Free Email Notification
The Euro-An Emblem of the Successes and Challenges of European IntegrationRemarks by Horst Köhler
Managing Director, International Monetary Fund
On the Occasion of the Informal Meeting of the ECOFIN Council
December 14, 2001
1. I welcome this opportunity to speak to you on the eve of the final stage of the introduction of the Euro.
2. The Euro is unquestionably a major milestone of European integration, envisioned by the Treaty of Rome as leading to an "ever closer union among the peoples of Europe." The changeover to Euro notes and coins will cement an unprecedented, and so far clearly successful, monetary integration in Europe. The introduction of the Euro has created a huge common currency area, with a weight in the world economy that is rivaled only by the United States. For the international monetary system, this represents the most significant change since the breakdown of Bretton Woods. For the Euro area itself, the new common currency has done away with exchange rate uncertainty and the disruptive impact of exchange rate realignments on intra-European trade. As Laurent Fabius recently put it, the Euro has been a "magnificent shield" against turbulence in interest rates and exchange rates in a difficult global environment. And for most European countries outside the EU, Economic and Monetary Union (EMU) and EU membership has become the pole star of their orientation toward stability and reform.
3. Moreover, the European Central Bank (ECB) has lived up fully to its charter, both in the design and in the implementation of monetary policy. At its birth, the ECB's ability to deliver price stability was viewed by many Europeans with reservations, if not outright suspicion. Three years later, no one questions that the Euro area has an independent central bank fully committed to delivering price stability.
4. On the fiscal side, the Stability and Growth Pact (SGP) has succeeded in complementing and supporting the ECB's role, through stability-oriented fiscal policies. Whereas the fiscal deficit of the Euro area amounted to over 5 percent of GDP in 1995, it was in balance in 2000. Slower growth this year has led to some deterioration, but the actual and the cyclically adjusted deficits will still only be about 1 percent of GDP. And while the total masks significant differences among countries, this is still an impressive achievement in historical perspective. Moreover, the surveillance mechanism under the SGP has established a process for coordination of fiscal and other economic policy, which works but can and must be further improved.
5. The Euro has also been remarkably successful in unleashing powerful financial market forces. Europe quickly gained an integrated interbank market, underpinned by the efficient functioning of the new payment systems. The Euro has also energized Europe's wholesale capital markets, spurring the rapid growth of Euro-denominated corporate bonds, equities, and syndicated loans. For example, gross international and domestic bond issuance in Euros last year amounted to over $900 billion, more than triple 1998 issuance in the legacy currencies, and these markets were increasingly receptive to lower-rated issuers. Over the same two-year period, equity issuance in Euros more than doubled, and international syndicated lending quadrupled.
6. But these undoubted successes should not lead to complacency. The Euro has been undervalued for most of its three-year existence. One reason for this has certainly been the disappointing growth performance in the Euro area, compared with the United States. But this is obviously not simply an issue of comparing growth rates: the Euro did not strengthen either as the US economy slowed and entered a recession. Whether Europe likes it or not, many investors in Europe and abroad apparently still see the US economy as a more attractive place to invest. Or, as Alan Greenspan recently pointed out, the persistent weakness of the Euro may well reflect market expectations that productivity growth will remain stronger in the United States than in Europe in the years to come.1
7. Some of you may doubt this assertion. But the healthiest response to such a self-confident observation by an experienced observer would be to take up the challenge and prove it wrong—in particular as Europe does have some way to go to match the impressive record of employment creation in the United States over the past decade.
8. We talk rightly of the Economic and Monetary Union. But economic integration clearly is lagging behind monetary integration. This means that the EU does not yet make full use of a huge potential for stronger growth and improved competitiveness. The financial and energy sectors, to give but two examples, show that Europe is still far from realizing a single market. There is a widespread expectation that the Euro itself and the introduction of Euro bank notes and coins will be a major stimulus to structural change. And I agree that greater transparency in prices should boost competition. But this is not enough to make up for the inadequate pace, speed, and depth of structural reform.
9. At least among economists, there is a broad consensus that growth and job creation in Europe is hampered by labor market rigidities, by overstretched social security systems that take up a growing share of resources, and by high subsidies in important sectors of the economy—which also make life difficult for Finance Ministers struggling to meet the targets of the Stability and Growth Pact. Subsidies can inflict lasting and far-reaching damage:
10. To illustrate the macroeconomic cost of structural rigidities, a study in the IMF's October 1997 World Economic Outlook set out alternative growth and employment scenarios for Europe, depending on the pace of key structural reforms. Over a ten-year period, more rapid reform was expected to lead to a "growth premium" of about 5½ percentage points compared to a slow reform scenario, with the unemployment rate 4 percentage points lower by the end of the simulation period. Four years later, the evidence so far seems to confirm that Europe is not reaping the premium, but instead may be at risk of having to live with a "growth discount" as structural reforms lag behind well-publicized plans and objectives.
