Tag Archives: Economic situation

A European Economic Recovery Plan

A European Economic Recovery Plan

Outline of the Community (European Union) legislation about A European Economic Recovery Plan

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

A European Economic Recovery Plan

Document or Iniciative

Communication from the Commission to the European Council of 26 November 2008 – ‘A European Economic Recovery Plan’ [COM(2008) 800 final – Not published in the Official Journal].

Summary

The European Economic Recovery Plan is a response to the global economic crisis which affected the real economy in 2008. It sets out the broad lines of a coordinated European approach which involves:

  • swiftly stimulating demand;
  • helping the most vulnerable people affected by the economic downturn;
  • preparing Europe to be competitive with a view to future growth;
  • taking advantage of this period of upheaval in order to accelerate the establishment of a cleaner economy with more concern for the environment.

The European Commission proposes that Member States and the European Union agree on an immediate budgetary impetus amounting to EUR 200 billion.

The plan is intended to operate at both European and global level.

Solutions at European level

At financial market and macro-economic level

The instability in the financial markets triggered the crisis in the real economy. It is important that the banks should re-focus on their primary activities of providing liquidity and supporting investment in the real economy.

The European Investment Bank (EIB)will increase its yearly interventions in the European Union by some EUR 15 billion in the form of loans, equity, guarantees and risk-sharing financing, as well as investment from private sources.

Budgetary policy will have a role to play in stabilising economies and sustaining demand. This recovery will take place within the framework of the Stability and Growth Pact and the priorities of the Lisbon Strategy.

At the level of individuals

The Plan aims to help individuals who have lost their jobs and are suffering the social consequences of the crisis. In this perspective, it will reinforce the activation schemes, in particular for the low-skilled and vulnerable, in order to get them into training or even help them to re-train with a view to matching the supply and demand of jobs.

To this end, the Commission will use the European Social Fund and the European Globalisation Adjustment Fund in order to finance the costs of training and job placement for those who are made redundant.

In addition, Member States are advised to reduce their employers’ social charges on lower incomes to promote the employability of lower-skilled workers. Similarly, solutions such as service cheques for household and child care, or temporary hiring subsidies for vulnerable groups, are encouraged.

A reduction in the VAT on labour-intensive services is also envisaged.

At the level of businesses

Businesses must have access to financing on the same basis as the banks. Small and medium-sized enterprises and micro-enterprises are the most exposed and must therefore be the focus of urgent steps. It is envisaged that the European Small Business Act will be implemented to this end.

The Commission will put in place a simplification package to speed up its State aid decision-making.

At the level of the environment

It is becoming vital to develop a clean economy. In this perspective, the European Union must equip itself with new businesses and industries, as well as environmentally-friendly infrastructures.

The Commission plans in particular to invest in trans-European transport projects, while the EIB will increase the financing of investment to tackle climate change and to improve energy security and infrastructure.

The Plan also provides for action at the level of research and innovation in order to develop “green products”, particularly in the construction and automobile sectors.

Solutions at global level

The Plan aims to reinforce closer collaboration between the European Union and its international partners in economic and climate matters.

The European Union must also maintain its commitments to developing countries in the context of the Millennium Development Goals (MDGs) and Overseas Development Assistance (ODA), in particular by developing new instruments to help those countries deal with the direct consequences of the crisis whilst maintaining sustainable development.

Background

In the face of the crisis, the European Economic Recovery Plan is designed to create a basis for agreement between Member States to get Europe’s economy moving again. Although the Plan contains short-term action, it also falls within the Lisbon Strategy.

The euro area in the world economy – Developments in the first three years

The euro area in the world economy – Developments in the first three years

Outline of the Community (European Union) legislation about The euro area in the world economy – Developments in the first three years

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Practical aspects of introducing the euro

The euro area in the world economy – Developments in the first three years

Document or Iniciative

Commission communication “The euro area in the world economy – Developments in the first three years” [COM(2002) 332 final – Not published in the Official Journal].

