Christian GHYMERS

1
The euro and the citizens main social benefits
of the euro

• Christian GHYMERS
• Adviser DG ECFIN
• International Conference at Ministerial Level
•  The possible influence of euro adoption on the
  social situation of Slovak citizens
• Ministry of Labour, Social Affairs and Family
• Bratislava, 25 May 2007

2
Outline

• Introduction Money and the EU integration
• EMU as a tool for economic and social results
• Main social impacts of EMU
• Why the ?
• The net results of the
• Assessment of the impact of the

3
Introduction Money as a national public good and
the EU integration

• Overall, Money is a  public good  which affects
  the whole economic and social life, therefore gt
  governance issue
• Political power uses to extract rents from it
  (seignorage) and tends to manage it for its own
  interests, contributing to national segmentation
  (one currency per country), this created costs
  but also allows for some degrees of national
  autonomy
• However, increasing interdependencies and real
  integration change (1) the balance of
  costs/benefits of keeping its own money (2)
  spillover effects from one country to its
  partners need to be internalized and managed
  collectively
• This why the EU launched the Single currency as a
  complement to the Single market

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EMU gt ? Integration gt growth gt social ?
Stability

• This why EMU and the are
• A big step towards full EU integration
• A progress in economic governance making easier
  to warrant macroeconomic stability and
  predictibility
• Both factors are mutually supportive to EU
  integration this points to increase economic and
  social welfare of EU citizens
• Indeed, the purpose of EU integration is (Art. 2
  of the Treaty)  to promote economic and social
  progress and a high level of employmentin
  particular through the creation of an area
  without internal frontierand through the
  establishment of economic and monetary union 

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But the is not a panacea

• The euro is just a tool which could be
   well-used  or  mis-used  according to the
  respect of the agreed rules and the quality of
  other economic policies and conditions
• Adopting the euro improves the conditions for
  getting a higher growth as far as it improves
  macroeconomic stability (a necessary conditions
  for growth) but does not warrant to get it (it is
  not a sufficient condition)
• is a potential advantage not a guarantee of
  results, only good governance makes the
  difference, but helps to maintain better
  transparency

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and the is an easy scapegoat for populism

• The big difference between the and other
  currencies in the world is that responsibilities
  are put at clear but asymmetric levels (national
  and federal)
• This is an advantage for spuring cooperation
  among Member States and facing their own
  responsibilities
• But exposes to political unfair exploitation of
   the-one-fits-for-all  dimension of a single
  monetary policy and a single exchange rate

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What is EMU? Definition

• EMU and are tools for EU integration i.e. for
  social progress
• EMU Single Market national economic policy
  coordination ultimately a single currency (the
  )
• (Single Market Custom Union 4 freedoms of
  circulation common policies)
• important change in the policy regime 1
  Monetary policy 13 Fiscal and Economic
  policies, convergence !
• Economic integration is one the three pillars of
  European integration EMU is a tool for reaching
  the goals of the EU (growth, welfare, cohesion),
  Art. 2 of the Treaty

Customs union
Single market
Economic and Monetary Union
Full economic integration
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EMU is more than Monetary integration

• The Economic and Monetary Union is much more than
  monetary, and more than the euro area
• Stability-oriented macroeconomic framework
• Economic policy co-operation and co-ordination
  (fiscal structural policies)
• Legal framework
• In the euro-area, a centralised monetary policy

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The euro area 13 from the 27

• All EU-27 Member States are part of EMU, but not
  all of them have the euro as single currency

• 13 have the euro as single currency and form the
  euro area. Slovenia introduced the euro on
  January 1, 2007
• 2 have opt-outs (Denmark, United Kingdom)
• 2 Member States (Cyprus and Malta) are about to
  be admitted
• 10 others still have derogations as they do not
  fulfil the criteria for joining, but they
  formally committed themselves to join the area

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The main social impacts of the euro

