Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - EMU@10: successes and challenges after 10 years of Economic and Monetary Union {SEC(2008) 553}
Date: 2008-05-07
Institutions: European Commission
Subjects: Economic and Monetary Union, budget policy, economic stabilisation, foreign policy, governance, macroeconomics, monetary policy, structural policy

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.5.2008 
COM(2008) 238 final 

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

EMU@10: successes and challenges after 10 years of Economic and Monetary Union 

{SEC(2008) 553} 

EN 

   EN 

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

EMU@10: successes and challenges after 10 years of Economic and Monetary Union 

A HISTORIC STEP 

On  2  May  1998  Europe's  leaders  took  the  historic  decision  to  introduce  the  single 
currency, the euro. The move to the last phase of EMU – Economic and Monetary Union – 
on  1st  January  1999,  marked  a  watershed  in  European  integration.  Although  economic  in 
substance, it sent a very powerful political signal to European citizens and to the rest of the 
world  that  Europe  was  capable  of  taking  far-reaching  decisions  to  cement  a  common  and 
prosperous future for a continent that had all too often suffered from wars and economic and 
political instability. The launch of EMU – the most important monetary reform since Bretton 
Woods – was a bold move without precedent in modern European economic history and one 
that changed the global economic landscape.  

Ten  years  into  its  existence,  the  euro  is  a  resounding  success.  The  single  currency  has 
become a symbol of Europe, considered by euro-area citizens to be amongst the most positive 
results  of  European  integration  together  with  the  achievement  of  free  movement  within  the 
EU  and  peace  in  Europe.  One  in  two  people  in  the  euro  area  asserts  that  for  them,  the  EU 
means  the  single  currency.  EMU  has  secured  macroeconomic  stability  and  boosted  cross-
border trade, financial integration and investment. The number of countries that share the euro 
has increased from the original eleven to fifteen at the beginning of 2008 and is set to increase 
further. EMU is an achievement of strategic importance for the EU, and indeed for the world 
at large, in which Europe has become a pole of macroeconomic stability, especially welcome 
in the present times of financial turbulence.  

While  the  euro  is  a  clear  success,  so  far  it  has  fallen  short  of  some  initial  expectations. 
Output  and  particularly  productivity  growth  have  been  below  those  of  other  developed 
economies and concerns about the fairness of income and wealth distribution have grown. In 
addition, a number of significant challenges which had not yet emerged or were only starting 
to  become  apparent  when  EMU  was  devised  are  now  more  pressing.  Globalisation  is 
progressing  apace  and  natural  resources  are  becoming  increasingly  scarce.  Climate  change 
and  the  effects  of  population  ageing  will  place  additional  strains  on  the  capacity  of  our 
economies  to  grow.  Moreover,  unwinding  global  imbalances  are  putting  pressure  on  the 
exchange  rate  of  the  euro  and  the  functioning  of  our  financial  systems.  At  the  same  time, 
while the progressive enlargement of the euro area will add dynamism to its economy, it will 
also increase the diversity of EMU, making stronger demands on its adjustment capacity. 

EN 

2 

   EN 

 
This  Communication  and  the  accompanying  Report1  assess  the  experience  of  the  first 
decade of EMU, identify the goals and challenges facing the euro area and put forward a 
policy agenda for EMU’s continued success.  

THE MAJOR SUCCESSES OF THE FIRST TEN YEARS 

The launch of the euro represented a sea change in the macroeconomic environment of its 
participating  Member  States  and  beyond.  A  single  monetary  policy  combined  with  national 
but  coordinated  fiscal  policies  has  fostered  macroeconomic  stability.  The  exchange  rate 
realignments  that  periodically  traumatised  the  European  economies  have  become  a  thing  of 
the  past.  The  European  Central  Bank  (ECB),  to  which  the  euro  area's  monetary  policy  is 
entrusted, quickly established its credibility. Budgetary discipline has improved significantly, 
strengthened by the Stability and Growth Pact (SGP). The euro-area economy has pursued a 
faster track of economic and financial integration than the rest of the EU and its resilience in 
the  face  of  external  shocks  has  become  stronger.  Overall,  progress  has  been  made  on  many 
fronts, as the following highlights illustrate.  

Monetary  policy  has  anchored  long-run  inflation  expectations  at  close  to  the  ECB's 
definition  of  price  stability.  Inflation  averaged  just  over  2%  in  the  first  decade  of  EMU, 
falling  from  3%  in  the  1990s  and  a  range  of  8  to  10%  in  the  1970s  and  1980s.  Nominal 
interest rates have declined to an average of around 5% since the inception of the euro, down 
from 9% in the 1990s and 12% in the 1980s. In real terms, interest rates in EMU have come 
down to levels not seen for several decades, even in those countries which enjoyed the highest 
degree  of  stability  before  the  adoption  of  the  euro.  Admittedly,  inflation  has  increased 
recently,  mainly  due  to  soaring  oil  and  commodity  prices,  while  the  turbulence  in  financial 
markets has led to tighter credit conditions for households and businesses. But a return to low 
inflation and more normal credit conditions is expected once these external pressures unwind 
– even though oil and commodity prices may continue to trend up with strong demand from 
fast-growing developing countries. 