Summary

The third stage of economic and monetary union (EMU) started on 1 January 1999. Three years later, the euro became a tangible reality as notes and coins were put into circulation. Completion of EMU is an historic event with repercussions that are profoundly re-shaping the economies of the Member States of the euro area.

ECONOMIC SITUATION

Economic growth. After growing by an average of 3% during the first two years of EMU, the euro-area economy slowed down briefly in 2001 as a result of a number of factors including the hike in oil prices, the bursting of the speculative bubble on share markets and the events of 11 September.

Labour market. The situation on the labour market has improved in the last three years of the single currency. Some 6 million jobs have been created and this trend has even continued during the economic slowdown. The unemployment rate in the euro area fell to 8.3% in 2001 under the impact of structural reforms, wage restraint and economic growth.

Inflation. With inflation running at a subdued level of 1.1% in 1999, consumer prices rose, touching 2.5% in 2001 as a result of the hike in oil prices and the weakness of the euro against the US dollar. The increase in food prices caused by the BSE scare and the outbreak of foot-and-mouth disease contributed to this development.

Exchange rate. Following its launch on 1 January 1999, the euro fell by more than 20% against the US dollar but then regained some 10%. It is perceived as being under-valued. This has placed the euro-area economy in a strong position vis-à-vis its competitors, as the rise in exports and its positive contribution to gross domestic product (GDP) show.

Current-account balance and competitiveness. The euro-area’s current-account balance continued to improve in 2001 to show a small surplus. The competitiveness situation varies between Member States: in the first three years of EMU, Germany, Greece and Austria saw an improvement. Fiscal policy and structural reforms remain the only ways of preventing problems relating to competitiveness and the current-account balance from accumulating.

MACROECONOMIC POLICIES

Stability and Growth Pact. The Stability and Growth Pact sets the objective of public finance consolidation. The Member States have committed themselves to achieving budget surpluses by 2004. After 1999 the improvement in budgetary positions lost some momentum and the euro area’s budget deficit actually increased in 2001. There are still two main challenges on the fiscal policy front: eliminating fiscal imbalances in order to cope with normal cyclical fluctuations and preparing European countries for population ageing by reducing societies’ aggregate level of indebtedness.

Monetary policy. Monetary policy is now entrusted to the European Central Bank (ECB), whose primary objective, laid down by the Treaty, is price stability. According to the ECB, this stability is achieved when inflation remains below 2%. Monetary policy is based on two pillars: The first is money supply, with M3 being set at 4.5% by the ECB, while the second comprises numerous economic indicators such as cost and price indices, the exchange rate and real-economy indicators.

Interest rates. The ECB raised interest rates on several occasions in 2000 and 2001 on account of the inflationary pressures engendered by the hike in oil prices and the euro’s depreciation against the dollar. However, following developments in the world economy in 2001 and in the aftermath of 11 September, the ECB reacted quickly and lowered interest rates.

Economic policy coordination. The central element of economic policy coordination is the broad economic policy guidelines (BEPGs), which are the annual guidelines addressed to Member States by the Council of Ministers. They provide guidance with regard to both the macroeconomic and the structural spheres. The objective is to improve the EU’s economic growth potential and productivity.

The Eurogroup. The euro area has set up another coordination forum, the Eurogroup, which brings together the economics and finance ministers of the Member States that have adopted the euro. Their informal meetings take place on the eve of meetings within the Council of Ministers (“Ecofin”) and allow a frank discussion of EMU-related issues.

WAGE DEVELOPMENTS

EMU makes more evident the link between wage and employment trends. A loss of competitiveness is inevitable where the option of an exchange-rate adjustment is no longer available. Wage developments in one country in the euro area have repercussions on the area as a whole, notably via the inflation risk. The single currency increases price transparency and facilitates comparisons that may lead to “wage imitation”.

Aggregate wage developments. The fight against inflation in Europe has affected wages as wage increases are indexed to prices. The dispersion of wage growth between countries has also diminished significantly over the past decade, but it is still pronounced, and this may be justified by different productivity levels.

