The Euro: Past Successes and New Challenges
Buti, Marco, van den Noord, Paul, National Institute Economic Review
The successes of the first decade of European Economic and Monetary Union are impressive, but it is fair to stress these were achieved in a relatively benign economic environment characterised by steady global growth, supportive financial conditions and fiscal windfalls associated with booms in asset markets. Although all this has come to an abrupt end with the financial crisis, there is a silver lining of fiscal stimulus being more effective in EMU than without the single currency, with offsetting exchange rate responses absent, trade multipliers stronger and the fiscal framework credible. But the financial crisis also clearly demonstrated the need for stronger coordination of national policy actions to internalise crossborder spillovers. Meanwhile, the European Commission has a major role to play in striking the right balance between short-term emergency measures and longer-term priorities. Against this backdrop, this article sheds light on the longer-run challenges and the policy agenda for meeting them.
Keywords: Monetary union; economic governance; European Union
JEL Classifications: E60; F50; H00
We are living in challenging times. The subprime crisis in the United States developed into a full-blown global financial crisis and what may well be the worst global downturn since the 1930s. World trade, stock markets and confidence have fallen at an unprecedented pace. Banking systems are under extreme stress and calls for capital injections and guarantees from governments are the order of the day. Fiscal stimulus, state aid for ailing industries and plummeting tax revenues hit public finances. It is not easy a task to take a longer-term view on European and Monetary Union (EMU). Yet this is what we have been asked to do.
This crisis may be seen as the acid test of EMU, but, if so, in a rather unexpected way. From the outset sceptics and critics have been wondering if and how the Euro Area would survive recurrent 'asymmetric shocks' affecting individual countries amid a 'one-size-fits-all' monetary policy and exchange rate. But now we are in a very different situation: a massive common shock that is hitting all member countries of the Euro Area simultaneously, albeit with a differentiated impact dependent on countries' initial conditions. We are entering uncharted territory.
The Commission's Communication and staff report 'EMU@10, Successes and Challenges After 10 Years of Economic and Monetary Union' (European Commission, 2008a) released in May 2008, on which we will draw extensively in this article, predicted such a shock to be the archetypical one in the second decade of the Euro Area. The drafters had obviously no clue that the subprime crisis would develop into one--and that soon. Yet many of the policy recommendations in the Report were based on such a predicted change in the 'typology of shocks' and therefore, in our view, are more relevant than ever.
In section 2 of this article we shall look back to the first ten years of EMU, or more precisely, the first nine years and three quarters, which started with the launch of the European single currency on 1 January 1999 and ended in September 2008 with the default of the investment bank Lehman Brothers. In section 3 we will look ahead, starting from the current crisis and then looking beyond the crisis to consider the longer-term challenges and priorities. Section 4 lays out the policy agenda for the second decade and section 5 concludes.
2. The first decade in restrospect
On 1 January 1999 the euro became the currency of 300 million people in eleven EU Member States--Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. This move established the second largest currency area in the world (after the United States), producing roughly one fifth of the world's GDP. Five other EU Member States have joined the Euro Area since its inception: Greece in 2001, Slovenia in 2007, Cyprus and Malta in 2008 and this year Slovakia, the first member of the former Soviet bloc to adopt the single currency. …