Fiscal  policies  have  supported  macroeconomic  stability  in  EMU.  Progress  in  fiscal 
consolidation has been impressive over the last few years and culminated in a deficit of only 
0.6% of GDP in 2007 compared to an average of 4% in both the 1980s and 1990s. The reform 
of  the  SGP  in  2005  not  only  contributed  to  greater  discipline,  but  also  promoted  a  more 
sustainable  correction  of  excessive  deficits  by  discouraging  recourse  to  one-off  measures. 
While not fully eradicated, pro-cyclical fiscal policies have also become less common. As a 
result, and thanks to windfall gains in tax revenues in the last few years, no euro-area country 
ran a deficit in excess of 3% in 2007 and the overall deficit for the euro area (at 0.6% of GDP 
in 2007), was the lowest in several decades. Indeed ten out of the fifteen euro-area countries 
either recorded a budget surplus in 2007 or were very close to balance.  

1 

SEC(2008)  553  "EMU@10  :  successes  and  challenges  after  ten  years  of  Economic  and  Monetary 
Union". 

EN 

3 

   EN 

 
                                                 
EMU has fostered economic and market integration. The disappearance of exchange rate 
risk  and  lower  cross-border  transaction  costs  has  helped  develop  the  Single  Market  and 
integrate product markets. Intra-area trade flows now account for one third of the area's GDP, 
up  from  one  quarter  ten  years  ago,  and  available  estimates  indicate  that  the  elimination  of 
exchange  rate  volatility  can  explain  up  to half  of  this  increase.  What  is  more,  intra-area 
foreign direct investment now stands at one third of GDP as compared to an initial one fifth. 
Here estimates suggest that up to two thirds of this increase can be directly attributed to the 
creation of the single currency. These developments have in turn produced major economies 
of scale, spurred competition and had noticeable effects on productive efficiency. Likewise, 
the decline in risk premia built into capital cost has boosted capital formation, which has now 
reached  almost  22%  of  GDP  –  a  level  unseen  since  the  early  1990s.  Overall,  through  these 
various  channels,  the  single  currency  is  estimated  to  have boosted  labour  productivity  per 
hour worked by as much as 5% since the launch of the euro. 

The  euro  has  acted  as  a  powerful  catalyst  for  financial  market  integration.  Interbank 
money  markets  in  the  euro  area  have  fully  integrated,  while  cross-border  interbank 
transactions have expanded steadily since 1999. Cross-border consolidation among banks has 
accelerated, with the sixteen largest banking groups now holding more than 25% of their EU 
assets  outside  their  home  country.  A  significant  market  in  euro-denominated  private-sector 
bonds has emerged, with an annual gross issuance of more than €1 trillion now substantially 
exceeding  the  approximately  €800  billion  raised   through  public  sector  issuance.  Equity 
markets too have integrated faster than elsewhere, with the share of equity held in other euro-
area  countries  rising  from  20  to  40%.  Financial  market  infrastructure  has  advanced,  and 
progress  has  been  made  in  cross-border  wholesale  financial  services,  while  the  Single  Euro 
Payments  Area  is  set  to  eliminate  differences  between  national  and  cross-border  retail 
payments.  In  parallel,  a  certain  degree  of  regulatory  and  supervisory  convergence  has  been 
achieved  via  the  implementation  of  the  Financial  Services  Action  Plan  and  the  operation  of 
the Lamfalussy committees.  

EMU has improved the euro area's resilience against adverse external developments. In 
its first decade the euro area has been exposed to a series of external shocks associated with 
the  global  business  cycle,  the  most  significant  being  the  bursting  of  the  dotcom  bubble  and 
subsequent downturn in the US in the early 2000s. Nevertheless, the ensuing slowdown in the 
euro  area  at  the  beginning  of  the  decade  was  considerably  more  muted  than  in  comparable 
episodes prior to the adoption of the single currency. Today once again, the euro area appears 
protected from the worst of the present global financial turbulence. The anchoring of inflation 
expectations has contributed to this improved resilience, as have the reforms carried out under 
the Lisbon Strategy for Growth and Jobs and the renewed budgetary discipline since the SGP 
reform. 

EMU has brought significant benefits to its member countries engaged in a catching-up 
process. The environment of macroeconomic stability and low interest rates coupled with the 
support  of  the  cohesion  policy  and  its  Structural  and  Cohesion  Funds  have  created  the 
conditions for accelerated catching up; the positive effects of sound economic policies have 
been reinforced by the development and integration of national financial markets with the rest 
of  the  euro  area.  Not  surprisingly,  therefore,  participation  in  EMU  is  very  appealing  to  the 
twelve Member States that entered the EU since 2004; indeed three have already successfully 
joined the euro area and Slovakia is ready to enter in 2009. 

EN 

4 

   EN 

 
The euro has firmly established itself as the world’s second international currency. Euro-
denominated international debt securities surpassed those of the US dollar in 2004, while the 
percentage  of  bank  loans  issued  by  euro-area  banks  to  non-euro-area  borrowers  which  are 
denominated  in  euro  now  stand  at  36%  as  compared  to  45%  in  US  dollars.  The  euro  is  the 
second most actively traded currency in foreign exchange markets worldwide, and is used in 
more  than  a  third  of  all  foreign  exchange  transactions.  The  official  use  of  the  euro  has 
increased,  with  the  worldwide  share  of  disclosed  reserves  denominated  in  euro  rising  from 
18%  in  1999  to  over  25%  in  2007.  Likewise,  its  role  as  a  trade  invoicing  or  settlement 
currency has risen, to reach more than 50% of the euro area's external trade. The euro has also 
become very important in many third countries, notably euro-area candidate and neighbouring 
EU countries, around 60% of whose trade is now invoiced in euro.  

