Distinguished Speaker Seminar: Klaus Regling - EMU After 10 Years: How Does It Work? What Are the Challenges?

Klaus Regling, Director General of Economic and Financial Affairs of the European Commission, the first presenter in ADBI's Distinguished Speaker Seminar (DSS) program for 2008, presented his paper titled "EMU after (almost) 10 years: How does it work? What are the challenges?" The paper addressed the history, achievements and future challenges of the euro, which according to ADBI Dean Masahiro Kawai can "provide insights to Asia in its ongoing financial integration and cooperation."

The launch of the euro was unprecedented in terms of international monetary and economic participation. Equally momentous were the events required to bring the euro about. The hopes and fears for monetary integration were embodied in the creation of the European Monetary Union (EMU) because such a union had never been achieved before. The EMU's initial goals of macroeconomic stability, growth and job expansion, and economic cohesion and convergence have all been met. The perceived challenges of adjustment mechanisms and the assignment of economic policies led to a number of specific institutional features. These included: stability oriented economic policies (convergence criteria), strengthened fiscal discipline (stability and growth pact), and enhanced market adjustment (Lisbon strategy).

The success of the creation of the euro can be illustrated by a number of achievements in the euro-area. First, macroeconomic stability in the region has brought about the lowest and least volatile inflation rates since the 1960s. Second, public deficits have been reduced due to sound fiscal policies. Third, the growth in the number of jobs has been remarkable and the region is currently experiencing its lowest unemployment rate in 20 years. Fourth, GDP per capita has increased in the region due to convergence and cohesion. Last, the international position of the euro has been substantially enhanced as seen in the increase in the currency's share of stock of international debt securities. The strong international position of the euro makes it a potential pillar of global financial architecture.

Mr. Regling reported that while most of EMU's goals have been met, some challenges still remain. Europe is facing a radically different environment than it did a decade ago. The growth in inter-nation dependencies and the developments in the global environment are just examples of the mega-trends that are changing the economic landscape. Globalization (as evidenced by an increase in world trade and foreign direct investment), demographic change (such as higher life expectancies and a reduction in the working age population in the region) and environmental issues (such as carbon dioxide emissions, pollution and extreme natural hazards) are part of these mega-trends.

In response to these challenges, Mr. Regling focused on the need for more knowledge-based economies that will boost productivity, enhance adjustment mechanisms and strengthen public finances. Education and training are keys to success and there is a need to advance their infrastructure especially in innovation, research and development. A competitive knowledge-based economy needs a strong workforce base, so the EU is modernizing its educational systems and improving its adjustment mechanisms to allow for greater competition and more wage flexibility. In order to facilitate adjustment, Regling proposed expanding financial market integration and competition especially in services. He also emphasized the need to strengthen public finances by consolidating in periods of good times. This is important since Europe will be facing long term pressures on public expenditures with a reduced ability to increase budgets.

As the membership of the EMU continues to grow, the region can not afford to become economic bystanders. Effective consolidation could take the form of having one EMU representative in multilateral institutions such as the IMF and G7. Regling ended his speech by pointing out that the EMU on its first decade has achieved a great deal. Monetary policy has been successful and job creation has surged. The euro has rapidly emerged as the second most important currency in the world. The challenge is for European countries to look for common responses to cross-cutting challenges and become more actively engaged on the world stage.

View Regling's presentation.