Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank – Annual Statement on the Euro Area { SEC(2006) 936 }
Date: 2006-07-27
Institutions: European Commission
Subjects: economic policy, economic reform, economic situation, euro area

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 27.7.2006 
COM(2006) 392 final/2 

CORRIGENDUM 
Page de garde, référence croisée. 
Concerne FR DE EN 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN 
CENTRAL BANK 

– Annual Statement on the Euro Area – 

{ SEC(2006) 936 } 

EN 

   EN 

 
 
 
  
 
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN 
CENTRAL BANK 

– Annual Statement on the Euro Area – 

I. INTRODUCTION 

1. 

2. 

Membership of the euro area strengthens the degree of economic interdependence 
between Member States through the existence of a single monetary policy and by 
fostering closer trade and financial ties and encouraging a closer coordination of 
economic  policies.  In  view  of  this  interdependence,  euro-area  members  face 
economic challenges which are related to, and in some cases more immediate than, 
those confronted by all Member States of the European Union (EU). 

The  Annual  Statement  on  the  Euro  Area,  and  its  companion  piece,  the  Annual 
Report on the Euro Area, present the Commission's views on the nature of these 
challenges and discuss the appropriate response of economic policies at the euro-
area and Member State level. It aims to raise awareness and stimulate a broad debate 
on  euro-area  economic  policies  and  developments;  issues  that  are  relevant  for  the 
310 million people living in the euro area. It is also salient in the context of euro-area 
enlargement, with Slovenia becoming the newest Member State to join the euro area 
on  1 January 20071.  By  informing  policy  makers  and  the  broader  public,  it 
complements  the  Commission's  analysis  of  the  euro-area  economy  in  publications 
such as the Quarterly Report on the Euro Area, Public Finances in EMU and the EU 
Economy Review. 

II. IMPROVING OUTLOOK FOR THE ECONOMY 

3. 

4. 

1 

Shaking off the sluggishness of the last five years, the euro area is experiencing a 
recovery  in  economic  activity.  Businesses  are  looking  to  the  future  with  greater 
optimism  thanks  to  strong  corporate  profits  and  low  interest  rates.  Consumers,  too, 
are  gradually  becoming  more  confident  about  the  road  ahead  with  expenditure 
expected  to  pick  up  gradually  after  several  cautious  years.  The  euro-area's  better 
performance at home is supported by a continued strong growth in external demand. 
This reflects buoyant world trade, but also improving competitiveness at the global 
level. 

Growth is going back to potential, but there are no grounds for complacency. The 
European  Commission's  latest  forecast  expects  euro-area  GDP  to  grow  by  2.1%  in 
2006 – as compared with a growth rate of 1.3% in 2005. Consumer price inflation, 
which reached 2.2% last year, partly as a result of high energy costs, is expected to 

The  current  members  of  the  euro  area  are  Belgium,  Germany,  Greece,  Spain,  France,  Ireland,  Italy, 
Luxembourg, the Netherlands, Austria, Portugal, and Finland. 

EN 

2 

   EN 

 
                                                 
remain  at  this  level.  This  year,  over  a  million  new  jobs  will  be  created  in  the  euro 
area. Nevertheless, in spite of the recent substantial decline, the unemployment rate 
still  remains  at  7.9%  of  the  labour  force  in  May  2006,  while  with  employment 
growth at 0.9% per annum, the pace of job creation in the euro area is still too slow. 
Similarly, the low rate of potential growth in the euro area, around 2% per annum, 
underlines,  inter  alia,  the  need  for  productivity-enhancing  reforms.  Redressing  this 
balance is a top priority for euro-area policies in the years ahead. 

5. 

Risks to the outlook are on the upside in the short term, but more on the downside 
over the medium term. Over the short term, job creation and the positive effects of 
past  or  ongoing  economic  reforms  in  the  euro  area  could  help  to  spur  economic 
growth by more than expected. Over the medium term, the possibility of further rises 
in  oil  prices  could  dampen  growth  conditions  in  the  euro  area.  The  risk  of  a 
disorderly  unwinding  of  global  imbalances  could  undermine  global  growth  and  the 
euro-area's  economic  recovery.  On  the  upside,  the  windfall  profits  of  oil-exporting 
countries may translate into extra demand for euro-area goods and services. 