The euro area has become a pole of stability for Europe and the world economy. Thanks to 
the  euro's  rising  international  status  and  the  sheer  size  of  the  euro-area  economy,  economic 
policies within EMU increasingly have a global impact. With an external position in balance, 
a  credible  macroeconomic  framework  and  a  sound  financial  system,  the  euro  area  has  been 
contributing to an orderly evolution of the global economy, even during the highly turbulent 
period of the last few months.  

The  euro  area  has  developed  a  sound  structure  of  economic  governance.  While  major 
economic  policy  responsibilities  remain  at  the  national  level,  a  common  understanding  has 
developed among EMU Member States that sound public finances and flexible and integrated 
product,  labour  and  financial  markets  are  necessary  for  EMU  to  function  efficiently.  The 
reform of the Stability and Growth Pact in 2005 increased national governments’ “ownership” 
of  the  budgetary  governance  framework.  And  the  revised  Lisbon  Strategy  for  Growth  and 
Jobs,  the  key  instrument  for  the  co-ordination  of  EU  economic  policies,  spells  out  in 
Guideline  No.  6  that  Member  States  should  "contribute  to  a  dynamic  and  well-functioning 
EMU".  The  Eurogroup  has  served  as  the  key  forum  for  euro-area  finance  ministers  to 
address issues relating to the single currency going beyond the Treaty-based surveillance and 
coordination  tasks.  As  its  informal  character  encourages  open  and  frank  debates,  the 
Eurogroup  is  well  placed  to  develop  common  understandings  and  clear  positions  on 
macroeconomic  issues  pertaining  to  the  euro  area.  Over  time  it  has  gained  visibility  and 
relevance, particularly since it appointed its first permanent President in January 2005. On the 
international  front,  collective  action  taken  by  the  euro  area  has  led  to  greater  external 
influence,  as  demonstrated  by  the  engagement  of  the  Eurogroup  troika  –  the  Eurogroup 
President,  the  President  of  the  ECB  and  the  Commissioner  for  Economic  and  Monetary 
Affairs  –  in  bilateral  dialogues  with  China  and  other  countries,  and  by  last  year's  IMF-led 
multilateral consultations on global imbalances. 

EN 

5 

   EN 

 
All these positive developments have culminated in the creation of a record 16 million jobs 
during the first decade of EMU in the euro area. Employment has risen by almost 15% since 
the launch of the single currency while unemployment has fallen to about 7% of the labour 
force,  the  lowest  rate  in  more  than  fifteen  years.  Importantly,  job  growth  outpaced  that  of 
other mature economies, including the United States. The bulk of these improvements reflect 
reforms  of  both  labour  markets  and  social  security  systems  carried  out  under  the  Lisbon 
Strategy for Growth and Jobs and the coordination and surveillance framework of EMU, as 
well  as  the  wage  moderation  that  has  characterised  most  euro-area  countries.  This  clearly 
demonstrates  that  Europe's  workforce  is  capable  of  rising  to  new  challenges  and  making 
necessary  changes  that  will  ultimately  result  in  further  job  creation  and  higher  economic 
growth.  

EMU'S REMAINING CHALLENGES AMPLIFIED BY NEW GLOBAL TRENDS  

The overall picture of the first decade of EMU is thus a very positive one. However, not all 
expectations have been fulfilled. 

At  around  2%  per  annum,  potential  growth  remains  too  low.  Although  employment  has 
soared, and despite the positive impact of the single currency, productivity growth has slowed 
from  1  1/2%  in  the  1990s  to  around  1%  this  decade.  As  a  result,  the  euro  area's  per  capita 
income has stalled at 70% of that of the United States. While most of the smaller euro-area 
economies  have  done  exceptionally  well,  potential  growth  should  have  been  significantly 
higher in some of the largest Member States.  

Moreover, there have been substantial and lasting differences across countries in terms of 
inflation  and  unit  labour  costs.  The  tendency  for  persistent  divergences  between  euro-area 
Member States has been due in part to a lack of responsiveness of prices and wages, which 
have not adjusted smoothly across products, sectors and regions. This has led to accumulated 
competitiveness losses and large external imbalances, which in EMU require long periods of 
adjustment.  Essentially,  this  protracted  adjustment  reflects  the  fact  that  structural  reforms 
have  been  less  ambitious  than  in  the  run-up  to  the  euro.  As  is  the  case  within  the  EU  as  a 
whole, product markets within the euro area are still only partially integrated and cross-border 
provision of services remains underdeveloped. 

As an international currency the euro is a major asset for all euro-area members and for the 
EU at large. However, the lack of a clear international strategy and the absence of a strong 
voice in international fora implies costs for the euro-area in an increasingly globalised world. 
The global  economic imbalances that have built  up  since  the  mid-1990s  are  starting  to  take 
their toll, with exchange rates excessively volatile and financial stability arrangements under 
heavy strain. The emerging economies' rapidly growing demand for scarce energy and other 
primary resources are hitting supply constraints, sending oil, food and other commodity prices 
soaring  as  a  result.  In  this  turbulent  environment,  the  single  currency  provides  a  shield  and 
can put the euro area in a unique position to play a key role in the global political arena in 
stemming the associated risks. However  this  potential is insufficiently  exploited as the euro 
area  has  neither  a  properly  defined  international  strategy  nor  effective  international 
representation.  

