Lessons to be Learned

As EMU enters its second decade, what lessons can we draw from the assessment of the euro's first 10 years, and in particular from the way the euro area has weathered the ongoing unprecedented global crisis? The following considerations do not aim to provide an exhaustive enumeration, but rather to highlight some key factors, both on governance and on policies.

First and foremost, the euro has proven that it is a viable and sound project that is here to stay. EMU, a policy regime without real historical precedent,³⁴ has found its feet and established an area of economic and monetary stability and the second-most-important currency in the world. During the first decade of EMU the macroeconomic record overall has been positive, fostered by a stability-oriented institutional framework, anchored in credible area-wide monetary policy, and benefiting from an underlying “policy convergence” among Member States that has been in marked contrast to preceding decades. The euro has fostered trade and financial integration among members, contributing to the completion of the Single Market. During the current crisis the euro has proven its worth in strengthening members' resilience in the face of global financial shocks by, among other things, eliminating exchange rate volatility and facilitating access to liquidity and risk sharing.

At the same time, the first decade of EMU has shown uneven progress in fiscal and structural policies, which are the main domestic policy levers within monetary union. Insufficient domestic adjustment capacity can lead to persistent divergences within monetary union, whose eventual correction may take time and can be economically costly. The experience clearly underscores the fact that countries themselves remain in the driver's seat when it comes to realizing the full potential of EMU, and adapting policies to the requirements of an irrevocably fixed exchange rate has not always been as smooth as hoped for.

Second, the governance framework of EMU has functioned well overall, though further improvements in its effectiveness should be explored. Within the overall framework provided for in the Treaty, economic policy governance in EMU has evolved over time and has been further operationalized according to emerging needs and lessons learned. Most visibly this includes the 2005 reform of the Stability and Growth Pact and the adoption and refinement of the Lisbon Strategy on Growth and Jobs. This evolutionary process will continue, drawing both on the broader lessons from the past 10 years and on the daunting challenges thrown up by the crisis.

Well before the peak of the crisis, the European Commission set out a number of recommendations in the EMU@10 report that will allow the euro-area economy to better address challenges. In a situation of crisis, more than in usual times, economic policies need to react swiftly to address the economic downturn and mitigate its effects. The ability to deliver swift and coordinated responses should therefore be strengthened.

One of the key issues for further reflection is economic policy surveillance. The Treaty provides for a set of surveillance instruments based on Articles 99 and 104, which have served to exert peer pressure, foster policy consistency, and encourage learning from best practices. But the depth and intensity of surveillance is not even among policy areas. In its EMU@10 report, the European Commission called for a broadening and deepening of euro-area surveillance, to encompass in particular developments in relative competitiveness among euro-area members, and eventually to be extended to future members. This should serve to capture a more complete picture of countries' policy challenges and the requirements of operating well in EMU. Surveillance of macro-financial stability should also be strengthened and appropriately integrated into the EU policy processes. The crisis has underscored the relevance of these proposals. But a caveat is important: it was not a lack of surveillance or prior diagnosis that led to the emergence of imbalances and vulnerabilities in the euro area, but rather a lack of political will to implement necessary reforms and policies “in good times.” With this key lesson in mind, ways of giving surveillance greater traction should also be explored.

Moreover, the crisis has shown that financial market regulation and supervision needs to be improved. Many of the challenges, such as systemic risk assessment, have not been specific to the EU or the euro area. But the fragmentation of Europe's supervisory landscape has clearly not kept up with the ongoing financial integration. Significant progress was made in the period before the crisis, in particular on regulatory reform through the Financial Services Action Plan, and on supervisory cooperation through memorandums of understanding, but this has not been sufficient to prevent the collective action problems that arose in particular at the start of the crisis.

On the upside, the crisis has shown the ability of the euro area, and the EU more broadly, to act decisively and in a coherent manner when this was vital. Despite some initial hesitation, concrete policy initiatives such as the European Economic Recovery Plan show political will and recognition of joint responsibility. The crisis teaches a key lesson on the importance of policy coordination and the need to take full account of the intensified interdependencies and spillovers within the euro area. An important concrete stepping stone is the envisaged strengthening of the EU-wide supervisory framework, on which the European Commission has made proposals for further discussion with Member States and the European Parliament. Regarding fiscal policy, the prevailing setup appears to be capable of delivering the necessary degree of coordination while maintaining its country-specific dimension and accountability.

Finally, the crisis also documents the urgency of consolidating the external representation of the euro area, not least with a view to addressing more powerfully such challenges as global imbalances, which are among the root causes of the crisis. The euro area and the EU need to provide global leadership in developing joint responses to restore financial stability and sustainable growth in the global economy and to design a better regulatory and supervisory system. This is not to say that the EU does not play its part in managing the crisis. It plays a leading role in the G20 and other forums. But the clear and pressing need for effective external representation highlighted by the crisis may catalyze further progress toward consolidating Europe's role as a global partner in the future.

The euro area has already expanded from 11 to 16 members since 1999, and further Member States are set to join over the coming years. The framework for euro-area enlargement, based on the achievement of sustainable convergence, remains fully relevant. Establishing a track record of sound policies is in the interest of both existing and prospective euro-area members. Fears of the euro area becoming a “closed shop” have proved unfounded, with four countries joining the euro area in the last 3 years. While not specifically designed with the NMS in mind, the euro-area enlargement framework has stood the test of time and fulfills an important role in safeguarding the credibility and stability of EMU.

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