III. SECURING SOUND MACROECONOMIC POLICIES 

6. 

7. 

8. 

Macroeconomic  policies  have  played  an  important  role  in  the  euro-area's 
economic recovery, building on the credibility of the policy framework created by 
EMU. Monetary policy helped to spur economic activity and confidence by keeping 
an  accommodating  stance,  which  led  to  historically-low  nominal  and  real  interest 
rates  in  2005,  while  maintaining  price  stability.  Fiscal  policy  has  also  been 
supportive of economic growth in the euro area. Indeed, most Member States were, 
thanks  to  previous  efforts  to  promote  fiscal  consolidation,  in  a  better  position  to 
allow the automatic stabilisers to play a broadly supportive role in recent years. 

As the economic situation improves, the macroeconomic-policy setting must evolve. 
With  respect  to  monetary  policy,  the  monetary  stimulus  given  in  recent  years  is 
gradually  being  withdrawn.  Budgetary  authorities  have  a  responsibility  to  recharge 
Europe’s budgetary batteries after the economic slowdown by improving budgetary 
balances  and  paying  off  government  debt.  Securing  the  sustainability  of  public 
finances is also essential in view of the additional budgetary pressures that will stem 
from the ageing of the euro-area's population. According to the Commission's latest 
forecast,  overall  government  borrowing  in  the  euro  area  is  expected  to  remain 
unchanged  in  2006  in  spite  of  the  improved  economic  situation,  although  less 
temporary measures imply somewhat better structural balances. To fully implement 
the preventive arm of the Stability and Growth Pact, some euro area Member States 
will need to undertake a more ambitious budgetary adjustment in 2006 and 2007 than 
envisaged in their 2005 Stability Programmes. 

Concerns  that  an  adjustment  in  macroeconomic  policy  would  cut  short  the 
economic recovery are unjustified. The real worry is that a failure to undertake such 
adjustment will undermine the conditions for continued economic growth in the euro 
area  by  postponing  policy  decisions  that  are  necessary  to  sustain  the  recovery  over 
the medium term. When it comes to macroeconomic policy, Europeans have learned 
the hard way that a strategy of wait and see will not do. In the 1970s and 1980s, a 
disregard  for  macroeconomic  stability  during  the  good  times  contributed  to  a 
crippling legacy of persistent inflation, high deficits and rising debt laying the ground 

EN 

3 

   EN 

 
for low growth and high unemployment. More recently, the favourable growth at the 
end of the 1990s was not seized upon to complete the fiscal consolidation undertaken 
in  the  run  up  to  EMU.  With  economic  growth  in  the  euro  area  experiencing  a 
sustained pick-up for the first time since 1999, the European Commission considers 
that a prudent macroeconomic policy mix delivering price stability and reduced fiscal 
imbalances  coupled  with  structural  reforms  to  improve  the  functioning  of  product, 
labour and capital markets would be the appropriate policy response. 

IV. ENHANCING ECONOMIC REFORM IN THE EURO AREA 

9. 

10. 

11. 

Winning  the  battle  for  macroeconomic  stability  in  the  euro  area  and  the  war  for 
growth  and  jobs  is  an  economic  and  political  priority.  Twelve million  men  and 
women are still unemployed in the euro area. Growth and productivity are too low, 
especially  when  the  challenges  presented  by  our  ageing  population  are  considered. 
Technological advances and globalisation are not yet fully benefiting all Europeans. 
Whereas  some  lay  the  blame  for  the  euro  area's  disappointing  growth  and 
employment performance over the last five years at the door of the single currency, 
the  real  reason  lies  in  insufficient  progress  in  product,  labour  and  capital  market 
reform. Stepping up the pace of economic reforms, fostering greater competition, and 
ensuring  macroeconomic  stability  are  central  to  the  Lisbon  partnership  for  growth 
and jobs.  

