Klaus Liebscher: EMU and globalization - chances and challenges
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, at the Central
Council of ELEC, Vienna, 1 June 2007.
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Ladies and Gentlemen!
It is both a privilege and a pleasure for me to address this distinguished audience on the
topic "EMU and Globalization - Chances and Challenges".
European Monetary Union (EMU) and the euro, which seemed to be very ambitious projects
of European integration some decades ago, meanwhile have become a remarkable
contribution both to the stability and the international competitiveness of the European Union,
and in particular of the euro area. One of the success factors of this milestone of European
integration was the strong political will to follow the "stability architecture of EMU", which
rests on three pillars: a monetary policy oriented to price stability, a fiscal policy geared
towards sound public finances (Stability and Growth Pact) and structural policies designed to
foster competitiveness and sustainable economic growth (Lisbon Agenda). So far, EMU and
the euro can be seen as one of the EU's most important strategic responses to the chances
and challenges of a globalized world.
Earlier this year, we celebrated the 50th anniversary of the Treaty of Rome, which
established the European Economic Community (EEC). The day the Treaty was signed,
March 25, 1957, is considered the birthday of the European Union, which today unites
around 490 million people in 27 countries. And in today's euro area, about 317 million people
in 13 countries benefit from a low inflation environment and stable inflation expectations, a
high degree of confidence in their currency and moderate interest rates - all elements of a
favorable economic environment conducive to investment and business.
Since 1999, we have experienced a number of important shocks to the global economy, such
as the Y2K challenge, substantial oil price increases, the ups and downs of the euro
exchange rate, the boom and the burst of the equity market bubble, global imbalances and
the clouds of war and terrorism. Amidst all of this, the Governing Council of the European
Central Bank (ECB) has guided inflation expectations in a manner consistent with price
stability and thus provided a reliable anchor for the euro-area economy, while the euro has
sheltered euro area financial markets against those shocks.
Not least because of the growing international use of the euro, the stability culture formed by
the single currency has already bestowed positive benefits on the non-euro area EU Member
States and many Eastern European, Middle Eastern and African countries. Meanwhile,
nearly one-third of all international debt securities are denominated in euro, and the euro
accounts for about 25% of global foreign exchange reserves. Since its introduction, the euro
has become the second most widely used currency in the world. Moreover, with 646 billion
banknotes and coins in circulation, the euro has already overtaken the US dollar.1
In a global perspective the EU and the euro area are unique. No other model of
supranational cooperation or agreement has achieved such a high level of integration. In the
classification of the IMF, the euro area is the 3rd largest economic area in the world in terms
of real GDP (15%), after the US (20%) and developing Asia (27%).
Moreover, following a few years of economic sluggishness, the euro area is now becoming
an ever larger player in the global economy, thereby contributing to an urgently needed
rebalancing in global economic growth. Economic activity, in fact, accelerated to 2.7% last
year, and since the start of Monetary Union real GDP growth has averaged 2.1%. The ECB
staff projections from March 2007 see growth ranging between 2.1% and 2.9% in 2007 and
between 1.9% and 2.9% in 2008.
Unemployment has declined significantly, from 9% in 1999 to 7.2% (March 2007), a
development which is particularly welcome. 12 million new jobs have been created since
1999.
On average, inflation has stood at 2.1% since the start of EMU, which shows that inflation
expectations are firmly anchored. Hence, price stability has created a favorable environment
for investment and growth in the euro area. Concerning the outlook for prices, the ECB staff
projects annual inflation to average between 1.5% and 2.1% this year and between 1.4% and
2.6% in 2008.
Risks to the medium-term outlook for price stability remain on the upside, relating in
particular to stronger than currently expected wage developments in a context of ongoing
robust growth in employment and economic activity. Given the vigorous monetary and credit
growth in an environment of already ample liquidity, the Governing Council of the ECB will
continue to be strongly vigilant in order to ensure that risks to price stability over the medium
term do not materialize.
A price stability-oriented monetary policy is a necessary precondition for sustainable dynamic
growth and employment, but it is by no means the only precondition. Monetary policy needs
to be supported by sound public finances, ambitious structural reforms and a competitive
economic framework.
It is important to understand that unsustainable fiscal policies may put the entire euro area at
risk. For instance, higher risk premiums in response to unsustainable policies in one Member
State could spill over to other euro-area countries. Euro-area membership thus also means
compliance with a stringent regulatory framework, the Stability and Growth Pact.
We are aware that structural improvements are only part of the reason for the current
improvement in euro-area fiscal balances, from -1.6% in 2006 to an expected -1.0% in 2007.
Thus, it is essential that any budgetary leeway granted by the current favorable economic
environment be used for lasting budgetary consolidation in order to prepare for challenges
such as population ageing and to create room to maneuver for future economic downturns.
In addition, structural polices are needed to ensure that countries can flexibly react to
asymmetric shocks, as the single monetary regime makes adjustments to asymmetric shocks
a painful and drawn-out process.
In 2000 the European Council adopted the Lisbon Agenda. In broad terms, the Lisbon
strategy aims to "make Europe, by 2010, the most competitive and the most dynamic
knowledge-based economy in the world". In 2005, after the mid-term review, European
policymakers renewed their commitment to the ambitious goals. Even though a number of
Member States have achieved significant progress in several areas, much remains to be
done. This includes more effective and efficient investment in knowledge and innovation and
making labor and product markets more flexible. At the end of the day, only dynamic
economies can sustain modernized yet generous welfare systems in Europe.
This brings me to further challenges facing the EMU in the years to come, most notably the
further enlargement of the euro area and the EU.