EN 

6 

   EN 

 
Finally,  the  public  image  of  the  euro  does  not  fully  reflect  EMU's  successful  economic 
performance. The euro is often used as a scapegoat for poor economic performances that in 
reality result from inappropriate economic policies at the national level. Furthermore citizens 
in some countries believe that prices significantly increased because of the euro. Indeed, even 
if  overall  inflation  was  only  marginally  affected  at  the  time  of  the  changeover,  occasional 
abusive price increases in specific sectors and countries have tarnished the image of the euro 
and  continue  to  do  so.  At  the  same  time,  the  lack  of  development  of  the  economic  leg  of 
EMU,  compared  with  the  monetary  leg,  has  also  fed  the  concern  that  the  euro  area  is 
incapable  of  addressing  the  key  challenges  facing  it,  further  weakening  its  public  image. 
Clearly important work still lies ahead. But beyond the fulfilment of initial expectations, the 
EMU  policy  agenda  for  the  next  decade  will  be  marked  by  the  emergence  of  new  global 
challenges which will have an amplifying effect on the weaknesses of EMU outlined above.  

•  Globalisation is progressing apace, with emerging economies competing with developed 
economies  in  lower-skilled  industrial  activities  and  increasingly  in  higher  value-added 
activities  too.  Globalisation  offers  major  opportunities  for  market  growth,  yielding  lower 
prices  and  greater  choice  for  consumers,  and  efficiency  gains  for  producers.  However,  it 
also  puts  strong  demands  on  the  adjustment  capacity  of  the  euro-area  members  as  new 
activities will need to replace declining industries, and as research, innovation and human 
capital  become  ever  more  important  drivers  of  economic  dynamism.  Moreover, 
globalisation further compels the euro area to take an effective role in global economic and 
financial governance. 

•  Food  and  energy  prices  are  on  the  rise,  spurred  by  fast  growth  of  the  global  economy 
and changing consumption patterns in emerging economies. Climate change is also having 
a  growing  economic  impact.  These  developments  may  act  as  a  constraint  on  growth  and 
could impair the distribution of income and wealth given that it is the least well-off who 
may  be  disproportionally  affected.  A  complicating  factor  is  that  the  tasks  of  containing 
climate  change  and  keeping  a  lid  on  food  and  energy  prices  may  not  be  easily  achieved 
simultaneously.  These  problems  can  affect  euro-area  countries  differently,  adding  to  the 
need to ensure smooth adjustment to shocks. 

•  Meanwhile, the population of the euro area, as elsewhere, is rapidly ageing. As a result, 
the portion of the population dependent on pensions will increase, simultaneously reducing 
the  economic  growth  potential.  Indeed,  the  ratio  of  working-age  to  older  people  is 
projected  to  halve  over  the  next  four  decades  and  on  unchanged  policies,  the  potential 
output of the area will slow to just over 1% per annum from around 2% at present. Ageing 
will also make relatively large demands on public spending, and unless reforms are made 
to pension and health systems it will increase the share of public expenditure in GDP by an 
estimated  4  percentage  points  over  the  next  four  decades.  Ageing  populations  pose  a 
serious challenge to the euro area's capacity to adjust and put the sustainability of its public 
finances and, more generally, its welfare systems at risk. 

These longer-term trends, whose effects are increasingly being felt, will pose challenges for 
the  performance  of  all  advanced  economies  in  terms  of  growth,  macroeconomic  stability, 
adjustment  capacity,  the  sustainability  of  social  security  systems  and  the  distribution  of 
income  and  wealth.  But  they  will  produce  policy  challenges  that  are  particularly 
compelling  for  the  euro  area  considering  its  relatively  low  growth  potential,  its  weaker 
adjustment  capacity,  high  public  indebtedness  and  the  strong  interdependence  of  its 
economies.  

EN 

7 

   EN 

 
A THREE-PILLAR POLICY AGENDA FOR THE SECOND DECADE 

The experience of the first decade of EMU, while overall very successful, reveals a number of 
shortcomings  that  need  to  be  addressed.  It  will  be  necessary  to  consolidate  the  hard-won 
macroeconomic stability while: (a) raising potential growth and safeguarding and increasing 
the welfare of euro-area citizens; (b) ensuring a smooth adjustment capacity as EMU expands 
to take in new members; and (c) successfully protecting the interests of the euro area in the 
global economy. Importantly, these efforts will have to be made in a global environment that 
has changed considerably since the euro was launched, and failure to do so will be much more 
costly now. 

To address these challenges, the Commission proposes a three-pillar agenda: 

•  The  domestic  agenda  aims  to  deepen  fiscal  policy  co-ordination  and  surveillance,  to 
broaden macroeconomic surveillance in EMU beyond fiscal policy and to better integrate 
structural reform in overall policy co-ordination within EMU.  

•  The external agenda aims to enhance the euro area's role in global economic governance.  

•  Both agendas will require a more effective system of economic governance.  

I. 

The domestic policy agenda: better co-ordination and surveillance 

Deepening and broadening surveillance 

The  corrective  arm  of  the  Stability  and  Growth  Pact  (SGP)  should  continue  to  be  applied 
rigorously and surveillance under the SGP's preventive arm should be improved. Fiscal 
policy  coordination  should  better  guide  national  budgetary  behaviour  over  the  whole  cycle, 
i.e. in both good and bad times. Budgetary surveillance should be deepened to cover two main 
areas:  

(i) securing the sustainability of public finances for the benefit of future generations. At the 
national level, the adoption of medium-term fiscal frameworks could go a long way towards 
achieving  stable  and  sustainable  public  finances.  To  be  effective,  such  frameworks  should 
encompass  well-designed  expenditure  rules,  which  would  allow  the  automatic  fiscal 
stabilisers  to  operate  within  the  limits  of  the  SGP  while  attuning  the  composition  of  public 
expenditure  to  the  structural  and  cyclical  needs  of  the  economy.  At  the  euro-area  level 
increased  attention  should  be  put  on  monitoring  public  debt  developments,  while  medium-
term  budgetary  objectives  should  be  strengthened  to  address  implicit  liabilities.  Moreover, 
long-term budgetary  projections which identify the impact of ageing on public finances can 
support the preparation of national sustainability strategies and  promote measures to  reform 
pension and health systems and increase employment rates.  