Ensuring  broad  public  support  is  central  to  the  success  of  economic  reforms. 
While  there  is  a  growing  awareness  in  Europe  of  the  need  for  macroeconomic 
stability, a few persistent myths about economic reform need to be addressed. One is 
that economic reform is about giving up a standard of living that Europeans can no 
longer afford. Although it can entail short-term adjustment costs, economic reform is 
ultimately  about  raising  Europe's  standard  of  living.  According  to  a  study  by  the 
European  Commission,  comprehensive  economic  reforms  in  product,  labour  and 
capital markets could raise potential growth in the EU from 2% to 3%. This means 
more  jobs,  higher  disposable  incomes  and  the  modernisation  of  Europe’s  unique 
welfare  state.  Another  myth  is  that  economic  reform  is  about  making  Europe  less 
European  by  importing  a  different  economic  and  social  model.  On  the  contrary, 
economic reform is about reconnecting with the European values of entrepreneurship 
and social concern that are embedded in the Treaty of Rome. 

EU leaders have recognised that economic reform is part and parcel of euro-area 
membership. The Spring European Council earlier this year again underlined that, in 
a  monetary  union,  well-functioning  product,  labour  and  capital  markets  have  an 
important role to play in raising growth potential and also in cushioning the impact 
of  economic  shocks.  Prices  and  wages  that  respond  rapidly  to  changing  economic 
circumstances  are  also  essential  for  dealing  with  unwarranted  inflation  and  growth 
differences between euro area Member States. Although all EU Member States stand 
to gain from the Lisbon reform agenda, the members of the euro area have an added 
incentive to enhance structural-reform efforts as the benefits of greater competition 
will accrue more quickly if members of a monetary union open up their markets in 
tandem. 

12. 

It  is  paramount  that  euro  area  Member  States  take  resolute  steps  on  the  path  of 
economic reform identified in the Integrated Guidelines for Growth and Jobs for 

EN 

4 

   EN 

 
13. 

the  period  2005-2008.  The  Commission's  Annual  Progress  Report  on  the  Lisbon 
Strategy,  which  was  adopted  in  January  2006,  notes  that  euro  area  Member  States 
have  shown  commitment  in  their  National  Reform  Programmes  to  achieving 
sustainable  public  finances,  bolstering  labour  productivity  and  raising  employment 
and participation rates while respecting the imperatives of sustainable development. 
Nevertheless, some euro area Member States will need to go further to ensure well-
functioning  goods,  services,  labour  and  capital  markets  for  a  dynamic  and  smooth-
functioning EMU. Key priorities in this regard include stepping up the pace of R&D 
in  the  euro  area,  promoting  greater  competition  in  services  and  network  industries, 
notably in energy, and achieving greater labour-market adaptability. 

To  ensure  a  sustainable  social  model,  achieving  higher  growth  and  more  jobs  is 
critical.  In  this  context,  reforms  pioneered  by  Nordic  countries,  which  are  often 
referred  to  as  "flexicurity",  may  represent  a  source  of  inspiration  for  euro  area 
Member States. These reforms have led to dynamic economies by promoting a high 
degree  of  adaptability  in  work  organisation  and  labour  relations  while  providing 
security for workers, inter  alia, through substantial investment in life-long learning 
and retraining and activation policies for unemployed people. Although there is not a 
single, one-size-fits-all model of "flexicurity", the principle of increasing flexibility 
where needed in the labour market whilst safeguarding certain securities for workers 
may be implemented by various means2. The experience of the Nordic countries may 
not  be  easily  transferred  to  other  Member  States.  Besides  the  fact  that  preferences 
may be different at the national level, policy makers must also give due regard to, for 
example,  the  budgetary  implications  of  such  reforms,  especially  in  countries  still 
running  significant  deficits  or  which  may  be  under  strain  from  the  budgetary 
consequences of ageing populations. 

V. ONE MONEY, ONE MARKET  

14. 

In the 1980s, Member States recognised that establishing "one market" in Europe 
provided  a  powerful  argument  for  the  creation  of  "one  money".  Now  that  one 
money  is  a  reality,  euro  area  Member  States  must  have  the  conviction  to  support 
policies  that  sustain  the  Internal  Market.  Over  the  last  twelve  months,  some  have 
challenged  this  goal  by  emphasizing  the  national  imperative  of  protecting  key 
industries  from  cross-border  competition.  But  this  prohibits  companies  from 
exploring all the possibilities offered by the Internal Market, and is to the detriment 
of  consumers  who  forego  the  benefits  of  lower  prices  and  increased  choice.  Fifty 
years ago, the signatories of the Treaty of Rome made a break from such policies by 
declaring their solemn commitment to the free movement of persons, goods, services 
and  capital,  providing  the  basis  for  Europe's  economic  prosperity  and  political 
stability in the second half of the 20th Century. The commitment to these principles 
has to be renewed by choosing economic policies that sustain the Internal Market and 
foster tangible economic benefits for the euro area and EU as a whole. 

