| Coming of Age: Report on the euro area. Bruegel blueprint series, Volume IV/January 2008 (2008) | |||||||||
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| The euro marks its tenth year in 2008. It is unlikely to be the easiest one in its successful first decade. At the end of 2007, inflation in the euro area had jumped to above three percent, yet with economic growth slowing and unsteadiness in financial markets persisting, the European Central Bank is faced with a serious dilemma. The euro has appreciated recently to record levels against other major currencies but, at the same time, the global balance-of-payments adjustment is still far from complete and the risk of major exchange rate instability remains. With the entry of Cyprus and Malta, the euro area now counts 15 members, but the climate of uncertainty and mistrust generated by the rejection in 2006 of Lithuania’s euro application lingers, and it is still unclear when the new EU member states of central and eastern Europe will join the euro. The time is right, therefore, to look back and assess whether Economic and Monetary Union (EMU) is equipped to sail through less calm, perhaps even stormy, waters. This was Bruegel’s intention when in 2006 it assembled a group of highly experienced policymakers and academics from countries within and outside the euro area. In this report, the group delivers a sobering assessment. It emphasises that the euro is a major achievement of European integration; that the European institutions deserve high marks for giving birth to a new entity out of what was initially a group of very different member economies; and, especially, that there is much to praise in the conduct of monetary policy by the ECB and in its handling of the 2007 liquidity crisis. Worryingly, however, the group also notes that, in spite of an exceptionally supportive international environment, the euro area’s economic performance over the last nine years has been adequate at best; that governments have sometimes failed to realise that membership in a currency union requires a change in behaviour; and that almost twenty years after the start of the Maastricht negotiations, competing visions of future EMU continue to coexist. The group makes a number of concrete proposals to improve euro area policy and governance. But the main message in this report is broader. When the EMU project was launched, it was often regarded as a step towards a fully-fledged federal union in Europe. For many advocates of EMU, the goal was political – and money was a building block. After Maastricht, Amsterdam, Nice, the aborted EU Constitutional Treaty and Lisbon – five treaty changes or would-be treaty changes in less than twenty years – federal union is today a more remote prospect than it was in the late 1980s. For all practical purposes, the assumption must be that no federal government will emerge in the foreseeable future as a counterpart to the ECB, and that EMU will remain a sui generis policy system. Fortunately, however, EMU is also an evolving entity and only time will tell what the sharing of a currency will mean for the member economies and their mutual relationship. The euro’s first decade has provided important insights, but ten years is a short time in the life of a monetary union. This is why the group emphasises that, if the euro is to be a lasting success, all participants must be more willing than they have been so far to draw lessons from their joint experience. | |||||||||
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