The introduction of the single European currency has been a
historic landmark, with important positive consequences for the
12 participant countries. For more than five years now, the European
Union has had a single currency and a monetary policy conducted
by the Eurosystem, consisting of the European Central
Bank (ECB) and the national central banks of the euro area.
The euro has been firmly and credibly established as a stable
currency. The euro area has witnessed a period of moderate inflation
and low long-term interest rates. In almost all member countries,
market interest rates have been at their lowest levels since
World War II.
Now, however, there are three key
priorities, which are particularly challenging
at the present juncture. These
are the recent enlargement of the European
Union, the need for higher growth
and employment by means of structural
reforms and the necessity of implementing
an original form of fiscal surveillance
in a single currency area.
The entry of ten new member countries
into the European Union on May 1,
2004 is a cause for profound rejoicing. It
is an emblematic illustration of the victory
of political democracies over totalitarianism.
It is a living demonstration of
the efficiency of market economy rules.
And it gives the founding fathers of the
European Union the most extraordinary
reward they could have dreamed of 50
years ago.
What would Jean Monnet have said
if we had told him in the 1950s what his
original vision would have achieved
today? The six original member countries
of the European Community have
become 25, and we not only have a single
currency for 306 million people but also
a single market for 450 million European
producers and consumers. Postwar reconciliation
between Germany, France,
Italy and the Benelux countries has
evolved into a close union between most
of Western Europe and large parts of
Eastern Europe. Perhaps, he would have
commented that we have succeeded in
an extraordinary historical achievement,
but that we shall be even more surprised
in the future. As he wrote in his memoirs,
"the historical evolution of United
Europe is unpredictable, because nobody
can say which new bold changes will be
triggered tomorrow by the effects of
today's changes."
Whatever new achievements are
likely in the future, the entry of the ten
new member states, with 75 million people,
has increased the EU population by
about 20 percent, to more than 450 million.
The economic weight of the new
members is lower. Their total Gross Domestic
Product currently represents, at
market exchange rates, around 5 percent
of that of the 15 older members. But
their entry will bring important economic
benefits. As past enlargements
have shown, both new and old member
states will benefit from a wider union, in
particular from an expanded internal
market. Trade integration has already
reached a high level in the acceding
countries, with the European Union accounting
for 67 percent of their total exports
and 60 percent of their imports.
The new member countries have
made remarkable progress in recent
years. They have achieved significant
macro-economic stabilization and structural
reforms. The eight new member
states in Central and Eastern Europe,
which formerly had centrally planned
economies, have been able to establish
functioning market economies. There
remain, however, great challenges.
The key tasks are to advance real
convergence while safeguarding and,
where necessary, enhancing macroeconomic
and financial stability. It will
be of the utmost importance to lock in
inflation at low levels, preserve the
soundness of the financial sector, correct
unsustainable external imbalances, in a
few cases, and renew efforts toward fiscal
consolidation.
The gap in per capita income between
the old member states and most
of the newcomers remains large, and in
some countries the process of catching up
in real incomes has been slower than
originally expected. The per capita income
of the acceding countries as a
whole is less than half the EU average.
Given the low starting point for most
countries, increasing prosperity and living
standards will be a major policy objective
for quite some time. In view of
that strategic objective, it must be
stressed that prudent macro-economic
policies will be essential to support and
facilitate progress toward higher GDP per
capita levels.
Accession to the European Union is
expected to improve the new members'
prospects for economic convergence
with their more prosperous partners.
Full integration into the internal market
will increase growth prospects and foster
the catching-up process, mainly through
trade and foreign direct investment, together
with lower interest rates. The new
member states will have to implement
and enforce the whole corpus of EU
laws and regulations, which they have
adopted in the course of recent years
(except, for the time being, where transitional
arrangements apply).
The European Union itself has also
been taking serious steps to make enlargement
work. In the field of central
banking, the Eurosystem has been engaged
since 1999 in a constructive and
ever more intense dialogue with the central
banks of the new member states.
