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 2007 – [SEC(2007) 550]
Date: 2007-05-03
Institutions: European Commission
Subjects: economic growth, economic policy, economic reform, economic situation, euro area

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.5.2007 
COM(2007) 231 final 

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 2007 – 

[SEC(2007) 550] 

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I. INTRODUCTION 

1. Earlier this year, European leaders endorsed a solemn declaration in Berlin to mark the 
50th Anniversary of the Treaty of Rome and reaffirmed their commitment to a project that 
has  paved  the  way  for  peace  and  prosperity  in  Europe.  Economic  integration  is  central  to 
this  European  success  story.  A  gradual  elimination  of  economic  barriers  over  the  last  half-
century  has  helped  to  raise  living  standards,  ensure  a  fairer  deal  for  consumers,  create  new 
opportunities  for  investors  and  foster  closer  economic  and  political  ties  between  Member 
States. As the Berlin declaration says, "the common market and the euro make us strong". 

2.  Economic  and  Monetary  Union  (EMU)  is  the  most  advanced  stage  of  European 
economic  integration  to  date  and  it  will  continue  to  be  an  important  driver  of  ever  closer 
union in the coming years. For the 318 million people that use the euro on a daily basis, the 
single currency is a tangible symbol of the shared successes and challenges facing Europeans. 
Since  the  euro  was  launched  in  1999,  EMU  has  delivered  a  high  degree  of  macroeconomic 
stability  and  encouraged  closer  trade  and  investment  ties  and  deeper  financial-market 
integration in the euro area. During this time, the euro has emerged as a major global currency 
and is now widely used as an anchor or reference currency in foreign-exchange arrangements 
and  as  an  official  reserve  currency.  These  and  other  benefits  from  EMU  should  represent 
strong incentives for countries to sign up to the euro. 

3. Encouraged by Slovenia's adoption of the euro on 1 January 2007, other Member States 
are stepping up their preparations to enter the euro area. Earlier this year, Cyprus and Malta 
submitted formal requests to the European Commission and the ECB to prepare Convergence 
Reports  on  the  basis  of  which  the  Council  of  Ministers  will  decide  whether  these  Member 
States can join the euro area on 1 January 2008. 

4. There is a growing awareness that being a member of the euro area means confronting 
common challenges and responsibilities. At this year's Spring European Council, EU leaders, 
in their annual assessment of the renewed Lisbon Strategy, endorsed a new set of euro-area 
specific  recommendations  in  the  context  of  the  Integrated  Guidelines  for  Growth  and  Jobs. 
The  recommendations  emphasise  the  need  for  prudent  fiscal  policies,  improvements  in  the 
quality of public finances and greater adaptability in the markets for goods and services. They 
also  call  for  a  better  alignment  of  wage  and  productivity  developments  and  an  accelerated 
pace of financial-market integration. 

5. The Annual Statement on the Euro Area, and its companion piece, the Annual Report on 
the Euro Area, present the Commission's views on how euro-area countries can meet their 
shared  responsibilities  and  challenges.  They  are  also  designed  to  inform  the  debate  on  the 
euro-area's economic performance and the functioning of EMU. The Annual Statement on the 
Euro  Area  also  serves  as  a  contribution  to  the  European  Commission's  dialogue  with  the 
European Parliament on euro-area economic policy. 

II. THE EURO-AREA'S RENEWED ECONOMIC VIGOUR 

6. Since last year's Annual Statement on the Euro Area, the euro-area's economic recovery 
has gone from strength to strength. The euro-area grew by 2.7% last year, its fastest growth 
rate  since  2000,  and  well-above  its  long-term  average.  Employment  growth  accelerated  to 
around  1.5%  in  2006  in  the  euro  area,  yielding  an  increase  of  close  to  2  million  new  jobs. 

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Inflation  remained  around  2%  in  2006  but  it  came  down  towards  the  year's  end  as  energy 
prices eased.  