15. 

Economic reform within Member States is necessary to deepen the Internal Market 
and sustain EMU. The Internal Market plays a key role in achieving the objective of 

2 

The  Commission  has  started  a  process  of  reflection  and  analysis  on  the  different  concepts  of 
"flexicurity" and intends to bring forward a Communication on this issue in the first half of 2007. 

EN 

5 

   EN 

 
                                                 
16. 

17. 

18. 

creating more growth and jobs. Supported by the single currency, it promotes a more 
efficient allocation of resources and offers greater trading opportunities to businesses 
and  a  wider  choice  to  consumers.  But  the  Internal  Market  can  only  achieve  its  full 
potential  if  legislation  agreed  at  the  European  level  is  effectively  implemented  and 
applied by all Member States. In this respect, the poor performance of most euro area 
Member  States  in  transposing  and  applying  Internal  Market  legislation  remains  a 
source  of  concern.  Seven  euro  area  Member  States  have  not  reached  the  1.5% 
transposition-deficit  target,  while  the  four  largest  euro-area  countries  are  the  worst 
performers among the EU-25 in terms of the number of infringement cases. To raise 
growth potential further and increase the responsiveness of the euro area to economic 
shocks,  moving  ahead  with  further  economic 
through  a  fuller 
transposition and better implementation of directives will be essential. 

integration 

Reforming  the  service  sector  is  crucial  for  the  euro  area.  The  importance  of 
promoting  greater  integration  in  the  services  sector  should  not  be  underestimated 
given that services account for around 70% of total jobs and value added in the euro-
area economy. In this respect, the full implementation of the EU Services Directive, 
following  its  adoption later this year, is crucial to foster competition and economic 
dynamism  in  Europe  and  fully  exploit  the  potential  benefits  offered  by  the  single 
currency. 

Financial market integration, in particular, offers real benefits by contributing to 
greater productivity and competitiveness and ultimately increasing the potential for 
economic growth. Removing the barriers to the creation of a Single Euro Payments 
Area  would  provide  stronger  incentives  for  trade,  consumption  and  investment 
within  the  euro  area  by  allowing  citizens  and  businesses  to  make  cross-border 
payments  as  easily,  safely  and  efficiently  as  they  already  can  within  their  own 
countries  and  subject  to  identical  charges.  Financial  market  integration  can  also 
contribute  to  the  smooth  functioning  of  EMU  by  promoting  macroeconomic 
adjustment  and  increasing  the  resilience  of  the  euro  area  to  external  economic 
shocks. Economic studies suggest that EU financial market integration could increase 
GDP by between 0.5 and 1.1% over time. 

The EU and euro area must build on the achievements of the euro and the EU's 
Financial  Service  Action  Plan.  This  calls  for  consolidating  existing  legislation  on 
financial  services  and  ensuring  that  Internal  Market  rules  are  implemented  on  time 
and  enforced  effectively.  Further  action  will  be  required  to  open  up  Europe's 
fragmented retail financial services, for example, by making it easier for consumers 
to  shop  around  for  the  best  savings  plans,  mortgages,  insurance  and  pensions. 
Another  major  challenge  over  the  next  five  years  is  to  develop  a  pan-European 
approach  to  financial  market  regulation  and  supervision  to  keep  pace  with  the 
increasing cross-border integration of the financial industry. While this is essentially 
a  positive  –  and  even  necessary  –  development  to  enhance  the  economic  growth 
potential of the EU, it also means that national authorities need to be willing to adapt 
and adjust to the new financial landscape. In this context, the continuing tendency by 
Member  States  to  add  unnecessary  provisions  when  transposing  directives  into 
national law must be curtailed if the full benefits of an integrated market for financial 
services are to be realised. 

19. 

In  order  to  generate  sustainable  improvements  in  productivity  growth,  the  euro 
area needs to generate and, above all, absorb and exploit knowledge. A high degree 

EN 

6 

   EN 

 
20. 