Since the signing of the EU Accession
Treaty in 2003, the governors of the national
central banks of the acceding
countries have been participating as observers
in the General Council
1 of the
ECB. The new voting modalities agreed
for the General Council will allow the
ECB to maintain efficiency and timeliness
of decision-making once the euro
area is expanded.
The new member states are expected
to adopt the single currency some time
in the future indeed, as members, they
are committed to striving toward eventual
adoption of the euro. The main aim
of the Eurosystem in this process will be
to ensure that the monetary integration
of each new member state proceeds
smoothly and in line with treaty provisions.
In view of this challenge, at the
end of 2003 the Governing Council
2 of
the ECB adopted a policy position paper
on exchange rate issues relating to the
acceding countries.
The Treaty foresees that the new
member states will at some point join
the Exchange Rate Mechanism II (ERM
II), which will link their exchange
rates to the euro within certain fixed
margins. To ensure a smooth participation
in ERM II, however, the new
members will have to undertake major
policy adjustments for example with
regard to price liberalization and fiscal
policy and follow credible fiscal consolidation
paths before joining the
mechanism.
As these countries differ greatly in
terms of economic structure, exchange
rate and monetary regimes, and in the
degree of nominal and real convergence
already achieved, no single path towards
the euro can be identified or recommended
for all of them. Various strategies
may be feasible, provided they are
based on sound economic reasoning,
conform to the existing institutional
framework and contribute to the high
level of sustainable convergence that is
essential when joining the euro area.
Progress toward the adoption of the euro
will thus need to be assessed on a case by -
case basis.
At the same time, the principle of
equal treatment will continue to apply
throughout the entire process of monetary
integration. Adopting the euro is an
irrevocable decision and it is of the utmost
importance that countries first fulfill
the required convergence criteria, not
only nominally but also in a sustainable
manner, as required by the Maastricht
Treaty. There will be no additional criteria,
but the existing criteria will not be
relaxed either.
Structural reforms will be required in
both new and old member states. In
March 2000, EU leaders meeting in Lisbon
set the European Union a new
strategic goal for the next decade, namely
"to become by 2010 the most competitive
and dynamic knowledge-based economy
in the world capable of sustainable economic
growth with more and better jobs
and greater social cohesion."
The ECB very much welcomes and
supports the impetus given by the Lisbon
summit meeting to the economic
reform process, embodied in the so called
Lisbon agenda. The Bank also welcomes
the message of determination and
confidence reinforcing the validity and
relevance of the Lisbon process endorsed
by EU leaders at their summit meeting
in spring 2004. Four years after the
launch of the Lisbon agenda, however,
the pace of reform needs to be stepped
up significantly to meet the ambitious
targets set in Lisbon.
There are several reasons why the
ECB is inviting member states to pursue
structural reforms. Such reforms increase
employment opportunities and
real income, and thus support the sustainability
of social security systems. It is
widely recognized that structural reforms
in labor, product and capital markets
are needed to improve the prospects
of the euro area. Structural reforms permit
a higher level of sustainable long run
economic growth by increasing the
supply of production factors and improving
the efficiency with which they
are used.
Such reforms also enhance the capacity
of the economy to cushion
macro-economic shocks. The more flexible
labor, product and financial markets
are, the lower the employment and
income losses in response to adverse domestic
and global economic developments
will be. Moreover, given that
demographics in the euro area are less
dynamic than in other economies, including
the United States, we need even
more improvements in terms of higher
productivity growth, rising labor force
participation and declining structural
unemployment. The case for decisive
structural reforms is therefore pressing.
Structural reforms are generally associated
with changes in an economy's
long-term balance between supply and
demand and in the relative prices of
goods and services. The transition from
pre-reform to post-reform equilibrium
conditions normally takes time, and during
this period some resistance and uncertainty
may occur. For this reason the
implementation of structural reforms
requires strong leadership, a great deal of
courage and tireless efforts to explain the
process to the general public. It is very
important to make clear to the public
that there will be significant benefits if
governments, Parliaments and social
partners deliver the reforms.
In capital markets, structural reforms
should aim at allowing a more effective
allocation of savings toward the
most rewarding investment opportunities.