• Social impacts are clearly positive as far as the
  national policies are coherent with the stability
  framework
• Significant positive social impacts of EMU
• As a result of macroeconomic factors
• Better stability framework gt lower risks
  better predictibility gt better macroeconomic
  conditions necessary condition for higher
  economic growth and higher job creation
• As a result of microeconomic factors
• Lower costs of transaction across the euro area
  and with the rest of the world as a result of a
  bigger international currency
• Better transparency of prices, increased
  competition
• Increased Financial efficiency (larger and more
  liquid markets)

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The main social impacts of the euro

• Social impacts are clearly negative as far as
  wrong national policies are applied (no-respect
  of the stability framework or damage to the
  potential output)
• Significant negative social impacts of EMU
• As a result of macroeconomic factors
• Fiscal deficits gt Real overvaluation gt loss of
  competitiveness gt job destruction and lower
  growth
• As a result of microeconomic factors
• Lower costs of transaction and increased
  competition could make thing worst (fast external
  deficit, delocalization)

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Other social impacts of the euro

• Another possible negative social impacts of the
  changeover would be some asymmetries in the
  impact on the prices for some kinds of goods and
  services.
• Even without net impact on the consumer price
  index, some social categories could be affected
  as far as some prices would increase as a result
  of the changeover.
• For example, in the first wave of changeover,
  the prices of some frequently-purchased-products
  rose more than the average when market
  competition used to be lower. For most consumers
  this negative impact was compensated by opposite
  price behaviours where competition was higher.
• However, it could not be excluded that some
  social categories could be negatively affected
  according to their specific consumption structure.

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Other social impacts of the euro

• The changeover from national currency to the euro
  constitutes a major social change that could also
  have a negative social impact for some specific
  vulnerable social groups (mainly blind and old
  people) or special minorities.
• A special care in the information strategy has to
  take them on board for reducing these inescapable
  negative aspects
• However these costs have to be seen as the price
  for collective significant benefits

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Why the euro?

• Benefits
• Elimination of exchange costs and currency
  fluctuations
• Price transparency and comparability
• Increased competition within the Single Market
• Price stability and low interest rates guarantee
  of a better economic governance (market
  expectations)
• Less uncertainties
• Consumer borrowing less expensive
• Encourages business investment Growth and Jobs
• Deeper financial integration (broader and more
  liquid markets)
• All the above elements lead to more trade,
  investment and growth
• Major international currency
• Building an European identity political
  integration

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Why the euro?

• Costs
• Member States cannot change exchange or interest
  rates to cope with economic shocks and cycles
• Relative price adjustments and factor mobility
  are the only available adjustment mechanism, but
  they are rather slow and sometimes painful
• Potential risks of lack of flexibility
  (structural reforms)
• Potential risk of national mistake creating
  negative spillovers
• Difference in inflation tends to create
  pro-cyclical effects (r)
• Loss of national sovereignty
• National monetary policy
• National symbol
• Costs of changeover preparations

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Net results of the euro

• Benefits are bigger than costs as far as national
  policies ensure convergence
• Monetary policy managed by independent body for
  ensuring price stability
• If national fiscal positions are compatible with
  stability
• Policy mix favourable to growth and predictible
• there is room for manuvre in case of specific
  shocks and cycles
• Fiscal balance or surplus gt  crowding-in  and
  higher growth
• There is less risk of real overvaluation at
  national level
• The institutional architecture of EMU helps to
  ensure sound fiscal positions
• Permanent mutual monitoring by Commission and
  partners
• Peer pressures, Excessive Deficit Procedure and
  Stability and Growth Pact reduce risks of
  populism and mistakes

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II. Assessment of the impact of the

• Long term charts on Inflation, Budget deficits
  and nominal interest rates
• Policy stance monetary and fiscal
• Overall assessment positive and negative aspects
• The changeover and the inflation perception

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Inflation Convergence 12 Euro areaAnnual
increases
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Budgetary Deficits of GDP
20
Long term interest rate convergence (10 years
bonds)Annual rate in
21
(No Transcript)
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Budgetary stances in the area have been
pro-cyclical since 1998 mismanagement

• Primary balance Budgetary balance less interest
  rate charges
• Cyclically adjusted without impacts of cyclical
  activites on public expenditures and receipts
  structural budget
• Indicating discretionary net impulse of budgetary
  policies in  good years  in contradiction with
  the SGP !