Unemployment rate. Despite a marked reduction in unemployment in recent years, there are few signs of a significant re-acceleration of labour cost growth in the euro area. Real wage moderation has prevailed in almost all countries of the euro area. This has borne fruit and contributed to the dynamism in job creation. The unemployment rate has fallen from 11.5% to 8.5%. The bulk of this improvement is due to a decline in structural unemployment. It is to be noted that all the major economies of the euro area still have relatively high structural unemployment.

Social pacts. In a number of countries social pacts have helped create a favourable climate by setting in train negotiations between the public authorities and the social partners, thereby helping to sustain wage moderation. The risk of conflict between companies and their workforces is much lower. Wage flexibility has become more important for the smooth functioning of EMU. Differentiated agreements or some measure of decentralisation, e.g. in the form of “opening clauses”, which take account of regional conditions or the conditions in the sector concerned or in the company concerned, have increased this flexibility.

INVESTMENT

Investment potential. The euro has clearly boosted investment potential in the euro area. First, it has eliminated the exchange-rate risk between twelve markets and has fostered competition within this integrated market. Second, financing conditions for firms have improved thanks to the faster integration of financial markets. EMU should also act as a catalyst for structural reforms in Member States, in particular on labour markets. Lastly, it has had a positive effect on interest rates via the policy of consolidating public finances.

Public and private investment. As a result of the privatisation policies pursued in the 1990s, the share of public investment in GDP has declined continuously. By contrast, business investment, in particular in information and communication technologies (ITC), has risen in recent years. The variation of investment rates between countries has been reduced considerably in the last ten years, suggesting convergence between the countries of the euro area. Since 1999, however, dispersion in investment rates has increased slightly, to some extent on account of more buoyant investment in the countries catching up.

Foreign direct investment. Foreign direct investment (FDI) was facilitated throughout the 1990s by the removal of numerous barriers as part of the process of European integration. Introduction of the euro furthered this development by eliminating exchange-rate variability and risks. Flows of FDI from and to the euro area have increased significantly, largely on account of the global expansion of firms and the associated mergers and acquisitions.

Effects of EMU. Exchange-rate volatility is a thing of the past. Thanks to policies of budgetary consolidation, short-term and long-term interest rates have been reduced. Financial, labour and product markets are expected to become even more flexible, enabling the euro area to improve investment conditions. A link exists between restrictive regulations and a poor investment rate. The euro area could, therefore, make the most of the opportunities afforded by EMU. Higher investment leads to enhanced growth potential in the euro area. This is particularly important if the adverse effects on long-term growth, such as the demographic outlook, are taken into account.

FINANCIAL SYSTEM

Overall developments. There has been a visible acceleration in the integration of financial markets in the wake of globalisation but also following the creation of a common regulatory framework and the changeover to the euro. The financial sector is experiencing a phase of rapid structural change, with integration being accompanied by general expansion and heightened competition. The exchange rate risk has disappeared, as have the costs resulting from fragmentation of the system. Market liberalisation and the introduction of the euro should facilitate business financing via calls on capital markets rather than bank financing.

Money markets. Market integration varies between segments. In the market for interbank deposits integration is virtually complete and the derivatives market is highly integrated. Against this, the secured money-market segments (private repurchase agreements, treasury bills, commercial paper and certificates of deposit, for example) remain less integrated. This state of affairs largely reflects the continuing differences between Member States’ legislation. The Collateral Directive should improve this situation.

Bond markets. With the introduction of the euro, domestic bond markets have become integrated, resulting in a substantially more homogeneous euro-denominated bond market. Greater liquidity has been reflected in higher issuance volumes. Private-sector issuance has risen sharply to the detriment of sovereign issuance as a result of the policy of fiscal retrenchment. The growing number of mergers and acquisitions as well as UMTS auctions, often financed by bond issues, have contributed to the expansion of this segment of the financial market.

Government bonds. Sovereign issuance still accounts for some 40% of total issuance. There has been marked convergence in yields between Member States. Liquidity on this market is still, however, limited as government bonds are issued by twelve separate agencies with different issuance, strategies, procedures and instruments. Overall, the euro has emerged as the second most important currency for international bond issuance, after the US dollar.