(ii)  enhancing  the  quality  of  public  finances.  In  other  words,  ensuring  better  value  for 
public  money,  by  channelling  public  expenditure  and  taxation  systems  towards  growth-
friendly and competitiveness-enhancing activities. Reforms of social expenditure programmes 
that  offer  better  income  protection  while  strengthening  incentives  to  work  –  the  flexicurity 
approach – would also greatly help to enhance the sustainability and quality of public finances 
while ensuring that budgets support macroeconomic stability.  

EN 

8 

   EN 

 
But beyond budgetary surveillance, there is a clear need to broaden surveillance to address 
macroeconomic  imbalances.  Developments  within  Member  States  such  as  the  growth  of 
current account deficits, persistent inflation divergences or trends of unbalanced growth need 
to  be  monitored  given  that  the  occurrence  of  spillover  effects  and  the  growing 
interdependence  of  euro-area  economies  mean  these  developments  represent  a  concern  not 
just for the country in question but for the euro area as a whole. The evidence of the first ten 
years  of  EMU  indicates  that  while  market  integration,  particularly  in  financial  services,  is 
beneficial overall for EMU – as it can help absorb macroeconomic disturbances by providing 
risk-sharing  opportunities  and  fostering  reallocation  of  resources  –  it  can  also,  if  not 
accompanied by appropriate policies, amplify divergences among the participating countries. 
While some of these divergences can be benign – reflecting the catching-up process or even 
normal adjustment – they may also be harmful and the result of inefficient adjustment. In this 
case, enhanced surveillance would help the affected countries to devise early responses before 
divergences become entrenched.  

Finally, a broader surveillance of euro-area candidate countries, akin to that proposed for 
current euro-area members, will be crucial to help them prepare for the challenges of sharing 
a  single  currency.  Many  future  euro-area  members  are  experiencing  large  capital  inflows 
(reflecting  expectations  of  continued  fast  income  growth)  and  rapidly  developing  financial 
sectors,  both  of  which  can  boost  credit  (typically  from  a  low  base)  and  result  in  external 
imbalances.  Currently  surveillance  of  prospective  euro-area  countries  takes  place  via  the 
assessment  of  Convergence  Programmes.  But  there  is  scope  to  provide  stronger  policy 
guidance  and  closer  surveillance  of  economic  developments  in  particular  for  the  countries 
participating  in  the  Exchange  Rate  Mechanism  (ERM)  II  framework,  which  is  both  an 
element of the euro adoption criteria and an instrument to foster sustainable nominal and real 
convergence. This should not mean imposing any additional constraints on euro-area entry. 

Surveillance must build on the existing instruments. The key instruments for fiscal policy 
surveillance  and  economic  policy  coordination  are  clearly  anchored  in  the  Treaty  and  the 
SGP. The enforcement of the corrective arm of the SGP will remain a key pillar in dissuading 
non-compliance  with  the  Treaty.  The  SGP  provides  for  the  definition  and  assessment  of 
medium-term  budgetary  strategies 
through  Council  opinions  on  national  Stability 
Programmes. Article 99 of the Treaty states that "Member States shall regard their economic 
policies as a matter of common concern” and “shall coordinate them within the Council". The 
euro-area  and  country-specific  recommendations  of  the  Lisbon  process  are  key  instruments 
for guidance and surveillance. There is, however, scope to improve the way such instruments 
are used. The analysis of the first 10 years reinforces the case for strengthening the preventive 
part  of  the  SGP,  as  endorsed  by  the  ECOFIN  Council,2  to  support  the  achievement  of 
sustainable  budgetary  policies  and  address  broader 
the 
macroeconomic  stability  of  a  country  and  the  overall  functioning  of  EMU.  These  Treaty-
based  instruments  are  complemented  by  the  Medium-Term  Budgetary  Review  process 
undertaken  by  the  Eurogroup  in  the  spring  of  each  year.  While  it  has  so  far  focused  on 
budgetary  surveillance,  this  peer  review  mechanism  should  broaden  its  scope  to  make  the 
Treaty-based surveillance more effective. 

issues  which  may  affect 

2 

COM(2007) 316. 

EN 

9 

   EN 

 
                                                 
Better integrating structural policies in the co-ordination process 

The  euro  area  has  a  special  interest  in  the  success  of  structural  reform.  Stepping  up 
reforms – of course welcome in the EU as a whole – is an absolute must for the euro area. 
Importantly, improved market responses will pay a double dividend – by boosting growth in 
living standards over the longer haul while allowing better adjustment to shocks and fostering 
macroeconomic  stability.  Empirical  evidence  from  our  analysis  indicates  that  structural 
reforms in countries sharing the single currency have higher "multipliers" than elsewhere: that 
is, those countries undertaking structural reforms can accrue more benefit while those falling 
behind may pay a higher price for their inaction. The Lisbon Strategy for Growth and Jobs, 
which has been instrumental in putting structural  reform  on the policy agenda,  provides the 
basis for identifying the most pressing areas for action through Guideline No. 6 on the euro 
area  and  the  euro-area-specific  recommendations.  In  a  partnership  approach  between  the 
Commission  and  the  Member  States,  the  Lisbon  Strategy  forms  the  basis  for  steering  the 
reform process in both the euro area and the individual countries. 