21. 

of competition and  favourable  framework conditions for companies to innovate are 
essential  in  this  respect,  including  an  integrated  and  efficient  framework  for  the 
protection  of  intellectual  property  rights.  Businesses  need  to  enjoy  a  friendly 
regulatory  framework,  have  sufficient  supply  of  highly-qualified  personnel  and  to 
have access to affordable sources of financing. In addition, more resources need to be 
invested in R&D and innovation and, in particular, Europe-wide economies of scale 
should  be  exploited  by  encouraging  private  spending  in  R&D  and  projects  and 
activities with significant cross-border spillovers. R&D expenditures in the euro area 
stand at around 2% of GDP, thus significantly short of the EU-wide objective of 3%. 
All  euro  area  Member  States  have  set  targets  with  respect  to  rising  R&D 
expenditures when submitting their National Reform Programmes or thereafter. 

Reforms  that  aim  at  increasing  labour  utilisation  and  human  capital  will  also 
improve  the  adaptability  and  facilitate  the  mobility  of  the  euro-area's  workforce. 
Moreover,  measures  that  focus  on  the  matching  of  labour  demand  and  supply,  for 
example  through  an  upgrading  of  public-employment  services,  can  be  expected  to 
improve  adjustment  to  shocks.  Although  some  euro  area  Member  States  have 
undertaken reforms in this field, measures have generally targeted flexibility of work 
contracts  for  new  entrants  and  people  facing  particular  difficulties  in  the  labour 
market  through  fixed-term  contracts,  job  agencies,  public  employment  schemes, 
while leaving unchanged some aspects of the legislation on permanent employment 
that may act as a barrier to labour-market adjustment. 

In  order  to  improve  the  supply  of  highly-skilled  labour  across  the  euro  area,  an 
upgrading of education and training systems in many Member States is necessary. 
Efforts should concentrate on upgrading the quality of human capital and the skills 
base of the workforce. Youth education attainment levels are significantly lower in 
the euro area than in the rest of the EU. Policies are also required to develop coherent 
and comprehensive life long learning strategies, which will help to promote flexible 
learning pathways from an early stage, a significant decline in early school-leaving, 
to  increase  completion  rates  at  upper  secondary  level,  and  to  improve  the  quality, 
relevance  and  attractiveness  of  vocational  education  and  training.  The  quality  of 
tertiary education needs to be improved to increase the contribution of universities to 
social  and  economic  innovation.  Excellence  should  be  pursued  through  the 
networking  of  higher  education  institutions  with  research  and  technological  centres 
and  enterprises.  An  efficient  use  by  Member  States  of  available  EU  funding,  in 
particular the European Social Fund and Education and Training Programmes, would 
contribute to meeting these goals. 

VI. A DYNAMIC AND SMOOTH FUNCTIONING EMU 

22. 

The persistence of cross-country growth and inflation differences in the euro area 
deserves  attention.  In  2005,  for  example,  the  gap  between  the  fastest  and  slowest 
growing  countries  in  the  euro  area  stood  at  4½  percentage  points  and  the  gap 
between  the  highest  and  lowest  inflation  rates  stood  at  3 percentage  points.  As 
discussed  in  the  Annual  Report  on  the  Euro  Area,  growth  and  inflation  differences 
are a normal feature of monetary unions and can reflect a variety of benign factors, 
including differences in population growth and the effect of catching-up by less-rich 
Member States. Cyclical differences have been substantially reduced in recent years, 
thanks to a closer alignment of cycles and the reduction of policy errors due to better 

EN 

7 

   EN 

 
23. 

macroeconomic-policy coordination. This is a positive development for a monetary 
union. However, the decreasing importance of cyclical factors means that structural 
factors  now  account  for  a  high  share  of  the  growth  differences  that  remain.  In 
particular, it appears that some Member States may be adjusting to economic shocks 
and long-term economic developments only very sluggishly. Unless policies change, 
this  means  that  the  gulf  between  the  euro-area's  fast  and  slow  growing  Member 
States  may  become  entrenched  over  time,  and  that  inflation  differentials  may 
translate  into  a  serious  loss  of  competitiveness,  which  would  require  a  more 
significant adjustment the more action is delayed. 