Equity markets. The introduction of the euro has stimulated demand for cross-border equity investment in euros. Investors appear to be moving increasingly towards sector-based investments, to the detriment of purely country-based investments. The changeover to the euro has also been a factor in stimulating activity in the new-economy stock markets. The response of stock exchanges in Europe to European integration has been to adopt regrouping and merger strategies.

Venture capital. Venture capital often plays a key role in the initial stages of the lifecycle of a firm. The European Union has attempted to improve access to such financing for firms, including via the Risk Capital Action Plan (RCAP). European risk capital markets remain fragmented, with the bulk of investment being undertaken domestically. This partly reflects the continuing differences in regulatory, tax and legal infrastructures in the Member States. The bursting of the stock market bubble for technological companies led to a significant fall in venture capital investment.

Financial services. The market in Europe for corporate financial services is increasingly open to global competition. Banks have responded by restructuring and reorienting activities away from traditional bank lending towards “investment banking”-style activities, which consist in creating and selling new financial products, advising clients or structuring mergers and acquisitions. Consolidation has taken place mainly within national boundaries, where there has been an increase in industry concentration. Legal differences make a pan-European product range impractical at present.

The challenges ahead. The euro is one of the main factors in speeding up integration. Financial market integration has not yet been completed and must be continued in order to take advantage of the opportunities offered by integration. Savers and investors would benefit from broader choices at lower transaction costs. This translates into higher productivity and, consequently, higher economic growth. This is why successive European Council meetings have established the integration of financial markets as a priority of economic reform. The Financial Services Action Plan (FCAP), a package of 42 initiatives, should be implemented between now and 2005. The date for implementation of the Risk Capital Action Plan (RCAP) has been set for 2003.

THE EURO AS AN INTERNATIONAL CURRENCY

The US dollar is still the leading international currency, but the euro has become the world’s second most important currency thanks to the size of the euro-area economy and to its stability, which reflects sound economic fundamentals.

International use. Prior to the introduction of euro notes and coins in 2002, the share of the euro in the invoicing of international transactions was estimated to be between 15% and 17% of the total. The US dollar remains the dominant currency for such transactions. The role of the euro as a payment currency should expand, notably at regional level. Use of the single currency for international payments has increased in the first three years and is expected to increase further following the introduction of notes and coins. The euro has become the second most important financing or investment currency. It accounts for just under 34% of transactions in these areas, and this also reflects the historically low interest rates in the euro area.

Anchor currency. Over fifty countries have tied their currencies to the euro via, among other things, managed exchange-rate arrangements or a currency board. They are located mainly in Europe and Africa, the main motivating factors being commercial and financial links and the EU accession process. The euro is also used as an intervention currency, this being closely linked to its role as an anchor currency. Most interventions are carried out under the new exchange-rate mechanism (ERM II). At present, only Denmark has tied its currency to the euro under this mechanism. Lastly, the euro is used as a store of value and is the second most important reserve currency held by central banks. In 2000 the US dollar accounted for 68% of all foreign-exchange reserves. The share of the euro has remain virtually unchanged in recent years.

Candidate countries. The candidate countries will have to take over the Community acquis and are required to participate in EMU. At the outset, they will benefit from a Treaty derogation until such time as they satisfy the convergence criteria. Before adopting the euro, they must have participated in ERM II for two years.

Global coordination. The single monetary and exchange-rate policies are the exclusive competence of the Community. As regards internal policy coordination, the Council (in this case, the Member States that have adopted the euro) decides on Community representation at international level. The Eurogroup defines common positions. Externally, as regards the International Monetary Fund (IMF) or the G7, for example, no decision has yet been taken by the Council of Ministers. The European Central Bank has been granted observer status at the IMF and within certain G7 working groups. EMU is, therefore, still in the making as regards the external side.