7. The euro-area's positive growth performance partly reflects the current cyclical upturn 
but it may also show that structural reforms are beginning to take effect. There are signs of 
an  increased  resilience  to  global  disturbances.  The  employment  effect  of  recent  growth  has 
been  particularly  intense.  In  December  2006,  the  unemployment  rate  dropped  to  7.5%,  its 
lowest level in 15 years. Labour productivity growth in the euro area averaged 1% in 2006, 
compared with an annual average rate of 0.7% during the previous decade, and several factors 
indicate  that  this  rebound  could  be  more  than  just  cyclical  in  nature.  Overall,  these 
developments suggest that Member States are being rewarded for their efforts to, inter alia, 
increase  labour  participation  rates,  boost  R&D  and  innovation,  develop  human  capital  and 
create a more attractive and competitive business environment. They also show the benefits of 
a  macroeconomic  framework  that  is  designed  to  enhance  stability  and  promote  greater 
certainty about medium-term economic prospects. 

8.  Domestic  demand  is  an  important  driver  of  economic  growth  in  the  euro  area.  This  is 
reflected  in  the  continued  buoyancy  of  investment  spending  and  the  revival  in  household 
spending  thanks,  in  part,  to  greater  consumer  confidence  and  the  euro-area's  strong 
employment  performance.  Euro-area  exports  also  made  a  positive  contribution  to  growth 
despite  less  favourable  economic  conditions  in  some  of  its  key  trading  partners  and  the 
appreciation of the euro. 

9. The prospects for continued economic growth in the euro area are more favourable in 
2007  than  they  have  been  for  many  years.  Domestic  demand  is  expected  to  maintain  its 
relatively  strong  momentum,  with  investment  benefiting  from  ongoing  favourable  financial 
conditions,  improved  corporate  balance  sheets,  the  need  for  replacement  investment, 
productivity  gains  and  a  positive  outlook  for  profits.  Global  economic  growth  is  likely  to 
moderate  somewhat  but  euro-area  exports  are  well  placed  to  continue  their  strong 
performance. 

10. As ever, there may be economic surprises around the corner. A disorderly correction of 
global  imbalances,  exchange-rate  tensions  and  geo-political  developments  are  among  the 
factors that could lead to lower-than-expected growth in the euro area. Conversely, a stronger 
labour  market  performance  and  a  more-benign-than-expected  impact  of  ongoing  fiscal 
consolidation efforts could lead to higher-than-expected growth. 

III. PUTTING THE MACROECONOMIC HOUSE IN ORDER 

11.  Macroeconomic  policy  needs  to  be  on  a  sound  footing  for  the  euro-area's  economic 
recovery  to  continue.  Since  December  2005,  the  European  Central  Bank  has  been 
withdrawing the stimulus provided in recent years in view of the medium-term risks to price 
stability. Alongside this,  the process of  wage determination in euro-area  members must pay 
sufficient  regard  to  price  stability,  trends  in  productivity  over  the  medium-term  and 
differences across skills and local labour-market conditions. Wages in the euro area continued 
to grow moderately in 2006 in spite of price developments and strong output and employment 
growth.  Although  significant  cross-country  differences  remain,  overall  wage  growth  in  the 
euro  area  appears  to  have  been  dampened  since  the  1990s,  thus  reducing  the  potential  for 
second-round effects induced by the previous oil price increases. In the budgetary sphere, it is 
essential  that  Member  States  seize  the  opportunity  created  by  the  economic  upturn  to 

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complete  the  consolidation  of  their  budgetary  positions  before  the  end  of  the  decade.  Such 
fiscal consolidation would also enhance the euro-area's overall fiscal-monetary policy mix. 