Getting  to  grips  with  growth  and  inflation  differences  requires  a  mix  of  sound 
budgetary policies and economic reforms. The action to be taken is identified in the 
Integrated  Guidelines  for  Growth  and  Jobs  for  the  period  2005-2008.  Maintaining 
prudent  budgetary  policies,  particularly  during  the  good  times,  will  allow  the 
automatic budgetary stabilisers to cushion the economic shocks that drive growth and 
inflation differences. Economic reforms will also help prices and wages to react more 
rapidly to changing economic circumstances and favour a more efficient allocation of 
resources.  Most  Member  States  need  to  step  up  the  pace  of  reforms  to  foster 
competition and raise productivity in the market for goods and services. Policies that 
deepen the Internal Market in the area of services, such as financial markets, could 
also help by promoting a closer alignment of national business cycles. Furthermore, 
some  Member  States  may  need  to  take  steps  to  ensure  that  the  process  of  wage 
determination pays sufficient regard to price stability, trends in productivity over the 
medium-term and differences across skills and local labour-market conditions. 

VII. THE EURO AREA'S GLOBAL ROLE AND CHALLENGES 

24. 

The  euro  is  a  key  global  currency,  providing  benefits  to  the  euro  area  and 
underlining  the  need  to  pay  due  regard  to  international  financial  developments. 
The launch of the euro has led to a seismic shift in international financial markets. 
Today, the euro area represents about one sixth of world GDP and a fifth of world 
trade and the euro accounts for a substantial and increasing part in the denomination 
of the international debt market (31.5 % versus 44 % for the US dollar by mid-2005). 
The  euro  also  accounts  for  a  significant  proportion  of  international  bank  liabilities 
and  foreign  exchange  transactions.  For  example,  since  1999,  the  euro  has  been  the 
second currency of denomination of loans by euro-area banks to non-bank borrowers 
outside the euro area, with the share above 39% in the first quarter of 2005 (against 
44%  for  the  US  dollar).  The  euro  is  also  widely  used  to  quote,  invoice  and  settle 
external  trade  transactions  between  the  euro  area  and  third  countries  and,  in  some 
cases,  between  third  countries.  The  euro  also  plays  an  important  role  as  an 
international foreign exchange reserve currency, accounting for about 25% of world 
reserves, compared with 66% for the US dollar. 

25. 

The unprecedented size and duration of global imbalances is a key challenge for 
the world economy and the euro area. In 2005, the United States posted the largest 
current account deficit in its history – equivalent  to  6.4%  of  US  GDP  and  1.5%  of 
world GDP. The deficit is mostly financed by capital inflows from Japan, China and 
other  East  Asian  countries,  and  recently  also  from  the  Middle  East  (which  profits 
from  oil  revenue  windfalls).  Although  financial  markets  have  been  relatively 

EN 

8 

   EN 

 
26. 

27. 

28. 

sanguine  about  this  situation,  the  unprecedented  size  and  duration  of  global 
imbalances means that they cannot go on indefinitely. 

A disorderly unwinding of global imbalances could have a severe, negative effect 
on the growth of the world economy and international financial stability. Although 
the euro area has a roughly balanced current account, it would not be immune to the 
effects  of  such  a  crisis.  A  disorderly  adjustment  of  global  imbalances  could  affect 
euro-area trade due to changes in exchange rates and global demand. It would affect 
the  value  of  assets  held  abroad  by  euro-area  residents.  Business  confidence  could 
also be severely hit, particularly in the event of a severe output contraction in deficit 
regions. 

Tackling  global  imbalances  in  an  orderly  manner  requires  a  gradual  shift  in 
global demand from regions with current-account deficits to regions with current-
account  surpluses.  The  United  States  can  play  its  part  by  increasing  private  and 
in  particular 
public  savings.  Stability-oriented  macroeconomic  policies,  and 
sustainable public finances, could make an important contribution in this regard. In 
East  Asia,  the  challenge  is  to  reduce  excess  savings.  A  transition  to  more 
domestically-generated  growth  through  improved  social-security  systems  and 
financial market development would help to reduce global external imbalances. This 
would  also  support  East  Asia’s  longer-term  development.  As  domestic  demand 
accelerates  in  these  countries,  their  savings  (and  current-account)  surpluses  will  be 
reduced. 