The new Member States to date have succeeded in transforming their economies from
centrally planned systems to market economies. Substantial progress has been achieved in
the areas of property rights and privatization as well as capital and trade liberalization. As
these countries have anchored their institutional structures to the EU, they are viewed as
increasingly secure places for investing and doing business in general. Moreover, the euro
anchors monetary stability in the region, often directly, for instance through the European
Exchange Rate Mechanism ERM II. Currently, six of the 12 new Member States are
members of ERM II: Cyprus, Estonia, Latvia, Lithuania, Malta, and Slovakia.
Full monetary integration will be the ultimate goal of all new Member States depending on
their progress of sustainable convergence. However, the application of the convergence
criteria for the new Member States must not be more, but also no less strict than for the
current euro area countries. Moreover, when adopting the euro, quality must not be
compromised for the sake of speed.
Slovenia became the 13th member of the euro area at the beginning of this year. In February
2007, Malta and Cyprus submitted their requests for convergence assessment by the ECB
and the European Commission. If given approval by the European Council, both countries
would adopt the single currency at the beginning of 2008.
The anchoring effect of the euro also applies to many other countries located in the
neighborhood of the euro area. Tightening financial and institutional links is an integral part of
the EU's Stabilization and Association process with the countries of the Western Balkans.
The merits of the process are assessed regularly. Bulgaria and Romania joined the EU
on1 January 2007, with some more countries to follow in the future.
As a small open economy, Austria is highly exposed to the changing global economy and
globalization. Open economies face greater challenges than less open economies in
adjusting to a more integrated world and to the greater exposure to real and financial
volatility that comes with integration. Large capital flows can complicate the task of achieving
sustainable growth, low inflation and financial stability. Austria has never shied away from the
challenges of globalization. Not in the period prior to EU and EMU membership, when
Austria followed a fixed exchange rate regime, which became a role model coined as
stability-oriented exchange rate policy, nor later on when the euro replaced the Austrian
Schilling.
All in all, we can safely say today that Austria's EU membership has contributed not only to
solid economic growth, a significant consolidation of public finances and price stability, but
also to structural changes which have securing Austria's position in a highly competitive
environment. Thus, over the past decades, Austria has become a leading small open
economy in Europe. This achievement is borne out by GDP per capita figures which place
Austria third in the euro area, right behind Luxembourg and Ireland in 2006. Austria's goods
exports-to-GDP ratio grew from about 24% in 1995 to 43% in 2006 (goods and services
exports-to-GDP ratio: 58% in 2006), and foreign direct investment has increased from 5% to
23% of GDP in 2005. In addition, average (CPI) inflation fell from approximately 2.7% in the
decade before EU membership to some 1.7% thereafter and, at 4.8% in 2006, the
unemployment rate is one of the lowest in the EU, also due to a successful "social
partnership". The employment rate of 15-64-year olds is one of the highest in Europe.
Austria benefited not only from EU membership and the Single Market, but also from the fall
of the Iron Curtain in 1989 and from the transition and integration process in Central and
Eastern Europe, including Southeastern Europe. FDI in the region and bilateral trade have
intensified very markedly. Bilateral trade with Central and Eastern Europe has tripled since
1993 in real terms.
Austrian companies in general, and Austrian banks in particular, were quick to identify
market opportunities in Central, Eastern and Southeastern Europe and have established a
considerable presence. With an average market share in banking sector assets of almost
25%, Austria's banks are among market leaders in this region.2 More than one-third of the
profits of the six largest Austrian banks already come from this region. As Austrian banks
continue to move into the southeast and east, their exposure is broadly diversified, which is
intended to contain risks. At the same time, the Austrian authorities closely monitor potential
challenges involved. Stress tests indicate that the banks' exposure is manageable and
potential contagion effects on Austrian banks should be very limited.
Having mentioned some positive effects for Austria, we must concede that big changes
rarely only create winners. In balance, however, EMU and the euro have undoubtedly
shielded the Austrian economy well from possible adverse effects of globalization. Moreover,
backsliding into protectionism would be like traveling back in time.
From the narrow focus, let me again widen the perspective to the world economy.
The increasing emergence of new players on the globalized stage has contributed to the very
impressive recent expansion of the world economy. Yet, this dynamic growth has also
created economic challenges, such as surging commodity prices and significant current
account imbalances. Recently, global growth appears to have become somewhat more
even-footed, as growth in Japan and the euro area has been picking up.
The economic upswing in the euro area can be attributed at least in part to improved
economic structures and is based on the stability-oriented framework of EMU. The
Governing Council of the ECB will continue to support this upswing by acting vigorously to
maintain price stability.
Moreover, the international competitiveness of the euro area has to be improved. With
structural reforms still ahead, the euro area economy seems vulnerable to an abrupt
unwinding of global imbalances in the US and Asia. Today, there is large consensus in
Europe that lower growth in the EU is largely structural in nature. In order to improve its
position in the global economy, we have to work on reducing growth differentials, in particular
vis-à-vis the US. We should respond with policies designed to use opportunities of
globalization, particularly to increase productivity and growth, while minimizing unavoidable
adjustment costs. The right answer to globalization and international competition is therefore
to continue and intensify the structural reform process. Standstill would be detrimental.
In this context, let me mention the moribund Doha round, which has even cast doubt on the
future of the World Trade Organization (WTO). Although calls for protectionist measures to
counter the increasing competition from Asian economies should be taken seriously, I stand
on the side of free trade and believe that protectionist pressures need to be firmly resisted.
There is no doubt that globalization has worked well for the people of Europe. After nearly
nine years of experience, Economic and Monetary Union and the euro have proven to be
Europe's most forceful strategic responses in a changing global economy. It is said that:
"Change is inevitable; growth is optional." In a globalized world, Europe has chosen to grow.