12. Euro-area members  have  made a concerted effort to correct excessive budget deficits. 
On 30 January 2007, the Council decided that the excessive deficit procedure against France 
should  be  closed  as  its  budget  deficit  remained  below  3%  also  in  2006.  In  Germany,  the 
economic recovery has helped to bring the budget deficit below 3% of GDP one year ahead of 
schedule.  In  Greece,  there  has  been  a  strong  correction  in  2006  which  has  led  the  budget 
deficit  to  remain  at  2.6%  of  GDP.  Portugal  and  Italy  have  also  recorded  a  significant 
structural  improvement  in  2006,  masked  in  the  case  of  the  latter  by  the  effect  of  one-off 
measures. In the euro area as a whole, the quality of the adjustment has increased, with less 
reliance on one-off measures, and a decrease in public expenditure. Overall, the combination 
of  the  consolidation  efforts,  notably  in  countries  with  excessive  deficits,  and  improved 
economic developments, leading to substantially higher-than expected revenues, has reduced 
the euro-area's budget deficit to 1.6% of GDP in 2006, down from 2.5% of GDP in 2005. 

13. Member States, especially those that are in the process of correcting excessive deficits, 
must  press  ahead  with  budgetary  consolidation  to  meet  their  medium-term  budgetary 
objectives. Some Member States planned little or no improvement in their structural balances 
in  their  2006  Stability  Programmes,  even  though  the  Stability  and  Growth  Pact  calls  for 
budgetary  consolidation  that  goes  beyond  the  benchmark  of  0.5%  of  GDP  during  the  good 
times. France, for example, in its programme, plans to improve its structural balance by just 
0.3  percentage  points  of  GDP  in  2007.  Germany  in  its  stability  programme  plans  no 
improvement  of its  structural balance in 2008 even though "good times" are forecast. Some 
euro-area  members  that  have  reached  their  medium-term  objectives  are  at  risk  of  a  pro-
cyclical fiscal stance in 2007, notably in the Netherlands where a significant deterioration is 
expected  this  year  even  though  "good  times"  are  forecast.  This  situation  calls  for  renewed 
efforts: Member States that fail to make sufficient progress in spite of the favourable growth 
may not achieve a sufficient safety margin against breaching the 3% of GDP deficit threshold 
if and when the pace of economic growth slows, thus repeating the policy mistakes of the late 
1990s. At the same time the reappearance of structural deficits in countries already in balance 
or in surplus should also be avoided. 

14. On 20 April 2007, the Eurogroup adopted orientations for fiscal policies in euro area 
Member  States,  recalling  the  commitment  to  actively  consolidate  public  finances  in  good 
times and to use unexpected extra revenues for deficit and debt reduction. With a view to 
improving the coordination of fiscal policies, euro area Finance Ministers discussed national 
budgetary  developments  in  2007  and  the  preliminary  policy  outlook  for  2008  and  their 
implications  for  the  euro  area.  Firstly,  they  committed  to  build  on  the  better-than-expected 
budgetary outcomes in 2006 and to pursue more ambitious budgetary targets than those set in 
the  2006  Stability  Programmes.  Secondly,  they  agreed  to  implement  budgets  for  2007  as 
planned,  avoiding  expenditure  overruns,  and  using  unexpected  extra  revenues  to  reduce 
government deficit and debt. Thirdly, it was agreed that fiscal policy plans for 2008 should be 
carefully  designed  so  as  to  accelerate  adjustment  towards  the  medium-term  budgetary 
objectives for Member States which have not reached it and for those which have reached it to 
avoid fuelling macroeconomic imbalances. 

15. The euro-area's strong growth performance presents a golden opportunity for all euro-
area  members  to  put  their  fiscal  houses  in  order.  On  the  revenue  side,  there  is  a  strong 
economic case for using revenue windfalls – i.e. from unexpectedly high economic growth – 
to  reduce  government  borrowing.  On  the  expenditure  side,  the  experience  of  some  Member 

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States  suggests  that  reductions  in  government  spending  tend  to  provide  a  more  durable 
approach to deficit reduction. After the Stability and Growth Pact has successfully supported 
Member States in the reduction of the excessive deficits, the functioning of its preventive part 
should  support  Member  States  in  eliminating  deficits  altogether  in  order  to  deal  with  the 
looming challenges. Following the orientations of the Eurogroup on fiscal policy would mean 
that most euro area members would achieve their medium-term budgetary objectives in 2008 
or 2009 and all of them should aim for 2010 at the latest.  

