Memorandum by Pervenche Berès,
Committee on Economic Monetary Affairs, European Parliament
Further to your letter dated 8 February related
to the inquiry led by the House of Lords European Union Committee
into issues related to the Euro zone, I am glad to provide you
with the following comments.
What contribution has the introduction of the
Euro made to levels of trade within the Euro zone, and between
the Euro zone and the rest of the world?
1. The Euro and the single monetary policy,
coupled with the internal market, have fostered trade and integration
while currency stability has been delivered to participating countries.
Since the launch of the Euro there has been a significant increase
in both intra and extra-euro zone trade. This rise may be partly
related to the introduction of the Euro. Exports and imports of
goods within the Euro zone increased from about 26.5% of GDP in
1998 to around 31% in 2005. Over the same period, exports and
imports of goods with trading partners outside the Euro zone rose
from about 24% of GDP to almost 30%. This is mainly due to an
increase in global trade integration and a very sizeable increase
in trade with the ten new member states of the European Union.
Thus, partly due to the Euro, the openness of the Euro zone countries,
starting from an already high level, has still risen while at
the same time the integration has been strengthened. No doubt
that without the Euro, the main economies of the zone would have
suffered a lot while the international economies have been going
through important international financial crisis. Thus the internal
trade of the zone, but also by contagion of the EU as a whole,
is yet immune from some major impacts of the global imbalances.
What effect has the introduction of the Euro had
on the functioning of European capital markets?
2. The introduction of the Euro has allowed
and fostered financial integration in the Euro zone. The degree
of integration varies substantially between market compartments.
The money markets and the markets for government securities and
private sector bonds are now highly integrated and progress has
been made regarding the integration of stock markets. The integration
of banking markets, in particular retail banking, is lagging behind,
though consolidation of the banking sector notably through development
of mergers has certainly been fostered by the Euro. But the main
paradox is that even though it is because of the existence of
the Euro that those progresses have been made possible, due to
the law of the internal market and the absence of specific rules
for its functioning inside the Euro zone, the benefit of the integration
of the Euro zone financial market has never been specific to the
zone.
Are there any lessons to be drawn from the changes
in Euro exchange rates since 1998?
3. In the context of the prevailing global
system of floating exchange rates, the exchange rate of the Euro
against the main currencies has strongly fluctuated, notably against
the US dollar with which the order of magnitude of fluctuations
has been around 50%. These developments have highlighted the need
for improving the external representation of the Euro-zone.
4. Actually the Euro has experienced tremendous
growth in international markets since its creation. It is now
the second world currency. Whether it was a voluntary policy or
not, does not matter. The reality is that the Euro has now become
a major reserve currency. This creates some new responsibilities
which need to be faced. The challenge is to achieve a better representation
of the Euro-zone to gain European influence based on its acquired
credibility. Notably there is still some confusion among institutions
(the Council, the Commission, the ECB) as to which one is responsible
in terms of representation of the Euro, which could be a problem
in view of the risks of rapid adjustments of the global imbalances
that could result in abrupt changes in the Euro exchange rate
against the US dollar with direct impact on growth. A better representation
of the Euro-zone in international institutions is needed. Specifically
the European Parliament calls for a single Euro zone seat at the
IMF Board.
Was the recent reform of the Stability and Growth
Pact (SGP) appropriate?
5. The SGP was reformed in 2005 on one hand
by reinforcing its preventive arm by taking into account the debt
criteria vis a" vis the one on public deficit and on the
other hand by softening the corrective arm. Though it is too early
to judge the effect of the reform, this reform went into the right
direction.
6. Even though, much more can and should
be done. The SGP is an ex post constraint whereas there is a need
for an ex ante budget coordination. The challenge lies in the
fact that the member states of the Economic and Monetary Union
(EMU) have renounced national monetary policies for a single monetary
policy whereas they have retained full responsibility for the
budgetary policy. The coordination of the fiscal policies has
not taken place so far and anti cooperative policies have even
occurred. Large countries like Germany and France, where social
consensus to implement structural reforms is harder to find, have
been affected more sharply. Some small countries which are by
nature more open to trade have used social and fiscal dumping.
Divergences in the Euro-zone economies with countries for which
growth is mainly based on exports (Germany, Austria for instance)
and countries for which growth is mainly based on internal demand
(France, Spain for instance) are a proof of the need for better
coordination and could result in antagonistic effects which may
cancel each other out.
7. In the absence of exchange rate adjustments,
a lack of collective agreement is detrimental for every member
state, at some time or another, and this lack contributes to reducing
EU growth. The current coordinating tools are still on their way
for improvement. For instance, the Broad Economic Policy Guidelines
should have a better impact on the definition of national fiscal
policies. Coordination would infer that governments share the
same assessment of the economic situation and define common priorities
and investment strategies. So far, in practice, the coordination
has taken the form of peer pressure on an ex post basis.