Cohesion Policy in support of growth and jobs – Community Strategic Guidelines, 2007-13

Cohesion Policy in support of growth and jobs – Community Strategic Guidelines, 2007-13

Outline of the Community (European Union) legislation about Cohesion Policy in support of growth and jobs – Community Strategic Guidelines, 2007-13

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Regional policy > Review and the future of regional policy

Cohesion Policy in support of growth and jobs – Community Strategic Guidelines, 2007-13

Document or Iniciative

Council Decision 2006/702/EC of 6 October 2006 on Community strategic guidelines on cohesion [Official Journal L 291 of 21.10.06].

Summary

The strategic guidelines for cohesion policy after 2007 have two objectives:

  • to strengthen the strategic dimension of cohesion policy with a view to ensuring that Community priorities are better integrated into the national and regional development programmes; and
  • to ensure greater ownership of cohesion policy on the ground, as reflected in a reinforced dialogue in the partnerships between the Commission, the Member States and the regions and the creation of a clearer division of responsibilities between the Commission, Member States and the Parliament.

The re-launch of the Lisbon strategy

At the March 2005 European Council, the Lisbon Strategy was renewed with the adoption of the partnership for growth and jobs. In line with this strategy, cohesion policy must be focused on promoting sustainable growth, competitiveness and jobs.

The strategic guidelines identify those areas in which cohesion policy can contribute to the achievement of other Community priorities, including those deriving from the Lisbon strategy. They are also in line with the integrated guidelines for growth and jobs.

Priorities under the strategic guidelines

The strategic guidelines are focused on three priorities:

  • improving the attractiveness of regions and cities in the Member States;
  • encouraging innovation, entrepreneurship and growth in the knowledge economy; and
  • creating more and better jobs.

Strategic Guidelines for 2007-2013

On the basis of these priorities, the guidelines aim to:

  • make Europe and its regions more attractive places to invest and work;
  • improve knowledge and innovation;
  • create more and better jobs; and
  • take account of the territorial dimension of cohesion policy.

Investment and jobs

The Communication lists three groups of measures for making Europe and its regions a more attractive place to invest and work.

First, transport infrastructures must be expanded and improved. With this in mind, the Member States must give priority to the 30 projects of European interest by investing in secondary connections. In addition, better access to rail infrastructure and improved connectivity of landlocked territories to the Trans-European network (TEN-T) must be encouraged. The same applies to the environmental dimension of transport networks and the development of short-sea shipping.

Secondly, the synergies between environmental protection and growth must be strengthened so as to guarantee the sustainability of economic growth, innovation and job creation. With this in mind, the Commission recommends investing in infrastructures, creating attractive conditions for businesses and their staff and putting in place risk prevention measures. In addition, the EU’s Kyoto commitments must be taken into account.

Thirdly, traditional energy dependency must be reduced through improvements in energy efficiency and use of renewable energies.

Knowledge and innovation

The aims of growth and job creation will require a structural shift in the economy towards knowledge-based activities. To achieve this, it will be necessary to:

  • increase and improve investment in research and technological development (RTD), especially in the private sector (including through public-private partnerships (PPPs), small and medium-sized enterprises (SMEs) and cooperation among companies);
  • facilitate innovation and encourage the creation of companies with the objective of promoting a climate which promotes the production, dissemination and use of new knowledge (entrepreneurship);
  • promote the information society and the dissemination of information and communication technology (ICT) equipment to companies and households; and
  • improve access to finance by creating financial engineering mechanisms, while supporting financial instruments other than subsidies.

Jobs

To create more and better jobs, cohesion policy must aim to address the challenges highlighted in the European employment strategy. In particular, more people must be attracted into and retained in employment through the modernisation of social protection systems.

In addition, worker adaptability and labour market flexibility must be increased by investing in human capital through improvements in education and skills. In line with these priorities, the administrative capacity of public administrations and services must be increased and a healthy labour force maintained.