16. Securing sound public finances will help euro-area members to address the economic 
implications  of  ageing  populations.  Dramatic  changes  in  the  demographic  structure  of 
European  populations  mean  that  the  old  age  dependency  ratio  is  expected  to  increase  from 
25% at present to more than 50% by 2050 in most Member States. Some of them have already 
taken  significant  action  to  address  this  challenge.  If  the  necessary  measures  are  not  taken 
soon,  ageing  will  have  a  substantial  budgetary  impact  in  several  euro  area  countries.  Age-
related public expenditure in the euro area, which includes spending on pensions, healthcare 
and long-term care, is projected to increase on average by around 4% of GDP by 2050 under a 
no-policy  change  scenario.  This  underlines  the  need  for  all  Member  States  to  achieve  and 
maintain  sound  budgetary  positions  over  the  long-term  in  order  to  reduce  significantly  debt 
ratios and contain the subsequent projected increases in expenditure. This need is particularly 
acute in Member States, such as Greece and Portugal, which run the risk of posting double-
digit increases in age-related public expenditure over the next decades. 

17. Safeguarding the long-term sustainability of public finances in the euro-area requires a 
three-pronged  policy  approach.  Firstly,  Member  States  should,  as  already  noted,  step  up 
efforts to consolidate their fiscal positions and meet their medium-term budgetary objectives 
under  the  Stability  and  Growth  Pact.  Secondly,  the  implementation  of  further  structural 
reforms  under  the  Lisbon  Strategy  will  help  to  foster  higher  productivity  growth  and  job 
creation  thus  countering  the  economic  impact  of  ageing  populations.  Thirdly,  reforms  to 
pensions  and  health  care  systems  and  investment  in  improving  years  of  life  spent  in  good 
health have the potential to improve government finances over the long term. 

18.  Ensuring  the  quality  of  public  finances  is  also  important,  as  recognised  in  Member 
States' National Reform Programmes and the EU's Integrated Guidelines for Growth and 
Jobs. A key challenge for Member States is to meet budgetary targets while ensuring that tax 
and expenditure systems promote an efficient allocation of resources. Adapting tax structures 
and directing government expenditure towards items such as education and R&D can increase 
productivity growth and growth potential and bring important social and economic benefits in 
terms  of  innovation  and  human  capital  accumulation.  Such  policies  can  also  help  to  put 
Member States' public finances on a more sustainable footing and improve the functioning of 
social models within the euro area.  

19.  Political  commitments  to  sound  public  finances  should  be  reflected  in  national 
budgetary  rules  and  institutions.  Research  shows  that  Member  States  with  well-designed 
numerical  expenditure  and  revenue  rules  usually  maintain  a  stronger  grip  on  government 
borrowing.  As  discussed  in  this  year's  Annual  Report  on  the  Euro  Area,  Member  States 
should,  when  designing  these  rules,  pay  careful  attention  to  their  coverage  and  the 
stabilisation  function  of  fiscal  policy.  Effective  fiscal  institutions  at  the  national  level  also 
have a role to play. For instance, parliamentary budget committees can support the conduct of 
sound fiscal policies and, thus, reinforce the preventive arm of the Stability and Growth Pact. 

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IV. SECURING SUSTAINED ECONOMIC GROWTH 

20. As the euro area reaps the fruits of the Lisbon Strategy, it must also sow the seeds of 
further  structural  reform.  As  emphasised  by  EU  leaders  at  this  year's  Spring  European 
Council  with  the  adoption  of  specific  recommendations  for  the  euro-area,  the  Lisbon 
economic reform agenda is critical for boosting growth and jobs in all 27 Member States but 
it has an added dimension for the countries that share the single currency. In the first place, 
economic reforms will reduce inflationary bottlenecks in the euro area and help to sustain the 
economic  recovery.  In  addition,  well-functioning  product,  labour  and  capital  markets  are 
essential  for  ensuring  a  smooth  adjustment  to  country-specific  economic  disturbances  under 
EMU.  

