I would like to share with you some thoughts on European integration. This is obviously a topic of interest to me as a European central banker, but in fact it’s very relevant to you as well, given the important and active role that many of you play in this dynamic part of Europe. As representatives of leading investors and corporations, as providers of technology and know-how, you play an essential part in promoting growth, employment and prosperity in Europe.
1 May this year, exactly two weeks ago, was more than just Labour Day. It was the tenth anniversary of the accession of no fewer than ten countries to the European Union. Three other countries – Bulgaria, Romania and, most recently, Croatia – have since joined. The European Union, despite its shortcomings, remains respected and influential. It also remains an aspiration for non-members and maybe even, in other ways, an inspiration. The Union has been and is a successful undertaking
The EU has become a role model for regional cooperation. It has achieved its original objectives, namely to ensure peace and prosperity in a notoriously conflict-ridden part of the world. It has also enlarged and deepened European integration. Throughout its almost 60-year history, the EU has shown its ability to overcome important economic and political challenges. In fact, the euro area, the most integrated part of the Union, has grown since 1999 and the number of member states continues to increase – despite the challenges and set-backs of the recent crisis. Having started out with 11 countries, it has expanded over the years and now comprises 18. Most of them have experienced a slow but steady improvement in their economies. The number of countries having recently reset a target date for the adoption of the Euro is a witness of unabated attraction of our common project subject to the agreed convergence path and criteria.
In many ways, EU membership and the prospect of euro adoption provided an impetus for reforms in these countries and contributed to the implementation of stability-oriented macroeconomic policies. EU accession has also helped in the development of stronger institutions and a more business-friendly environment. Last but not least, EU funds, on a significant scale, have been invested in these countries, bringing noticeable improvements to the transport infrastructure and other domains.
True, this process has not always been easy. But overall, these have been ten successful years. Poland is an example. It has grown strongly over this period and been remarkably resilient to the global financial crisis. It was, in fact, the only EU country – the only one! – whose GDP in 2009 did not fall after the onset of the global recession in 2008. The country’s per capita income jumped from around 45% of the euro area average in 2003 to 65% in 2013.
In my comments today, I will stress the importance of the sustainable convergence of Europe’s economies and why the different levels of integration between them call for a greater degree of commitment and mutual trust.
EU integration and sustainable convergence: why do they matter?
On the subject of European integration, what exactly is required of an EU Member State? The answer was provided at the time of the previous enlargement process in the 1990s. I am referring here to the so-called “Copenhagen criteria” ; there are three of them.
The first of these criteria is a “political criterion” – a candidate country must have stable institutions which guarantee democracy. Then there is the “economic criterion” – a country must have a functioning market economy. Finally, the third criterion concerns the adoption of the so-called acquis communautaire, the body of European laws. In other words, a candidate country must be able to take on and implement the obligations of EU membership, including adherence to the aims of political, economic and monetary integration.
What about euro adoption? Joining the EU is only the beginning of the monetary integration process. As so-called “Member States with a derogation”, following EU accession, countries are committed to preparing for their eventual adoption of the euro. Hence, the pursuit of macroeconomic stability, sound government finances and a monetary policy geared towards price stability should be the country’s objective.
But the experience of the Member States over the past ten years shows that there is no single path for euro adoption. Countries can follow different paths towards the euro and at different speeds. In fact, while some countries have already joined the euro area, a few others have not even specified a target date. Adopting the euro is a Treaty obligation but, at the same time, it must be a political ambition too. Moreover, the different paths being followed by different countries may also reflect the varying degrees of convergence of their economies. The drafters of the Treaty realised that successful monetary integration can only be ensured once a high degree of sustainable economic convergence has been achieved. That is why they drew up the “Maastricht criteria”. These are macroeconomic indicators which measure price stability, the soundness and sustainability of public finances, exchange rate stability and long-term interest rate convergence. Countries may only adopt the euro – and are expected to do so – once these criteria have been met.
One element of the convergence criteria is the exchange rate mechanism – ERM II – which a prospective euro area country must join. The mechanism is a multilateral arrangement of fixed, but adjustable, exchange rates, with a central rate against the euro and a standard fluctuation band of ±15%. As such it is consistent with the regional integration process in which all Member States are deeply involved. Their macroeconomic policies must be coherent if they are to successfully participate in ERM II. The convergence criteria form a coherent package that is neither negotiable nor subject to change. From a legal viewpoint, this ensures continuity and equal treatment, and from an economic point of view the logic of lasting convergence has not changed.
Euro adoption as a permanent, stronger commitment
The adoption of the euro is the strategic goal of all central and eastern European Member States, including Poland. However, joining the euro area should not be seen as an end in itself. The euro provides a notably higher degree of economic integration and stability but it also calls for a permanent, stronger commitment and a greater degree of mutual trust and responsibility. It is in each country’s own interest, as well as in the interest of the euro area as a whole.
As the past few years of Economic and Monetary Union (EMU) have shown, temporary fulfilment of the convergence criteria does not, by itself, guarantee trouble-free membership of the euro area. Large and persistent macroeconomic imbalances accumulated in several euro area countries and were partly to blame for the economic and financial crisis which broke out in 2008.