Since the introduction of the euro,
the pace of capital market reform has
been impressive. This includes policy induced
reform, such as the Financial
Services Action Plan initiated by the European
Commission in the spring of
1999 and the development of national
legal frameworks governing the issuance
of mortgage bonds. Reform also covers
market-led initiatives, such as the development
of electronic trading platforms
and consolidation of the clearing and
settlement infrastructure. This has been
possible owing to a cohesive and effective
interplay of free competition, coordinated
action by all market participants
and policy enforcement by public authorities.
But these reforms need to be
continued and completed.
Much progress has also been made
in increasing competition in product
markets. Substantial barriers to free
competition, however, continue to exist,
particularly preventing the integration of
services markets and effective competition
in network industries. Fostering
competition in these areas should
also help to lower prices. Further regulatory
reforms should be accompanied
by a sustained reduction in state aid
particularly if it takes the form of economically
questionable
ad hoc and sector-
specific measures. This will help to
smooth the restructuring process in
product markets by promoting the entry
of new players.
In the end, such reforms will enhance
innovation and the efficient allocation
of resources, while cuts in
subsidies will reduce the tax burden.
These product market reforms will contribute
to prosperity across the euro
area, and they will help to address the
largest current economic and social challenge
in Europe, namely high unemployment
and insufficient employment rates.
Thus far, implementation of labor
market reforms has been uneven in the
euro area. Some countries have already
significantly lowered unemployment.
Others are lagging behind and uncertainty
prevails about their future steps.
In many countries, it is important to enhance
the flexibility of labor contracts
and the setting of wages to enhance employment
growth in a lasting manner.
During the second half of the 1990s,
efforts by some euro area countries to
improve the functioning of their labor
markets appear to have helped to foster
employment growth and promote a
more job-intensive output growth compared
to the late 1980s. In particular,
labor market reforms implemented in
the second half of the 1990s seem to
have benefited those groups facing particular
challenges when trying to enter
the labor market, such as women, the
youngest and oldest job-seekers and the
least educated.
Reforms are also needed to allow
wages to reflect regional and sectoral
productivity differences more accurately.
This will make the whole economy more
flexible and better able to absorb economic
shocks. These measures must go
hand in hand with product market reforms
and reforms of pension and health
care systems. Such reforms are essential
to contain expenditures on pensions and
health care. They will be needed not only
to reduce non-wage labor costs and increase
incentives for job creation but also
to ensure the sustainability of the social
security systems.
Europe has been very bold in establishing
a single currency. The remarks
made by American friends during the
1990s were easy to sum up: "You are putting
the cart before the horse. You should
first have set up a political federation,
with a federal government and a federal
budget. Then you could have introduced
a single currency." Two main arguments
were advanced. First, without a significant
federal budget, the policy mix
would be very erratic. It would depend
on the random behavior of the different
national fiscal policies of the member
countries of the Monetary Union. Second,
without such a federal budget it
would be impossible to weather asymmetric
shocks hitting one particular
member economy.
These two economic arguments are
perfectly valid and would have been sufficient
to discourage the creation of the
euro had we not set up a profoundly
original instrument of national fiscal
policy surveillance. It is this instrument,
the Stability and Growth Pact, that guarantees
the coherence and the consistency
of European Economic and Monetary
Union (EMU) as a single currency area
without a political federation.
A number of other considerations
are worth mentioning. In particular, a
fiscal policy that is set according to rules,
and is adhered to, adds to macroeconomic
stability by providing economic
agents with expectations of a predictable
economic environment. This
reduces uncertainty and promotes
longer-term decision-making, notably
investment decisions, and economic
growth. In addition, sound fiscal policies
can contribute to lower risk premiums
on long-term interest rates and thus support
more favorable financing conditions
for the entire economy.
The fiscal rules set up under the
Maastricht Treaty and the Stability and
Growth Pact provide an important
framework to ensure the necessary fiscal
discipline. The rules are useful to help
individual countries preserve budgetary
discipline and sustainable public finances,
which is the best contribution
fiscal policy can make to macroeconomic
stability and growth. In a
monetary union like EMU, with a single
monetary policy and national fiscal policies,
there are two additional arguments.