8. Some progress has already been achieved
in coordination though. The reinforcement of the Eurogroup through
a stable presidency was an important step forward and the pragmatic
action of Jean Claude Juncker as head of the Eurogroup is to be
praised. For instance promoting budgetary coordination using same
macroeconomic data and converging' budgetary schedules is indeed
useful.
Has the ECBs monetary policy been too restrictive?
9. The attitude of the ECB can be considered
as overcautious. The monetary policy has been asymmetric: the
ECB is quick to raise interest rates when risks for increased
prices are looming and slow to reduce interest rates when there
is no inflation risk and poor growth forecasts. Everybody accepts
the need for price stability as a precondition for a healthy economy,
and there is also a consensus on the idea that an independent
authority can deliver it most efficiently. But a central bank
should also contribute to economic growth and employment, especially
if price stability has been achieved. More specifically the EU
Treaty in its article 105 says that the monetary policy should
support the economic policies of the EU having achieved price
stability. Several central banks in the world in practice pay
attention not only to price stability but also to both output
and employment, such as the US Federal Reserve.
10. The truth is there is no similar situation
in the world in terms of independence as the one experienced by
the ECB. The status of the US Fed is much different since the
institution before which it is accountable is also the institution
which confirms its nomination and can modify its status. Moreover
there are still progress to be made concerning the transparency
of the ECB which by not publishing its minutes prevents a debate
from developing which could help define coordination between the
fiscal policies and the monetary policy. The strong degree of
independence of the ECB calls for a clear democratic counterweight.
This means that there is still some progress to be made to increase
the weight of the Eurogroup. I am fully convinced that this should
never be perceived as a threat towards the independence of the
central bank but as a mean to have a really balanced approach
inside the Euro zone. That would allow to optimise the outcome
of the zone in the interest of its members but also of the EU
as a whole.
11. A policy which is simply orientated
towards price stability and institutional arrangements have neutralised
monetary policy, which is detrimental to growth in the Euro-zone.
No real pro-active relationship between the Eurogroup and the
ECB has still taken place. The reasons put forward by the ECB
for explaining slow growth is the lack of structural reforms.
But comparisons show us that countries which have managed to reform
their economy such as Canada and Sweden have been helped by a
more dynamic monetary policy and higher growth to facilitate these
structural reforms. By contrast with the lack of active monetary
policy and budgetary policies in the Euro-zone, it can be recalled
that the US policy mix is much more active and the US Federal
Reserve is praised and respected for its balanced action.
What impact will the expected enlargement of the
Euro zone have on the functioning of the Euro zone economy, the
management of monetary policy in the Euro zone?
12. The enlargement is subject to the strict
fulfilment of criteria set by the Maastricht Treaty. To the extent
that these criteria are strictly fulfilled, the enlargement will
be beneficial. But there is no need to speed up such a process
since it is clear that the Euro zone countries have experienced
diverging trends in inflation, growth, competitiveness in the
past years. These diverging trends, though not abnormal in the
short term, will raise concerns if they were entrenched. In this
context, any enlargement of the Euro zone reinforces, if ever
it was needed, the pressure to make sure that the governance of
the Euro zone is optimal. Actually some institutional changes
are necessary to revamp effectively the EMU framework.
13. Firstly there is a need for better coordination
of national fiscal policies (see question 4). Secondly there is
a need for better coordination between fiscal policies and the
monetary policy (see question 5). Actually in addition to the
insufficient coordination of national economic policies, the inadequate
policy mix in the Euro-zone is also due to the overcautious attitude
of the ECB. Thirdly the external representation of the Euro-zone
has to be strengthened (see question 3).
14. Apart from the Eurogroup, which is an
informal structure, a specific representation of the Euro-zone
would contribute to strengthening it as the core of the EU. Before
enlargement, the Eurogroup formed the bulk of the Ecofin Council.
Now that it represents 13 countries out of 27 countries some specific
mechanisms have to be devised to strengthen the core of the EU.
Some impulse could be given by a European Council specific to
Euro-zone member states which would devise better coordination
mechanisms. There is a need to think out of the box on convergence
of tax and fiscal policies, wages, minimum wages...
15. The involvement of national parliaments
in this process might also help and this is why as chairwoman
of the ECON I have taken for three years the initiative to invite
representatives of national Parliaments as well as Commissioner
Joaquin Almunia and Jean-Claude Trichet to discuss together the
priorities and the way of improving the functioning of EMU. In
this respect I invite you to refer to the ECON website: http://www.europarl.europa.eu/comparl/econ/hearings/default_2007_en.htm
12 April 2007
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