21.  The  slow  adjustment  of  some  euro-area  members  to  country-specific  disturbances  is 
proof that economic reforms need to go further. A comprehensive study of adjustment by the 
European  Commission  finds  that  although  the  process  of  competitiveness  adjustment  in  the 
euro  area  is  dynamically  stable,  some  Member  States  are  adjusting  too  slowly  to  country-
specific  developments.  This  slow  competitiveness  adjustment  has  contributed  to  the 
persistence  of  cross-country  growth  and  inflation  differences  in  the  euro  area,  thereby 
exacerbating the costs of policy inaction at the national level.  

22. The Internal Market is indispensable not only for the economic prosperity of the EU but 
also  for  the  smooth  functioning  of  EMU.  A  dynamic  and  mature  Internal  Market  can 
potentially  encourage  a  closer  alignment  of  national  business  cycles  and  speed  up  the 
adjustment  of  prices  and  wages  to  economic  shocks.  A  key  priority  for  euro-area  and  EU 
Member States alike is to ensure that the Internal Market is equipped to meet the opportunities 
and challenges of the 21st Century. When the Single European Act entered into force 20 years 
ago, a fairly homogenous European economy was strongly reliant on the mass manufacture of 
standardised  products.  In  today's  world  of  globalisation,  new  technologies  and  EU 
enlargement, an increasingly heterogeneous European economy is more and more reliant on 
knowledge-based and service sectors with a greater degree of product differentiation.  

23.  At  the  request  of  EU  leaders,  the  European  Commission  has  prepared  a  vision  paper 
which calls for the single market to adapt to new realities.1 The crux of the Commission's 
argument  is  that  to  deliver  more  tangible  benefits  for  European  citizens,  entrepreneurs, 
workers and consumers the single market needs to go beyond measures to tackle cross-border 
legal obstacles to business. Today's policies to deepen the single market must be more impact-
driven, more effective and more globally-oriented. The Commission will present a full review 
of the single market with concrete proposals for policy action in the autumn. 

24. In the area of financial market, the euro area should ensure leadership in stepping up 
the pace of integration at EU level, adding to the impetus already given by the euro. Euro-
area members have a particular need for financial integration as a means of boosting growth 
potential  and  facilitating  adjustment  to  economic  shocks.  The  Member  States  that  share  the 
single  currency  are  now  already  benefiting  from  highly  integrated  markets  for  derivatives, 
corporate bonds and money. The project to create a Single Euro Payments Area (SEPA) will 

1 

'A  Single  Market  for  Citizens',  Communication  from  the  Commission  to  the  Council,  the  European 
Parliament, the European Economic and Social Committee and the Committee of the Regions, Interim 
Report to the 2007 Spring European Council, Brussels, 21.2.2007, COM(2007) 60 final. 

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also enable consumers, companies and other economic actors to make and receive payments 
in  euro,  whether  between  or  within  national  boundaries  under  the  same  basic  conditions, 
rights  and  obligations,  regardless  of  their  location.  Further  integration  would  provide  more 
opportunities  for  cross-border  risk  sharing  and  favouring  a  more  efficient  allocation  of 
resources across the area. Areas where progress should be sought include for example cross-
border  clearing  and  settlement  transactions,  euro-denominated  government  bond  and  bills 
markets  –  still  segmented  on  the  supply  side  –  and  mortgage  markets  at  the  wholesale  (i.e. 
funding) and retail level. 

25. The Commission's White Paper on Financial Services Policy in 2005-2010 provides a 
road map for further financial market integration in the EU and euro area. A timely and 
coordinated implementation and rigorous enforcement of the various legislative measures of 
the  EU  Financial  Service  Action  Plan  at  the  Member  State  level  is  of  a  considerable 
importance. There is also a need for continuous consultations, ex-post evaluation of existing 
EU  policies  and  rules  and  impact  assessments  for  new  proposal.  Alongside  these  measures, 
further  efforts  will  be  required,  inter  alia,  to  ensure  that  EU  supervisory  arrangements  are 
well  adapted  to  an  integrated  European  financial  market  from  the  perspective  of  efficiency 
and stability.  

