By Joaquín Almunia, the European commissioner for economic and monetary affairs (THE GUARDIAN, 02/06/08):
European ministers meet today to celebrate 10 years of the European Central Bank, established after EU leaders met in Brussels and decided to launch economic and monetary union. It set 11 countries on the path to introduce the euro in January 1999 and was history in the making. Ten years on, has that bold and ambitious decision paid off? EMU has certainly confounded its strongest critics and discredited dire predictions of a break-up. The euro is here to stay and, judging by extensive analysis, seems an overwhelming success.
Today, the eurozone stretches from Finland to Cyprus, its 15 members soon to become 16 with the addition of Slovakia. With a population of 320 million, EMU is the largest market in the developed world and the euro an international currency that is second only to the US dollar.
The monetary policy of the European Central Bank, backed by a framework that encourages budgetary discipline, has delivered sustained price stability, with inflation averaging just over 2% annually, notwithstanding the recent resurgence caused by soaring global energy and food prices. In turn, interest rates have been kept remarkably low.
What to make, then, of the claims that the euro has increased prices? It is certainly hard to square this perception with EMU’s decade of record low inflation. Clearly, a few abuses that occurred around the 2002 changeover left a lasting impression, particularly where they concerned everyday purchases. But in reality, price increases during the year of the currency changeover amounted to just 0.1 to 0.3 percentage points. The simultaneous rise in house and oil prices probably reinforced a psychological link between the euro and high prices, though it is worth remembering that the euro-dollar exchange rate has largely shielded the eurozone from the full effect of oil hikes. In dollars the price of oil increased five-fold in five years, but nowhere near as much in euros.
In fact, the eurozone is now a lot more resilient in coping with external shocks than its constituent economies were before 1999. True, the members of EMU, like the rest of the world, are feeling the pinch from the current turmoil and high commodity prices. Yet, without a common currency it is likely that the current financial crisis and US downturn would have brought serious disorder to the European economy. Before the euro, exchange-rate realignments in times of economic turbulence often disrupted trade and investment.
In contrast, the disappearance of exchange-rate costs and risks has boosted cross-border trade and investment. The euro has also been a powerful driver of financial market integration, doubling to 40% the share of euro-area equities held across borders and fostering cross-border mergers and acquisitions. There have been 16m new eurozone jobs created over the past 10 years, three times the number created in the previous decade.
Despite these obvious gains, the criticism often levelled at the euro is about low growth and low productivity. It is true that while the euro has boosted labour productivity per hour worked by as much as 5%, growth has averaged around 2% over the past 10 years – not a great difference from the previous decade. Yet this figure is explained by low growth in Italy and Germany, the latter being an exceptional case as it struggled to regain competitiveness during the first half of this decade following the costs of reunification. Indeed, remove the German data, and euro-area growth rises to an average of 2.5% since 1999.
Of course, there is room for improvement. While some eurozone countries have performed exceptionally well, the growth rate of others has been undeniably modest. But if some politicians have used the euro as a convenient scapegoat, the real reason lies with the pace of economic reforms, rather than the single currency. Since 2006, Germany has flourished thanks to its programme of reforms and continues to expand at a strong pace despite the cooling economic climate.
There is scope for EMU to be an even more effective platform to coordinate and advance sound policymaking in the euro area. Which is why this important anniversary is both an occasion for celebration and reflection. As we prepare the ground for a prosperous second decade of the euro, we are confident that the European single currency will become an even more valuable asset supporting the stability and dynamism of the European Union as a whole.