Press Release: IMF Managing Director Strauss-Kahn Praises Euro on its 10 th Anniversary; Calls for Reforms to Maintain Success
May 15, 2008Press Release No.08/112
International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn today praised the economic stability promoted by the euro in its first decade, but also called for economic reforms—as well as a stronger European political voice—to maintain its success in the decades ahead.
Speaking at the Brussels Economic Forum 2008, he said Europeans had seen significant gains from the euro in the form of easier travel and trade, generally lower and stable inflation expectations, lower unemployment, and reduced vulnerability to financial crises. "At 10 years old, the euro area is still a club that people want to join. This is perhaps the strongest indication of its continued success and good prospects,"
Mr. Strauss-Kahn said.
But the currency has not yet been tested by very adverse conditions. "Currency crises within the euro area are a thing of the past, but the discipline that used to be exerted by bond and foreign exchange markets on individual countries has also largely disappeared. The Stability and Growth Pact has been only an imperfect substitute," he argued in his remarks, adding that the absence of a market disciplining mechanism also means that competitiveness problems and asset price booms can build up for longer periods. Financial market risks may also have increased along with financial integration, he warned.
With the right policies, however, the euro area can meet these challenges. At the national level, Mr. Strauss-Kahn said, countries can adapt fiscal policies to contain public deficits and debt while taking care of aging populations, reforming in a way that increases incentives to work in the private sector. "At the euro area and EU levels, integrated financial markets need to be matched by integrated financial stability arrangements. Crisis resolution mechanisms need to be developed further, drawing also on lessons learned in recent months," he said.
In addition, measures to address Europe's problems with enhancing productivity will need to encompass both labor and product market reforms. In the area of labor markets the focus should be on creating conditions for new jobs, rather than on protecting old ones. And in the area of product markets, service industries need to be opened to competition in the same way that industries that make tradable manufactured goods are already open.
The euro would also benefit in the years ahead from a stronger political voice. "Hopes that the euro would usher in political power for Europe have not been realized. While the ECB has established itself in a number of international fora, euro area member states have not yet made as much progress in developing and articulating a common view on broader macroeconomic issues. As a result, too little attention is paid at the global level to the euro area's economic challenges. For example, the exchange rate regime of the renminbi is treated as a U.S./China bilateral issue even though it is as important to the euro area as to the U.S.," he underscored.
In response to this challenge, Mr. Strauss-Kahn said that Europe already had very successful institutions, such as the Commission, the Parliament and the European Central Bank, and added, "I would like to see the eurogroup strengthened, and for it to assume a larger role in both the coordination of macroeconomic policies and structural reforms in the euro area, and in the communication of a euro area view to the outside world. This implies a broader willingness among euro area members than has recently been evident to put European goals and institutions above national priorities."