26. Labour-market reforms are bearing fruit in terms of employment and participation, but 
more can be done to facilitate adjustment in relative wages across sectors, promote labour 
participation and facilitate sectoral and geographical mobility. Flexibility-enhancing labour-
market  reforms,  heightened  global  competition  and  a  reduction  in  the  oil  intensity  of 
production  and  the  strength  of  the  euro  exchange  rate  are  among  the  factors  that  may  have 
altered  the  process  of  wage  formation  in  the  euro  area.  This  development  notwithstanding, 
wage  moderation  remains  essential  for,  inter  alia,  prolonging  the  economic  recovery, 
anchoring inflation expectations and facilitating competitiveness adjustment. 

27. In the area of product market reform, euro-area members have also made progress but 
there is a need to further enhance competition, innovation and dynamism. The adoption of 
the  Services  Directive  in  December  2006  is  a  major  achievement.  Ensuring  its  rapid 
implementation is a key priority and the euro area would benefit from coordinated efforts to 
achieve  this  goal.  In  its  assessment  of  Member  States'  National  Reform  Programmes  for 
Growth  and  Jobs,  the  Commission  noted  that  all  euro-area  members  had  taken  steps  to 
promote better regulation and encourage R&D and the diffusion of innovation but called for 
more  ambitious  measures  to  tackle  low  productivity  in  the  services  sector.  Further  steps  to 
enhance competition, including by better exploiting the potential of public procurement, and 
improvements  to the business environment  (e.g. access to financing, restrictive employment 
protection legislation) would allow consumers to benefit more widely from productivity gains 
and  the  best  performing  firms  in  the  euro  area  to  grow  rapidly.  Innovation  is  another  area 
where there is a need to focus efforts. The challenges in high tech sectors and the persistent 
innovation deficit require the creation of a truly competitive Internal Market for services and 
an  Internal  Market  for  innovation.  A  clearer  and  more  efficient  Intellectual  Property  Rights 
system is currently lacking and the European Research area is still too fragmented.  

28. Following the Commission's proposal to establish a new Energy Policy for Europe, EU 
leaders agreed at this year's Spring European Council on targets to combat climate change 
and boost energy security and competitiveness. These goals will be reinforced by, inter alia, 
further  efforts  to  create  a  true  internal  market  for  energy  and  gas  and  the  development  of  a 

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common external policy approach in support of energy policy. The EU's new energy policy, 
while paramount for all EU Member States, is relevant for the euro-area in view of possible 
implications for, inter alia, current-account and price developments.  

V. INCREASING GLOBAL INTERDEPENDENCE  

29.  The  euro  area  is  part  of  an  increasingly  interdependent  global  economy.  A  notable 
development in 2006 was the euro's rising value against key trading partners. Over the year, 
the  euro  appreciated  by  around  11%  against  the  US  dollar  and  around  12½%  against  the 
Japanese yen. This strong performance has continued in the early months of 2007, leading in 
effective terms the exchange rate of euro area to just above its long-term level. Exchange rates 
should  reflect  economic  fundamentals  and  excess  volatility  and  disorderly  movements  in 
exchange rates are undesirable for economic growth. In emerging economies with large and 
growing  current  account  surpluses,  especially  China,  it  is  desirable  that  their  effective 
exchange rates move so that necessary adjustments will occur.  

30. Widening global imbalances are a warning sign for the global economy. For the year as 
a whole, the US current account deficit widened to USD 857 billion, the largest in its history. 
In Japan, emerging Asian economies and oil exporting economies in the Middle East, current 
account  surpluses  continued  to  increase.  China's  global  current-account  surplus  increased  to 
USD 238.5 billion, exceeding its record in 2005. The euro-area's current account is close to 
balance but Europe would not be immune from the effects of a disorderly unwinding of global 
imbalances.  Global  imbalances  remain  an  important  challenge,  and  while  they  are  showing 
some signs of stabilising, helped by some rebalancing of domestic demand growth, ensuring 
their orderly correction remains a priority. This will be important to avoid potential risks to 
financial stability and to minimise the risk of protectionist reactions. 

