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EMU AT 10 : WHAT JOAQUIN ALMUNIA THINKS OF THE EUROZONE.

Information has begun to filter through on the contents of the European Commission's communication on the tenth anniversary of Economic and Monetary Union (EMU). The definitive text will not be finalised until 5 May, and adoption is scheduled for 7 May. In a document presented to his colleagues on 9 April, EU Economic and Financial Affairs Commissioner Joaquin Almunia devoted himself to demonstrating the advantages of the creation the EMU in general and the eurozone in particular. The commissioner reviews the challenges that the EMU will have to face in the next ten years. Finally, Almunia suggests three ways forward to be considered alongside these challenges.

LONG LIST OF SUCCESSES

As already stressed in the Commission's communication adopted for the fifth anniversary of the changeover to the euro in 2007, the single currency's advantages and benefits are numerous. Despite the current inflationary overheating, which has been seriously worrying the EU for the last few months (see Europolitics 3512), the creation of the EMU has nonetheless accentuated price stability. Inflation decreased from 8-10% in the 1980s to 3% in the 1990s and has stood at around 2% for the last ten years. Budget consolidation has also improved considerably: the average deficit in member states stands at around 0.7% (with strong variations). The cost of borrowing has also decreased significantly (long-term interest rates decreased from almost 12% on average in the 1980s to less than 4% since the creation of the EMU). On the job front, the single currency also registers excellent results, since 16 million jobs have been created since 1999 and the unemployment rate has fallen from 9% in 1999 to 7% in 2008. The EMU has also boosted cross-border economic activity: trade flows within the eurozone grew from 27.5% in 1999 to 31% in 2006. Regarding direct investments, they grew from 20% to 35%. As numerous economists suggest, the Commissions confirms that the EMU has truly boosted the integration of financial markets. As for the foreign perspective, now 50% of bills sent by eurozone companies are made out in euro.

ASCAPEGOAT

Despite this glowing report, Almunia nonetheless admits that "not all expectations have been reached". The potential growth rate in the eurozone remains "very low". Productivity growth was lower in Europe than in the USA. Growth and inflation differentials remained persistent in the eurozone. Generally speaking, "structural reforms have been less ambitious and less frequent in the eurozone than in the EU". As for banking and financial markets, they have remained fragmented. Now, the Union must confront more pressing risks: global imbalance (high depreciation of the dollar against the euro), the consequences of the financial crisis (excessive volatility in exchange rates, inflationist pressures, fall in confidence indexes, social impact, economic slowdown, etc). Almunia, moreover, dedicates a chapter to the decline in the euro's image with the public at large. Though the causes are known (abusive price increase in certain sectors), the commissioner believes that the euro has been used as a "scapegoat" to mask "the bad economic results reflecting unsuitable policies at national level". This criticism is currently being debated within the college, as the word scapegoat' is judged to be excessive by some commissioners.

REINFORCING ECONOMIC GOVERNANCE

Unsurprisingly, Almunia makes the (implicit) bet that the foundations of the single currency are in no way threatened but that the euro will have to confront great challenges which have already been loosely described here and there (impact of globalisation, ageing of the European population and migration, climate, energy and food challenges). To take up these challenges, the commissioner suggests some remedies regarding better economic governance (overall not innovative and mostly quite generous).

The Commission firstly considers that a large part of the euro's future success will come from member states through the reinforcement of budget surveillance both at national and at multilateral level. Almunia believes that a framework would need to be established to discuss national policies in the eurozone (from the point of view of the prior annual budget policy debate launched in Berlin in 2007). Without further elucidating this thought, Almunia stresses the need "use all instruments provided by the treaty to promote greater coordination of economic policies".

The Commission's communication should also dedicate a chapter to the reinforcement of the euro's international role. For Almunia, the euro's growing role will bring yet more advantages. In exchange, the eurozone will have more responsibility on the international stage and will be more exposed to risks.

By and large, the commissioner believes that it is Ecofin which will remain the suitable decision-making forum for economic policy even though the enlargement of the eurozone will progressively inverse the political order. In any case, theCommission intends to play a key role.

EUROGROUP'S SPECIFIC ROLE

Within the Eurogroup, the development of a "joint agreement" has been planned concerning macroeconomic subjects, for example as regards inflation turnover rates and exchange rates. The Commission also wants to promote a joint structural reforms agenda along the lines of specific recommendations formulated by the Commission for the eurozone in the framework of the revised Lisbon Agenda. The Commission suggests - without offering further details - improving dialogue between the European Central Bank, the European Parliament and social partners and wants to further promote the eurozone's interests on the international stage.

The DG ECFIN document is available at www.europolitics.info > Search > 223902
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Publication:European Report
Article Type:Organization overview
Geographic Code:4E
Date:Apr 21, 2008
Words:885
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