Without such rules, small countries
might be tempted to pursue expansionary
fiscal policies that could threaten
sustainability, because their fiscal imbalances would only have a marginal effect
on the common interest and exchange
rates. For big countries, on the other
hand, lack of fiscal discipline may affect
the common interest and exchange rates,
creating negative consequences for the
other participants.
Compliance with the fiscal framework
of the Maastricht Treaty and the
Stability and Growth Pact guarantees the
sustainability of public finances and the
operation of automatic stabilizers to correct
economic problems, while respecting
as much as possible the fiscal
sovereignty of member states.
Could we rely on financial markets
to impose sufficient discipline on budgetary
policy? In principle, growing concerns
about the sustainability of a
country's debt should be reflected in the
risk premiums that the country would
have to pay for its borrowing. It would,
however, be unrealistic and very risky to
rely on financial markets alone. Experience
suggests that financial markets react
only with a substantial lag to deterioration
in a country's fiscal situation, but
the reaction can then be quite drastic,
coming too late for a timely correction,
worsening the crisis and placing a large
burden on all participants.
In view of this, the ECB's Governing
Council has expressed its regret that EU
Finance Ministers in November 2003 rejected
the European Commission's recommendation
to invoke procedures
penalizing countries with excessive
deficits. We also respect the Commission's
decision to seek legal clarification
of the excessive deficit procedure in the
European Court of Justice. It would
surely be wrong to declare the Stability
and Growth Pact dead. On the contrary,
it is very much alive.We do not believe
that it is advisable to amend the text of
the Pact. It would be possible to improve
its implementation without actually
changing the wording. This could be
achieved, in particular, by better analyzing
structural imbalances as well as by
strengthening incentives for sound fiscal
policies during periods of strong economic
growth.
The introduction of such policies
would also strengthen economic confidence
and support demand in the short
run. Indeed, confidence among European
citizens is vital for a stronger economic
recovery and sustained growth.
The ECB's Governing Council recognizes
that the current low level of consumer
confidence is partly due to the
debate about the appropriate path for
fiscal policy and structural reform in
many countries in the euro area. For this
reason, too, progress in implementing
the necessary structural reforms, and
more determined efforts to establish
sound fiscal positions over the medium
term, are the keys to stronger confidence.
The ECB, its Governing Council,
and the full body of the Eurosystem are
doing their utmost to enable Europe to
cope with its present challenges. Our
best contribution, in conformity with
our mandate, is to ensure price stability
and to be credible in doing so, not only
on a short to medium term basis but
also on a medium to long term basis. In
fulfilling this role efficiently, the ECB is
today making a major contribution to
European prosperity, growth and job
creation. It is doing so in three ways. It is
consolidating a low level of medium and
long term market rates for the 306 million
citizens of the euro area. It is preserving
the purchasing power of
households, which is a necessary condition
for consumption growth. And it is
augmenting the confidence of economic
agents, which is so important at the
present juncture in Europe.
Jean-Claude Trichet became President of the European Central Bank in 2003.
He previously served two terms as Governor of the Banque de France, and two
terms as Alternate Governor of the
IMF. He also served two years as the Governor of the World Bank, and was a member
of the Board of Directors of the Bank for International Settlements. He was
earlier Director, Head of International
Affairs, and Head of the Development Aid Office at the French Treasury Department.
He has been an advisor to the Minister of Economic Affairs and to the President
of France on industry,
energy and research.
1 The General Council consists of the President, Vice President and Governors
of national central banks. It acts primarily as an advisory board. It contributes
to the collection of statistical
information, the preparation of the ECB's annual report, among other projects.
It will exist as long as there are EU member states that are not part of the
euro area.
2 The Governing Council is the decision making body of the ECB. It is comprised
of the President, Vice President, the other Members of the Executive Board and
the Governors of national central
banks of the euro area. It formulates monetary policy in the euro area free
from political interference, ensures performance of the Eurosystem, and establishes
implementation guidelines.
go to top
