Introduction of the euro – a European success story

By eliminating exchange rate risks and making prices in European monetary union more transparent, the euro has distinctly improved the underlying conditions for production and trade in the internal market. The growing integration of European financial markets has likewise enhanced the outlook for real economic growth. However, not all of the expectations associated with the euro prior to monetary union have proved to be realistic: the euro demonstrated only limited usefulness as a catalyst for growth-enhancing structural reforms.

Pre-monetary-union expectations of the single currency and the single monetary policy varied widely. There were more than a few pessimists who predicted an early demise for the euro. Some supporters hoped that the euro would simultaneously act as a catalyst for structural reform and, therefore, for more growth and higher employment. There were three areas in which economic advantages could realistically be expected from the introduction of the euro: price stability throughout the euro area, increased intra-European trade and financial market integration. Expectations have been largely met in all three areas. To that extent, the beginning of Stage Three of economic and monetary union marked the start of a European success story.

Although various overlapping effects mean that the euro’s positive impact on trade cannot be quantified exactly, even cautious estimates assume an increase of between 3% and 5% in trade, and other estimates are markedly higher. This has benefited, not least, Germany’s export-oriented economy, which exports 40% of its goods and services to other countries within the euro area.

The fact that there has been progress in the integration of Europe’s financial and capital markets, albeit not to the same extent in all segments, is undoubtedly also contributing to an improvement in the outlook for growth. Investors, in particular, are diversifying their investments – in bonds, shares (Chart 1) or mutual funds alike – much more broadly than prior to the introduction of the euro, thereby also diversifying their risks. In 1997, only 13% of shares and 12% of long-term debt securities held by euro-area residents were issued by other euro-area countries, whereas, at the end of 2006, the figures were 29% and 58% respectively.

The turmoil in the international financial markets has meant that some of the advances already achieved in terms of financial market integration in the euro area have now been reversed. The greater weighting of individual counterparty risks and the decline in liquidity in individual market segments are both playing a role in this. As a result of these factors, the financing conditions in the money and bond markets, which had largely converged prior to the financial market crisis, have now become more heterogeneous. Nevertheless, a permanent refragmentation of the European financial markets is not to be expected.

Overall, the global financial market crisis has emphasised the stabilising effect of the euro. Banks within the euro area as a whole are able to obtain short-term liquidity through the Eurosystem on the same terms and conditions. This facility has significantly mitigated the tensions in the money market and has therefore served as a buffer against global financial market shocks, as has the fact that there are no longer any exchange rate tensions between euro-area member states.

Price stability is the most valuable contribution which monetary policy can make to sustained economic growth. However, all that monetary policymakers can do is to create stability-oriented conditions to foster sustained economic growth. This has been achieved (Chart 2). Actual and trend growth of gross domestic product (GDP), however, hinge on many factors. It would therefore be wrong to link growth rates (Chart 3) or unemployment rates (Chart 4) directly to monetary union. Above all, it is the highly optimistic expectations that monetary union would act as a catalyst for structural reform that have failed to materialise. Although overdue reforms have been tackled in the past few years, this was primarily the result of national economic pressures and is due less to the changes in the underlying conditions in a monetary union.

Ten years’ experience of monetary union have shown that member states are perfectly capable of coping with the single monetary policy provided they are flexible and willing to adapt to changes in the underlying conditions through those areas of economic policy for which the individual nations are still responsible. Fiscal policy and wage policy, in particular, are called upon to adapt to country-specific circumstances. Even so, it has to be admitted that not all the countries have the same understanding of how these factors are interrelated. In Germany, it has been mainly the wage moderation of the past few years which has made the German economy more competitive.