31. There is a now a broad consensus among policy makers on how to tackle the problem of 
global imbalances. This has emerged as the outcome of the multilateral consultation process 
launched  in  April  2006  by  the  IMF,  in  which  the  euro  area  has  actively  participated  along 
with four other major global players. This process of consultation on global imbalances has 
delivered positive outcome and the IMF should continue to monitor progress. The actions that 
key  participants  have  agree  to  implement  are  (i) increased  national  saving  in  the  USA  with 
measures  to  reduce  the  budget  deficit  and  promote  private  saving,  (ii) further  structural 
reforms  in  Japan,  including  fiscal  consolidation;  (iii) greater  exchange  rate  flexibility  in  a 
number of surplus countries in emerging Asia, in particular China, (iv) efficient absorption of 
higher  oil  revenues  in  oil-exporting  countries,  and  (v) implementing  structural  reforms  to 
sustain  the  growth  potential  and  boost  domestic  demand  in  the  euro  area.  The  euro  area  is 
demonstrating its commitment to press ahead with further structural reforms. The priority now 
is for the other relevant actors to implement the agreed policy agenda in a timely manner in 
line with the IMF's multilateral and bilateral consultations.  

VI. PROJECTING A STRONG VOICE ON THE GLOBAL STAGE 

32. Since last-year's Annual Statement on the Euro Area, several steps have been taken to 
improve the external representation of the euro area. EU Finance Ministers have asked EU 
Member States' IMF Executive Board Representatives to elect a longer-term chair. Details of 
these  recommendations  have  been  agreed  upon  but  are  not  yet  implemented.  It  was  also 
agreed to appoint a Commission official in the office of a euro area IMF Executive Director, 

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but,  here  too,  implementation  has  not  been  achieved  yet.  Furthermore,  the  EU  and  Member 
States have agreed to support the Commission's participation in the G7 on all items within its 
competence.  Euro  area  representatives,  including  the  Commission,  have  also  participated  in 
all  phases  of  the  IMF  multilateral  consultation  during  the  last  year  and  euro  area  common 
positions and terms of references have been developed prior to the G7 and IMFC meetings.  

the  euro-area's  external  representation 

33.  Further  steps  are  needed  before 
is 
commensurate  with  its  growing  weight  in  the  global  economy.  A  stronger  external 
representation would also allow the euro area to show leadership on issues of its competency, 
such as global imbalances. While the best option for representation of the euro area in the key 
international  financial  fora  and  institutions  remains  the  creation  of  a  single  euro-area  chair, 
there  are  obstacles  to  achieving  this  in  the  short  term,  due,  in  part,  to  divisions  among 
Member  States.  Building  on  the  Communication,  “Europe  in  the  World”,  the  Commission 
will continue to contribute actively to the development of develop common positions on the 
crucial issue of external representation. 

34.  Global  governance  also  needs  to  take  greater  account  of  emerging  market  economies 
and  least  developed  countries.  This  was  reflected  by  the  quotas-and-voice  reform  package 
agreed at the Annual Meetings of the IMF of Singapore in September 2006, which led to an 
increase  of  quotas  for  China  and  other  emerging  market  economies.  The  discussion  is  now 
continuing  on  further  reforms  and  representation  at  the  IMF  and  the  World  Bank.  Together 
with  the  euro  area's  ambition  to  speak  with  a  single  voice,  the  economic  rise  of  the  key 
emerging market countries is likely to act as a powerful wind of change for the international 
financial system. 