Removing  remaining  barriers  to  product  market  integration  is  essential  for  a  well-
functioning euro area. Yet despite the boost given by EMU and the Single Market Programme 
to the creation of more open and competitive economies, low productivity growth and entry 
barriers, especially in services, are still hampering efficient adaptation to changing economic 
circumstances  in  the  euro  area  and  are  keeping  up  pressure  on  prices.  Innovation  and 
technology  diffusion,  important  elements  for  enhancing  both  competition  and  productivity, 
are lagging behind in euro-area member states. The market monitoring system proposed in the 
Single Market Review should be used to specifically target these shortcomings. 

Better-functioning  labour  markets  are  needed  in  the  euro  area  to  underpin  adjustment  in  a 
globalised  economy  and  raise  growth  potential  in  the  face  of  ageing  populations.  Greater 
wage flexibility and differentiation across industries, occupations and regions, and investment 
in  human  capital  are  instrumental  in  boosting  competitiveness  and  allowing  the  smooth 
reallocation of resources in the event of shocks. Numerous reforms to raise labour utilisation 
have been undertaken in the framework of the Lisbon Strategy – and have paid off. However, 
progress has been uneven across countries and should therefore remain at the core of reform 
strategies  in  the  next  decade.  Reforms  of  social  expenditure  programmes  and  active  labour 
market policies should aim to offer better income protection while strengthening incentives to 
work.  

The  euro  area  can  draw  comparatively  large  benefits  from  promoting  EU  financial 
integration.  Significant  progress  has  been  made  in  integrating  EU  financial  markets  but 
further  efforts  are  required  to  enhance  the  efficiency  and  liquidity  of  euro  area  financial 
markets. This would facilitate economic adjustment through risk sharing and promote a more 
uniform  transmission  of  the  single  monetary  policy  across  the  euro  area.  In  particular, 
increased effort is required to promote the cross-border provision of retail financial services, 
to  improve  the  efficiency  of  corporate  and  government  bond  financing  and  ease  regulatory 
and  supervisory  costs  for  financial  intermediaries  operating  in  a  multi-jurisdictional 
environment.  Given  the  shared  responsibility  of  the  Eurosystem  and  participating  Member 
States to safeguard financial stability in the euro area as a whole, there is a growing need for 
stronger  cross-border  cooperation  in  arrangements  for  crisis  prevention,  management  and 
resolution as financial integration proceeds. In light of these specific efficiency and stability 
considerations and taking on board the lessons of the current financial turmoil, the euro area 

EN 

10 

   EN 

 
should take a strong role in fostering the EU agenda for financial integration and in enhancing 
EU financial stability arrangements.  

To reap the full potential of EMU, there is therefore a need to strengthen the incentives to 
pursue reform in the euro area. Integrating structural policies in the euro area coordination 
process can provide support via three avenues: (a) The recommendations to the euro area as a 
whole  together  with  the  country-specific  recommendations  made  within  the  Integrated 
Guidelines  of  the  Lisbon  Strategy  provide  the  backbone  for  the  coordination  of  structural 
reforms; a closer monitoring of their implementation needs to be organised. (b) The reform of 
the  SGP  in  2005  created  the  possibility,  when  assessing  progress  towards  the  medium-term 
budgetary objectives, to take account of structural reforms that are fiscally costly in the short 
run  but  yield  longer-term  gains  in  terms  of  growth  and  fiscal  sustainability.  To  ensure 
compliance with the commitments enshrined in the SGP, a peer review mechanism could be 
established  based  on  the  analytical  framework  developed  under  the  Lisbon  Strategy  and  ex 
ante information provided by Member States. (c) To achieve a better sequencing of reforms, 
particular  priority  should  be  given  to  improving  the  functioning  of  financial  markets.  This 
would not only have favourable effects on growth and adjustment, but would also help boost 
the  incentives  for  other  structural  reforms  to  follow  by  bringing  forward  their  longer-term 
benefits and allowing capital to flow to the new investment opportunities generated by these 
structural reforms. 

II. 

The external policy agenda: enhancing the euro area's international role 

The  international  status  of  the  euro  brings  advantages,  responsibilities  and  risks.  It  helps 
develop the financial industry in Europe, yields seignorage gains from the use of the euro as a 
reserve currency and reduces exposure to exchange rate volatility as pricing and invoicing in 
euros develops. But the sheer size of the euro area means that policy decisions and economic 
developments within EMU are felt elsewhere, not least because global financial markets are 
acting  as  an  ever-stronger  international  transmission  channel.  And  there  are  risks,  as  the 
growing  international  status  of  the  euro  exposes  the  euro  area  to  disruptive  portfolio  shifts 
between key international currencies and asset classes. All in all, the growth of the euro as an 
international currency and the combined strength of the euro-area economy have changed the 
rules of the game for the members of EMU and for their international partners. 