11. This does not mean that Europe has to copy the "American model." Social cohesion and stability can be an important factor for engaging the creativity and involvement of European citizens in shaping a more productive economy. But there is ample evidence, for example in smaller EU member states, that economic liberalization and more flexibility in labor markets can go hand in hand with rising employment and welfare for all. Europe thus has good justification to pursue its own model. But in an increasingly competitive globalized economy, Europe needs to display more ambition and political decisiveness in making this difference productive. There actually is no lack of prescriptions about what needs to be done. European leaders themselves have set a comprehensive agenda of reforms at Lisbon and Stockholm, to be undertaken both at the national level and at the level of the union. What is needed is leadership for decisive action to implement, or even better to accelerate, this agenda.
12. There can be no question that the Stability and Growth Pact is a crucial anchor for EMU. It was right for the participants to submit themselves to the discipline of keeping their budget deficits below 3 percent of GDP, and having to achieve near-balance or small surplus over the medium term. And therefore, the 3 percent criterion should be observed. But it is also right, at this juncture, to use the scope within that ceiling to let automatic stabilizers work, because the prospects for growth are still a matter of concern. The fact that some major countries are now close to the 3 percent limit makes it clear again that fiscal consolidation was not ambitious enough in good times, and that more determination in qualitative consolidation and structural reform—boosting productivity and growth—would make life a lot easier for Finance Ministers.
13. For the time being, I am not alarmed that the Euro still falls far short of matching the U.S. dollar's role as an international reserve currency. This process takes time, based on long-term performance—i.e., confidence-building—not only in terms of stability but also in terms of economic and political strength.
14. The fact that the Euro area is no longer a zone of currency turbulence is already a strong contribution to greater stability in the international monetary system. This is also an argument in favor of greater regional economic and monetary cooperation elsewhere, and Europe should take pride in being a pioneer in this kind of process. Given the economic potential of Europe, the Euro can and should develop into a major international reserve currency. And on that basis, Europe should also assume greater responsibility in global economic governance.
15. But whether we like it or not, the future role of the Euro depends also on political elements. And here I see a question mark. The Euro is a currency without a foundation in a state. I think it was the right decision for Europe to dare this unprecedented step. I know that the Heads of State who signed the Maastricht Treaty—particularly François Mitterrand and Helmut Kohl—wanted to see the Euro as an irreversible economic and political project. But can irreversibility be taken for granted if there is not a vital process of sorting out the final quality of political integration in Europe? I remain convinced that in the longer run Economic and Monetary Union and the Euro will need to be underpinned by greater political cohesion among member states. And as we know, from its inception 50 years ago, political leaders like Robert Schuman have always viewed economic integration as part of a larger vision of peace and political unity in Europe.
16. Keeping sight of this vision is all the more important at this juncture, when the EU faces the challenge of preparing for the biggest enlargement since its foundation. You as Finance Ministers know better than anyone what this challenge means, both in terms of its economic and financial implications, and in terms of the ability of the EU and its institutions to function effectively. I am sure you are aware that without achieving concrete and tangible results on institutional and financial reform, the EU risks becoming ungovernable and its policies possibly unfinanceable.
17. In my view, confidence in the Euro would benefit significantly from further clarifications about the future course of European integration, leading the Union to speak better with one voice, and resolution of the obvious tensions between enlargement and deepening of the integration process. As the report by the group "Notre Europe" headed by Jacques Delors put it: "There is no better way for today's leaders of the European Union to honor their responsibilities than through the ambitious objective of pursuing the European project to its completion...."
18. I will not attempt to predict what the structure of Europe is likely to be, say, 10 to 20 years from now. There are no existing models that are suitable for Europe to adopt one-for-one. Europe has been and will continue to be in a permanent process of "inventing itself." With the concept of subsidiarity, the EU does have the appropriate guiding principle to prevent the union from getting out of touch with its regions and citizens, and to bring out the creativity and productivity that is inherent in Europe's diversity. That said, the principle of subsidiarity needs to be complemented by a set of strong, effective, and democratically legitimized institutions entrusted with the active pursuit of the common good.
19. To conclude:
> The economic challenge—to enhance growth in Europe by more ambitiously embracing structural change and realizing the full potential of the single market for income and job creation; and
> The political challenge—to clarify the future quality of European integration and stand up to a true leadership role in the world.
20. As European leaders rise to these challenges, I am confident the Euro will prove to be a lasting success for Europe and a major contribution to the stability of the international monetary and financial system.
1 Remarks by Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System, at the Euro 50 Group Roundtable, Washington, D.C., November 2001.
IMF EXTERNAL RELATIONS DEPARTMENT