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Short-sightedness in the conduct of fiscal policy
24
CUMULATED GDP GROWTH in the euro areaTotal
period 1999 2006
23
14
50
17
10
17
16
10
12
30
33
25
CUMULATED HICP GROWTH in the euro areaTotal
period 1999 2006
13
21
27
16
12
14
15
19
24
25
25
26
Current account balance in the euro areaTotal
period 1999 2006 (in of GDP)
40
45
-7
32
13
8
3
-3
-72
-40
-70
27
Cumulated deficit in the euro areaTotal period
1999 2006 (in of GDP)
26
8
8
-1
-22
-11
-22
-24
-30
-3
-38
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Overall Assessment

• The euro has brought most of the benefits we
  expected
• EMU has delivered price stability
• The cost of borrowing has fallen dramatically
• ECB credibility well established
• EMU has acted as a catalyst for trade with and
  investment flows in the euro area
• Unemployment has been reduced substantially
• The euro has become a major global currency

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Overall Assessment

• The euro has not delivered well for
• Outcome after entry in EMU significantly
  different across countries (but not more than
  before )
• SGP could not prevent a pro-cyclical fiscal bias
• Lower incentives to do the necessary reforms to
  increase productivity and adaptability
• The adjustment to shocks is slow (rigidities)
• Spillovers and interactions inadequately
  understood and addressed
• There is a lack of common vision

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Overall Assessment
1.Positive results EMU more resilient economic
governance in Europe, (not just in euro-area),
impressive nominal convergence (low and stable
inflation, sounder budgets, lower common interest
rates), spectacular monetary financial
integration (mutation of banking system), second
international currency protecting from
speculative attacks and deepening EU
integration 2. Negative results coordination
process not yet as effective as needed since the
(excessive free-riding, lack of national
ownership), adjustment mechanisms slower than
expected (divergent performances, insufficient
reforms and Lisbon failure), pro-cyclical fiscal
policies not eradicated (SGP not very effective),
growth has been slow to recover
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The euro in the world

• Key indicators 2005

¹Exports and Imports of goods, excluding intra EU
trade (EU 25 or euro area) ²Share in world trade
of goods, excluding intra EU trade (EU 25 or euro
area)
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The euro in the world

• The euro is a major international currency,
  backed by
• Member States' commitment to stability
• Solid monetary policy by the ECB
• Size and power of the euro area
• The euro area is one of the world's largest
  trading power, thus attracting foreign investment
• The euro has become an attractive reserve
  currency for other currencies around 25 share
  in 2005, compared to 18 in 1999 (38 increase)

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Euro and price increase

• Past changeover had a very limited impact on
  prices
• In 2002, actual inflation remained stable 2.3
  as in 2001
• Estimated contribution of the euro cash
  changeover was 0.12-0.29 points of 2002 HICP
  inflation rate
• Since 2002, inflation has remained close to 2
• However, perceived inflation rose to
  unprecedented levels after the changeover

34
Euro and price increase
Perception gap
Source HICP and Consumer Survey
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Euro and price increase

• Perception gap can be explained as
• Citizens extrapolate inflation perception of some
  small but frequently purchased goods and services
  that
• often involve sectors with lesser level of
  competition (hairdresser, cafes, newspaper)
• suffered from unfair rounding of prices during
  changeover
• Citizens are less influenced by decreases in
  larger expenses, such as loans and mortgages
• Citizens are more influenced by the number of
  price changes than by the direction of them
• Citizens have an imprecise memory of former
  prices they often refer to price levels beyond
  2001
• Price monitoring and early communication in the
  first days of the changeover are crucial