Economic  reforms  in  Europe  will  help  the  euro  area  to  adjust  to  potentially 
adverse global developments and to play a part in the orderly correction of global 
imbalances.  Better-functioning  product,  labour  and  capital  markets  would  make 
Europe more attractive to investors even if they would be unlikely to result in large 
changes  in  the  current  account,  because  both  demand  and  supply  would  rise.  Also, 
only  a  fraction  of  a  change  in  the  euro-area  current  account  would  appear  as  an 
improvement  in  the  US  current  account.  Nevertheless,  economic  reforms  remain 
desirable  from  the  point  of  view  of  improving  the  euro-area's  performance,  as  they 
increase  growth  potential  and  strengthen  resilience  to  possible  adverse  economic 
shocks.  This  issue  is  explored  in  greater  detail  in  the  Annual  Report  on  the  Euro 
Area. 

VIII. INCREASING THE EFFECTIVENESS OF COORDINATION 

29. 

Sustaining  the  economic  recovery  and  promoting  macroeconomic  stability  and 
structural  reforms  for  a  dynamic  and  smooth-functioning  EMU  requires 
commitment  by  Member  States  and  strong  leadership  at  the  euro-area  level.  The 
Spring  2006  European  Council  recognised  the  special  importance  of  enhanced 
structural reforms for Member States that share the euro and stressed the necessity of 
effective policy coordination within the euro area. Alongside the key role played by 
ECOFIN,  the  Eurogroup,  which  brings  together,  on  an  informal  basis,  the  Finance 
Ministers  of  the  euro  area,  the  Commission  and  the  ECB,  is  helping  to  promote  a 
euro-area wide consensus on shared economic-policy challenges. Euro area Member 
States  could  benefit  more  from  the  Eurogroup  meetings  by  engaging  in  a  more 
thorough discussion of macroeconomic policies and a closer follow-up of structural 
reforms  in  the  euro-area  Member  States,  particularly  where  these  are  important  for 

EN 

9 

   EN 

 
30. 

the  functioning  of  EMU.  Steps  could  also  be  taken  to  increase  the  effectiveness  of 
economic policy coordination in the euro area, for example, by eventually switching 
to  an  EU  Semester  for  budgetary  surveillance,  coordinating  national  budgetary 
calendars among euro area Member States, and ensuring greater coherence between 
macroeconomic policies and structural reforms. 

The growing importance of the euro as a global currency and the challenges posed 
by,  inter  alia,  global  imbalances,  underlines  the  need  for  the  euro  area  to  show 
leadership on the world stage. The Commission recognises  that some progress has 
been made in this respect in recent years. The appointment of a Eurogroup President 
for a two-year term of office in 2004 has, for example, brought greater stability to the 
external  representation  of  the  euro  area.  Nevertheless,  the  scarcity  of  common 
positions  among  euro-area  authorities  and  the  lack  of  firm  commitments  from  its 
Member  States  on  issues  of  shared  strategic  significance  have  made  it  difficult  for 
Europe  to  show  global  economic  leadership.  The  European  Commission  supports, 
and  is  ready  to  contribute  to  a  better  coordination  of  EU  external  representation  in 
international financial institutions and fora. 

IX. CONCLUSIONS 

31. 

Sharing  a  single  currency 
implies  confronting  common  challenges  and 
responsibilities.  This  Annual  Statement  on  the  Euro  Area  has  highlighted  the  most 
salient challenges for the euro area. The improved outlook for the euro-area economy 
calls  for  a  decisive  adjustment  of  macroeconomic  policies,  notably  by  accelerating 
budgetary consolidation. In the microeconomic domain, enhanced structural reforms 
are essential for raising productivity and promoting growth and jobs. They are also 
important for the smooth functioning of EMU, as prices and wages are adjusting too 
slowly  to  economic  shocks  in  some  Member  States.  At  the  same  time,  euro-area 
members  have  a  strong  incentive  to  deepen  the  Internal  Market,  as  increased 
economic integration will help to reap in full the benefits of the single currency and 
to  respond  rapidly  to  economic  developments.  In  the  external  domain,  the  growing 
importance  of  the  euro  as  a  global  currency  and  the  challenges  facing  the  world 
economy  underline  the  need  for  a  more  prominent  role  on  international  issues. 
Meeting  these  challenges  and  fulfilling  responsibilities  requires  commitment  by 
Member  States  and  measures  to  improve  the  effectiveness  of  economic  policy 
coordination. 

EN 

10 

   EN