In some countries, high public spending since the adoption of the euro has resulted in extremely high public deficits and an unsustainable accumulation of public debt. Other countries however have experienced excessive growth in private debt based on buoyant capital imports and low interest rates. This has resulted in surging imports and large current account deficits rather than strong trend potential growth. In some instances, excessive credit growth – closely associated with an unsustainable boom in real estate markets – has undermined the soundness of some financial institutions and given rise to an excessive accumulation of private debt.
While the cause of the crisis varied in the countries affected, the imbalances had to be corrected. There was simply no alternative to fiscal consolidation, repair and restructuring of financial institutions and structural reforms to restore sound fiscal positions and competitiveness and to improve flexibility.
The challenges we are facing are not exclusive to the euro area. In your capacity as business professionals, consultants or investors, you are all aware that many EU Member States are lagging behind in new technologies and know-how. In many countries, policies need to be supported which foster innovation and upward mobility on the technological ladder, which make employment protection legislation more flexible and which focus on training and human capital formation, and which give priority to efficient government expenditure. I believe these are policies of great relevance to this conference.
The EU has learnt its lessons. We now know what did not work properly. We have all realised that there needs to be a stronger set of institutions and rules to support the euro, that a monetary union needs to be accompanied by a banking union and a fiscal union, that, in the end, economic integration and political integration in Europe go hand in hand.
Needless to say, such a degree of integration requires a stronger, permanent commitment by all the countries involved.
The consequences of the crisis are still holding back growth and job creation and could do so for some time. But the euro area will return to being a region of prosperity and job creation, and certainly it is an area of stability. But such an area of stability is not a matter of course – it needs to be maintained and strengthened. It requires continuous reform efforts by national authorities.
Fiscal consolidation needs to continue. Sufficient public buffers must be created to ensure that the social costs of future adverse shocks can be cushioned.
Labour markets must be flexible enough to allow the economy to adjust to adverse events.
Product and service market reforms need to be accelerated. Closed, regulated professions and over-regulated sectors have to be liberalised.
As regards financial sector policies, countries need to ensure a sound financial system to facilitate access to financing for the real economy, particularly for SMEs.
But to remain an area of stability also requires a stronger framework of fiscal and macroeconomic surveillance and monitoring. As a result, the system of surveillance applicable to countries that have joined the euro area is significantly tougher than that applicable to countries seeking to adopt the euro.
In the aftermath of the euro area crisis, for countries that have already adopted the euro, the so-called convergence criteria have been reinforced. For instance,
the fiscal governance framework under the Stability and Growth Pact (SGP), which seeks to prevent and correct excessive government deficits and debt, has been strengthened further;
the Macroeconomic Imbalance Procedure (MIP), in place since 2011, aims to correct or prevent harmful macroeconomic imbalances which could jeopardise the functioning of EMU.
Both these frameworks have been integrated into the EU’s broader cycle of economic policy guidance and surveillance, known as the “European Semester”.
Let me just say a few words on Poland. The country has made impressive progress in recent years in terms of convergence. Incomes have been rising rapidly to euro area averages, while at the same time inflation has remained subdued both this year and last, at around 0.6%. Long-term interest rates have remained relatively low, at around 4%. But it’s not all plain sailing. On the fiscal side, although the general government gross debt-to-GDP ratio stands below the 60% reference value, the government deficit is still well above the 3% reference value. As a result of this excessive deficit, Poland is currently subject to an EU Council decision and must ensure that there is a sustainable reduction and correction by 2015. Also, the Polish zloty is not yet participating in ERM II, but trading under a flexible exchange rate regime. Last but not least, Polish law must still be adapted to meet all the legal requirements for euro area membership, notably central bank independence, the confidentiality regime, the monetary financing prohibition and legal integration into the Eurosystem.
Ladies and gentlemen,
more than 55 years ago, Europe’s political leaders recognized that they needed to agree on policies to ensure a future of peace and stability, and to bring the nations of Europe closer together. Their insight has been a very powerful force, considering the remarkable achievements since then, notably the stability achieved in and by the Union as a whole.
But although stability may prevail inside the Union, the situation is quite different outside. We live in an unpredictable region with fragile borders set in a turbulent world. Current developments painfully remind us the words of Robert Schuman in 1950: “World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it”. It means going beyond the economic foundations of the European project.
In today’s highly interconnected and competitive world, it means thinking beyond national economic interests and instead exploiting synergies and comparative advantages together. In short, it means working together to hold our own.
Of course, I am referring to very closely linked political and economic forces.
The lessons of history tell us that political objectives require sound economic foundations. And this is where central bankers come in. Our role is to support wider economic and political objectives by creating the monetary conditions that favour prolonged non-inflationary - and non- deflationary - economic growth. Only in this way can we help to maintain the euro area as a region of prosperity, job creation and growth, in other words, as a region of stability.
Many thanks for your attention.
These criteria were formulated at the Copenhagen European Council in 1993 with a view to defining a level playing field and ensuring equal treatment for countries seeking EU membership.