35. The euro area is fostering closer macroeconomic and regulatory cooperation with new 
partners  as  well  as  with  existing  ones.  Last  year,  the  European  Commission's  annual 
macroeconomic  and  regulatory  dialogue  with  the  Chinese  Ministry  of  Finance  was 
complemented  by  a  new  dialogue  with  the  Chinese  National  Development  and  Reform 
Commission.  The  regular  dialogues  with  Japan  continued  and  a  new  macroeconomic  and 
financial  regulatory  dialogue  with  the  Russian  Government  was  held  in  2006,  reflecting  the 
growing importance of Russia as a strategic partner of the EU. A new regular macroeconomic 
dialogue between India and the EU is also scheduled to begin this year. New macro-economic 
dialogues with Brazil and South Africa are also being explored to take into account of the role 
these countries pay in their respective regions and their strategic partnership with the Union 
and the euro area.  

VII. PROMOTING EFFECTIVE AND LEGITIMATE POLICY MAKING 

36.  To  meet  shared  economic  challenges,  euro-area  countries  need  an  effective  system  of 
collective governance. In this respect, the Eurogroup plays an increasingly important role in 
promoting a common understanding among euro-area members of shared policy challenges. 
Over the last twelve months, the Eurogroup has, with input from the Commission, sought to 
deepen its consensus on structural reform challenges and other matters relevant for the euro 
area,  as  highlighted  by  the  euro-area  recommendations  in  the  context  of  the  Integrated 
Guidelines  for  Growth  and  Jobs.  Some  progress  has  been  made  towards  improving  the 
coordination  of  economic  policies,  as  witnessed  by  the  adoption  of  public  orientation  for 
budgetary  policies  and  the  increased  attention  to  the  coherence  of  macroeconomic  policies 
and  structural  reforms.  The  goal  now  should  be  to  turn  this  common  understanding  into 
concerted policies to meet these challenges and maximise the benefits of the single currency. 

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A  clearer  propensity  by  Member  States  to  engage  in  cooperative  solutions  may  help  policy 
discussions.  

37.  The  effectiveness  of  policy  making  in  the  euro  area  is  important  but  so  too  is  its 
legitimacy. Mindful of this goal, the European Commission stands ready to participate in, and 
contribute to, the European Parliament's proposed dialogue on the key challenges facing the 
euro-area economy. The Annual Report on the Euro Area contributes to this understanding by 
presenting  an  analysis  of  the  economic  situation  in  the  euro  area,  macroeconomic  policy 
developments, structural-reform challenges and the external dimension of EMU. 

38.  As  EMU  approaches  its  10th  anniversary,  the  European  Commission  will  devote 
increasing  attention  to  evaluating  the  functioning  of  EMU  and  identifying  ways  to 
maximise  the  potential  of  the  euro-area  economy.  A  range  of  issues  are  relevant  here 
including  how  well-equipped  euro-area  economic  governance  is  to  meet  current  and  future 
challenges  and  whether  policy  makers  at  the  European  and  national  level  can  do  more  to 
achieve a policy mix that is conducive to higher growth and employment.  

VIII. CONCLUSION 

39.  Policy  makers  should  seize  the  opportunity  created  by  the  euro-area's  renewed 
economic  vigour  to  secure  sound  public  finances  and  push  through  further  structural 
reforms. The Annual Statement on the Euro Area has highlighted the most salient challenges 
for  the  euro  area  at  this  juncture.  In  the  fiscal  domain,  Member  States  must  resist  the 
temptation of fiscal loosening by intensifying efforts to meet and maintain their medium-term 
budgetary objectives  and improving the structure and quality of public finances. Putting the 
Eurogroup's  recent  orientations  on  fiscal  policy  into  practice  will  be  very  important  to 
complete the consolidation at the level of the euro area as a whole, further strengthening the 
credibility  of  budgetary  authorities,  and  benefiting  the  fiscal-monetary  policy  mix.  In  the 
structural  domain,  Member  States  are  benefiting  from  past  policies  but  further  reforms  are 
indispensable  for  enhancing  the  smooth  functioning  of  EMU  and  boosting  long-term  living 
standards. At the global level, the euro-area has taken steps over the last year to strengthen its 
external  representation  in  international  institutions  and  fora  and  to  foster  macroeconomic 
dialogues with strategic economic partners, also with a view to addressing global imbalances. 
Further steps will be necessary, however, before the euro area can truly speak with one voice 
on international economic issues.  

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