The  euro  area  must  therefore  build  an  international  strategy  commensurate  with  the 
international status of its currency. Following a successful first decade, the euro area, which 
already provides a stability anchor for its neighbours, is now called upon to develop a clear 
and all encompassing strategy on international economic and financial affairs. It has to play a 
more active and assertive role both in multilateral fora and through its bilateral dialogues with 
strategic  partners.  It  has  to  improve  coordination  and  define  common  positions  and  –  when 
appropriate  –  common  terms  of  reference  on  all  these  issues.  It  has  to  speak  with  a  single 
voice  on  exchange  rate  policies  and  assume  its  responsibilities  in  financial  stability  and 
macroeconomic  surveillance  issues.  The  risk  that  the  unwinding  of  global  imbalances 
disproportionately  harms  the  competitiveness  of  the  euro  area  and  its  members  is  adding  to 
these needs.  

EN 

11 

   EN 

 
The most effective way for the euro area to align its influence with its economic weight is by 
developing  common  positions  and  by  consolidating  its  representation,  ultimately 
obtaining a single seat in the relevant international financial institutions and fora. This is an 
ambitious aim and progress on the external agenda will depend first and foremost on a more 
effective system of euro area governance. Even though the EU and euro area are often seen by 
other countries as over-represented in international organisations (in terms of both seats and 
voting  power),  the  euro  area  still  punches  below  its  economic  weight  in  international  fora. 
Consolidating  the  euro  area’s  representation  would  strengthen  its  international  negotiating 
power and reduce the costs of international coordination, both for the euro area and for its key 
partners. It would also free up much needed space for emerging market countries to increase 
their participation in international financial institutions.  

III. 

Promoting effective governance of EMU 

EMU's  system  of  economic  governance  must  rise  to  the  challenges  facing  the  euro  area. 
That said, the current division of responsibility between the institutions and instruments that 
govern the conduct of economic policy in EMU is sound overall. Nevertheless, there is a clear 
need to adapt institutions and practices to tackle the emerging policy challenges.  

A  strong  involvement  of  all  EU  Member  States  within  the  ECOFIN  Council  is  key  to 
ensuring that EMU functions effectively. From the outset the ECOFIN Council has been the 
forum for economic policy decision-making in the EU and, in view of the evolving overlap 
between  the  euro  area  and  the  EU,  it  should  remain  centre  stage  in  EMU's  system  of 
economic governance by integrating EMU issues more thoroughly in its work. In particular, it 
could  push  for  a  more  consistent  approach  within  its  own  fields  of  competence  –  i.e. 
macroeconomic  policy,  financial  markets  and  taxation  –  so  as  to  ensure  positive  synergies 
between  them.  The  current  Treaty  provides  ample  scope  for  more  comprehensive 
coordination and surveillance along these lines across the whole EU. Moreover, while the new 
Lisbon  Treaty,  once  ratified,  will  strengthen  the  role  of  euro  area  finance  ministers  on 
questions  affecting  the  functioning  of  EMU,  all  discussions  on  these  issues  will  take  place 
within the ECOFIN Council. 

The Eurogroup should continue to serve as a platform for the deepening and broadening 
of  policy  coordination  and  surveillance  in  EMU.  In  terms  of  fiscal  surveillance,  ex  ante 
coordination of budgetary policy through the Mid-Term Budgetary Review should be geared 
to guiding fiscal behaviour over the cycle as a means to address any pro-cyclical bias. In view 
of the ageing challenge, a major task is to increase the effectiveness of the preventive arm of 
the  SGP  in  fostering  the  achievement  of  ambitious  medium  term  objectives.  To  avoid  the 
build-up of imbalances and excessive divergences between euro area countries, the Eurogroup 
should exchange views, develop policy guidelines and monitor Member States' compliance in 
areas  that  foster  adjustment  capacity  and  macroeconomic  stability.  “Peer  reviews”  – 
multilateral  discussions  on  relevant  developments  in  one  or  several  countries  –  should  be 
strengthened to encourage ministers of finance to consider national issues and policies within 
a  euro-area  perspective.  Moreover,  the  Eurogroup  should  devote  greater  attention  to 
monitoring the euro-area Lisbon recommendations in order to increase potential growth and 
strengthen competitiveness through structural reforms.  

EN 

12 

   EN 

 
The Commission should play a strong, supportive role to ensure the effective functioning 
of EMU. It is called upon to foster the coordination of policies while internalising the EMU 
dimension in its policy proposals. It should step up its fiscal and macroeconomic surveillance 
and  promote  further  economic  and  financial  integration.  In  its  surveillance  role,  it  should 
deepen the assessment of economic and financial developments of the euro area, focusing in 
particular  on  the  spillovers  of  national  policy  measures.  Work  to  improve  the  accuracy  of 
cyclical  and  structural  fiscal  indicators  should  continue,  in  cooperation  with  the  Member 
States.  As  to  the  international  agenda,  the  Commission  needs  to  enhance  its  role  in 
international dialogues and fora. In sum, the Commission must support efforts to improve the 
functioning  of  EMU  both  domestically  and  internationally  by  assuming  the  responsibilities 
assigned to it by the Treaty as the guardian of sound economic policies. To this end it should 
endeavour to better exploit the instruments provided by the Treaty.  

