shortcomings of the
first ten years
3.
Challenges of the second decade
4.
A three-pronged policy agenda
2
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





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
1957
1969-70
1971
1979
1989
1992-93
1993-98
1994
1997
Treaty of Rome
Werner Plan – feasibility study on
monetary union
Breakup of Bretton Woods system
European Monetary System and Exchange
Rate Mechanism established
Delors Report (3 Phases)
Maastricht Treaty signed and ratified
Convergence criteria met
European Monetary Institute created
(forerunner of the ECB)
Stability and Growth Pact agreed at
Amsterdam
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
1 JANUARY 1999
EURO LAUNCH
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
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
13
EMU has delivered price stability
Inflation
9
8
7
•
6
5
•
4
3
2
1
0
•
1980s
1990s
Inflation has
come down from:
8-10% in the
1980s
3% in the 1990s
to 2% under EMU
EMU (1)
(1) EMU corresponds to euro area-12 countries and covers 1999-2007
14
EMU has delivered price stability

Graph I.5.1: Inflation in the euro area
%
4.0
3.5

3.0
2.5
2.0
1.5

1.0
0.5
0.0
1997
HICP
1998
1999
2000
2001
2002
2003
HICP excluding unprogressed food and energy
2004
2005
2006
2007
2008
Break even inflation rate indexed bonds
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
Ten-year government bond yields (in percent, annual data)
26
24
22
20
18
16
14
12
10
8
6
4
2
BE
DE
IE
GR
ES
FR
IT
NL
AT
PT
FN
LU
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
SI
16
The cost of borrowing has fallen
Long-term interest rate
12
10
8
6
4
2
0
1980s
1990s
EMU (1)
Interest rates
have
progressively
diminished and
they have
achieved levels
not seen for
several
decades
(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.
Graph I.5.7: Development of fiscal positions
LU
AT
DE
IE
ES
NL
FR
PT
FI
BE
IT
EL
-12
-9
-6
-3
0
3
% of GDP
1992
1998
2007
18
Employment has received a major boost
Employment creation
Thousands
16 million jobs were
created in the euro
area since 1999
16000
Unemployment rate
has fallen from 9%
in 1999 to an
estimated 7% in
2008
14000
12000
10000
8000
6000
4000
2000
0
1980s
1990s
EMU (1)
(1) EMU corresponds to euro area-12 countries and covers 1999-2007
20
Investment has been boosted by
sound macroeconomic conditions
Gross fixed capital formation in the euro area
%, annual average
3
2,5
2
1,5
1
0,5
0
1980s
1990s
EMU (1)
Lower cost of
financing, less
crowding out
from the public
sector, and prospects
of stability and
integrating markets
have supported
investment, which in
turn helps
productivity
23
The euro has boosted
economic 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
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 crossborder linkages (assets) during EMU. There are now 46
banks in EU with significant cross–border holdings.
26
A growing international role



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
27
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
28
Inflation indicators
and inflation perceptions

Inflation perceptions are
crucial in determining
citizens’ 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
Not all expectations have been fulfilled





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…
30
Global imbalances put exchange
rates under pressure
Euro REER and EUR-USD (index, average 1994-2007 = 100)

140
130
120
euro REER
EUR-USD index
110
100

90
80
70
ja
nv
-9
4
ja
nv
-9
5
ja
nv
-9
6
ja
nv
-9
7
ja
nv
-9
8
ja
nv
-9
9
ja
nv
-0
0
ja
nv
-0
1
ja
nv
-0
2
ja
nv
-0
3
ja
nv
-0
4
ja
nv
-0
5
ja
nv
-0
6
ja
nv
-0
7
ja
nv
-0
8
60

The euro
appreciated
significantly visà-vis the USD,
but also in
effective terms
When imbalances
are located
elsewhere in the
world (US, Asia)
Implies risk of
disorderly
developments
31
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
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
33
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
37
Enhancing the international
role of the euro
•
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
38
Conclusions
EMU remains 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 spinoffs for other policy areas where the EU aspires to exert a global leadership role.
39
Reference
Commissioner Almunia website – Speeches on EMU
http://ec.europa.eu/commission_barroso/almunia/pres
scorner/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/focuso
n12123_en.htm
•