Marco Buti

1
How the Single Currency WorksEMUs Achievements
and Challenges

• Marco Buti
• Deputy Director General
• DG Economic and Financial Affairs
• European Commission

2
Outline

• The benefits of the euro
• Achievements and challenges
• Improving the euro-areas growth performance
• Ensuring smooth adjustment in EMU
• Accelerating the pace of financial market
  integration
• Strengthening economic governance
• Enhancing the euro-areas visibility on the
  international scene
• Challenges for Malta
• Conclusions

3
Price stability as promised
Different measures of euro-area inflation, Jan
2001 Aug 2007
4
Budgetary developments in the euro area
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Salient features of the revised SGP

• Preventive arm of the SGP
• Country-specific medium-term budgetary objectives
• Larger fiscal consolidation efforts required in
  good times
• Incentives for structural reforms, emphasis on
  sustainability
• Corrective arm of the SGP
• 3 and 60 remain the anchors of the system
• More economic analysis in the application of the
  rules
• Minimum fiscal effort, possibility to extend
  deadlines
• Improved fiscal and statistical governance
• Recognition of the role of national rules and
  institutions
• Focus on the importance of high quality and
  reliable statistics

6
MT stability in new MS
Structural budget balances in the EU Member States
7
Long-term sustainability in new MS
Budgetary pressures arising from the population
ageing (2005 2050)
Source Commission services.
8
Euro-areas growth performance in context
Disappointing compared to the USA
9
Long-term growth scenario for euro area
Economic effects of ageing populations
(assuming policies do not
change)
10
Growth and inflation differences Update
Annual change (period averages)
Real GDP growth
HICP
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Differences in GDP growth dispersion
Average deviation from statistical mean of
currency area GDP at
2000 market prices, 1992-2006
Euro-12 all euro-area MS EU 4 DE, FR, IT, ES
Germany 16 Bundesländer USA 50 states
12
Competitiveness adjusting too slowly
Intra-area real effective exchange rate

(based on
unit labour costs, index 1999 Q1100, Q1 1999 to
Q2 2007)
13
Adjustment channels under EMU

• Relative wage and price adjustment
• Downward price rigidity and sticky prices in
  services sector
• Productivity growth
• Slowdown placed burden of adjustment on prices
  and wages
• Budgetary stabilisers
• Over-optimism in upturns curtailed flexibility in
  downturns
• Financial market integration
• Facilitated growth but may have contributed to
  overheating
• Global trade and financial developments
• Geographical and sectoral specialisation affected
  exposure

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EMU has spurred financial integration
15
Strengthening economic governance

• The Eurogroup has assumed a pivotal role
• Brings key macroeconomic policy makers together
• Promotes common understanding of challenges
• Fixed presidency has increased visibility and
  coherence
• From consensus to concerted action
• The Eurogroup needs a more tangible output
• Enhancing the dialogue on policy interactions
• Need to enhance ownership

16
The euro as an international currency
Growing importance as an international reserve
currency
Significant weight in international debt markets
17
Strengthening external representation
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Benefits of Euro Area Membership for Malta

• The benefits could be particularly large for a
  small and open economy like Malta
• The EU is the main trading partner of Malta. More
  than ¾ of Maltas intra EU trade flows are with
  euro area Member States.
• Lower operating costs for Maltese enterprises
• Benefits to the tourism sector reduced costs of
  travelling to Malta
• Cost of loss of monetary sovereignty small

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Challenges

• Secure sound and sustainable public finances, in
  the light also of the rise in age-related public
  expenditure
• Need for a more resolute fiscal consolidation,
  especially in good economic times
• Enhance capacity to adjust to country specific
  developments
• Need to speed up the pace of structural reform
  that will increase the flexibility and efficiency
  of markets and lead to an enhancement of
  productivity and competitiveness

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Conclusion

• Over the last decade, we have learned a great
  deal about the benefits of EMU
• And the challenges facing euro-area policy makers
• Also for Malta
• Next year, the Commission will publish a
  comprehensive study of EMUs first decade
• On the basis of which we will identify the policy
  priorities for EMU in the coming decade