The  new  Treaty,  once  ratified,  will  provide  scope  to  strengthen  coordination  and 
surveillance of economic policies within the euro area. Article 136 of the resulting Treaty on 
the functioning of the European Union would offer the possibility to "adopt measures specific 
to euro-area Member States: to strengthen the coordination and surveillance of their budgetary 
discipline;  and  to  set  out  economic  policy  guidelines  for  them,  while  ensuring  that  they  are 
compatible with those adopted for the whole of the Union and are kept under surveillance". 
Furthermore, the Treaty would enhance the Commission's role as an independent “referee” in 
the  context  of  multilateral  surveillance,  with  Article  121  giving  the  Commission  the 
possibility  to  issue  direct  warnings  to  a  Member  State  when  its  economic  policies  are  not 
consistent with the broad guidelines or risk jeopardising the proper functioning of EMU. 

EMU's  governance  system  must  ensure  that  euro-area  enlargement  continues  smoothly. 
Over the next decade, the euro area is set to expand to encompass most current EU Member 
States  and  ensuring  that  this  process  proceeds  appropriately  will  safeguard  the  effective 
functioning of the euro-area economy in the future. During participation in ERM II, countries 
should  capitalise  on  the  environment  of  enhanced  macroeconomic  stability  to  adopt  sound 
macroeconomic  and  structural  policies.  As  specified  in  the  Treaty,  the  Commission  should 
provide  a  regular,  fair  assessment  of  sustainable  progress  in  the  convergence  process.  The 
Eurogroup and ECOFIN in turn have a special responsibility to build trust, survey economic 
developments  and  provide  the  necessary  guidance  in  terms  of  the  policies  and  reforms 
necessary for prospective euro-area members' nominal and real convergence.  

There is also a need to improve the dialogue concerning EMU among the EU institutions 
and with the public at large. The Commission should develop its dialogue and consultation 
with  the  European  Parliament  in  particular,  as  well  as  other  European  and  national 
stakeholders.  In  a  similar  vein,  the  Eurogroup  should  pursue  dialogues  with  the  ECB,  the 
European  Parliament  and  the  social  partners  in  the  euro  area.  All  these  institutions,  starting 
with the Commission, should improve communication on EMU issues to the wider public. In 
particular, there is a need to better explain the euro's significant macro- and microeconomic 
advantages, such as its role as a protective shield during the recent financial turmoil, and the 
significant, beneficial contribution of economic policies in EMU. 

EN 

13 

   EN 

 
CONCLUSION 

EMU  is  a  resounding  success.  Ten  years  into  its  existence,  it  has  ensured  macroeconomic 
stability,  spurred  the  economic  integration  of  Europe  –  not  least  through  its  successive 
enlargements –, increased its resilience to adverse shocks, and become a regional and global 
pole  of  stability.  Now  more  than  ever,  the  single  currency  and  the  policy  framework  that 
underpins  it  are  proving  to  be  a  major  asset.  Nevertheless,  there  is  potential  to  reap  further 
benefits  from  EMU.  This  --  coupled  with  the  pressing  challenges  of  globalisation,  scarce 
natural resources, climate change and population ageing, -- calls for improved co-ordination 
of economic policies,  further progress with structural reforms, a stronger global role for the 
euro  area  and  an  unwavering  commitment  by  Member  States  to  achieving  these  goals.  The 
fact  that  the  effects  of  these  global  trends  are  already  being  felt  in  high  energy,  food  and 
commodity prices, financial turbulence and global exchange rate adjustment only underscores 
the importance of timely action. 

Achieving the domestic and external policy agenda and improving governance as set out here 
will go a long way towards meeting the challenges that the euro area and the global economy 
are facing. It will also bring important positive benefits for all EU members: 

•  EMU remains a milestone of EU integration. Although its objectives and achievements 
are predominantly economic, EMU has never been solely an economic project. From the 
outset EMU was conceived as a crucial step in the process of EU integration. This role has 
become  even  stronger  since  the  EU’s  enlargement  from  15  to  27  Member  States  since 
2004,  with  all  newly  acceded  EU  member  countries  preparing  for  euro  adoption.  The 
prospect  of  euro-area  accession  has  been  one  of  the  main  drivers  of  those  countries’ 
convergence with the EU’s standard of living. 

•  A  well-functioning  EMU  is  a  major  asset  for  the  EU  as  a  whole,  not  least  since  the 
overwhelming  majority,  if  not  all,  of  EU  countries  will  eventually  become  members  of 
EMU.  A  thriving  euro-area  economy  will  contribute  to  the  wealth  and  dynamism  of  the 
whole EU, reinforcing public support for EU integration both within and outside the euro 
area. 

•  A  strong  EMU  will  also  foster  the  EU's  leadership  in  the  global  economy.  A  well-
functioning euro area lays the foundations for EMU to play a strong role externally, both in 
the macroeconomic sphere and in the area of global financial supervision and regulation. 
Proving  its  ability  to  strengthen  the  euro  area’s  external  role  and  assume  its  global 
responsibilities will have positive spin-offs for other policy areas where the EU aspires to 
global leadership, e.g. sustainable development, development aid, trade policy, competition 
and human rights. 

Political  will  and  determination  is  required  to  implement  this  comprehensive  agenda.  .  The 
very  success  of  EMU  shows  that  political  initiative  and  ambition  can  generate  considerable 
economic,  social  and  political  benefits.  But  to  fully  deliver  these  benefits,  the  continued 
involvement of all parties is crucial. Hence the Commission will encourage a wide discussion 
on  these  topics  in  the  second  half  of  2008  and  promote  a  broad  consensus  on  the  building 
blocks  of  this  agenda  with  other  EU  institutions  as  well  as  a  range  of  relevant  bodies  and 
stakeholders.  Drawing  on  this  discussion,  the  Commission  will  come  forward  with 
appropriate operational proposals. 

EN 

14 

   EN