Territorial cohesion and cooperation

Cohesion policy must be adapted to the particular needs and characteristics of individual regions in terms of the problems and opportunities which derive from their geographical situation. The territorial dimension includes the following themes:

  • the contribution of cities (urban areas) to growth and jobs (in order to promote entrepreneurship, local employment and community development, for example);
  • supporting the economic diversification of rural areas (e.g. the synergy between structural, employment and rural development policies); and
  • cross-border, transnational and interregional cooperation focused on the aims of growth and job creation.

Related Acts

Communication from the Commission of 5 July 2005 – Cohesion Policy in Support of Growth and Jobs – Community Strategic Guidelines, 2007-2013. [COM(2005) 299 final – Not published in the Official Journal].

LISBON STRATEGY

Communication from the Commision of 12 December 2006 to the spring European Council implementing the renewed Lisbon Strategy for growth and jobs – A year of delivery. [COM(2006) 816 final – Not published in the Official Journal (only available in EN).

Communication from the Commission – Economic reforms and competitiveness: key messages from the European Competitiveness Report 2006 [COM(2006) 697 final – Not published in the Official Journal].

Communication from the Commission to the European Council (Informal meeting in Lahti – Finland, 20 October 2006) an innovation-friendly, modern Europe [COM(2006) 589 final – Not published in the Official Journal].

Communication from the Commission to the Council and the European Parliament – Common Actions for Growth and Employment: The Community Lisbon Programme [COM(2006) 30 final – Not published in the Official Journal].

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – European values in the globalised world – Contribution of the Commission to the October Meeting of Heads of State and Government [COM(2005) 525 – Not published in the Official Journal].

Communication from the Commission to the Council and the European Parliament – Common Actions for Growth and Employment: The Community Lisbon Programme [COM(2005) 330 final – Not published in the Official Journal].

The euro and the international economy

The euro and the international economy

Outline of the Community (European Union) legislation about The euro and the international economy

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for capital

The euro and the international economy

Document or Iniciative

Commission working document of 23 April 1997 on the external aspects of Economic and Monetary Union [SEC (97) 699 final – Not published in the Official Journal].

Summary

Given the economic importance of the euro area, the introduction of the single currency will have significant effects, not only on the Member States which will not be participating but also on countries outside the European Union. This external aspect of the euro is the subject of increasing discussion in international forums such as the Organisation for Cooperation and Development (OECD) and the International Monetary Fund (IMF).

Supposing that all the Member States participate in the euro area, the economic and monetary union (EMU) will have the following characteristics:

  • Its economic and commercial weight will be comparable to that of the United States and larger than that of Japan;
  • If intra-Community trade is excluded, the degree of openness of the euro area is 10.2%, i.e. equivalent to that of the United States and Japan;
  • Greater synchronisation of the economic cycles in the different Member States due to better coordination of economic policies will make economic developments in the euro area more important to the rest of the world;
  • As a result of the disappearance of tensions between European currencies (which used potentially to stem from shocks occurring outside the European Union), the economic performance of the euro area will be less sensitive to exchange-rate fluctuations.

With the completion of EMU, the European financial market will become truly integrated:

  • the development of an efficient trans-border payment system (TARGET) connecting financial centres;
  • the harmonisation of financial instruments and convergence towards the most efficient means of financing;
  • a unified money market implying more intense competition between banks and financial intermediaries;
  • the elimination of the exchange-rate risk between participating countries.

Despite this integration, financial markets can be expected to retain some national characteristics.

The size of EMU, the stability of the currency and the wide financial market underpinning it should promote international use of the euro.

As an invoicing currency for trade, the euro should be widely used in trade relations involving the European Union directly but also, to a certain extent, in commercial transactions not involving the Member States of the Union.

As a result of the independence of the European Central Bank (ECB) and its stability-oriented policies, the euro should constitute an important reserve currency and play a key role in portfolios of financial assets on an international scale. If these same factors were to make the euro more attractive in the eyes of private investors, it would be more difficult to predict how important the euro would be in the composition of private portfolios.

The transformation of the euro into an important international currency will take place gradually; it should first show itself in the countries which have close economic links with the European Union.

The internationalisation of the euro will mean that ECB action has international repercussions. However, it will initially complicate the conduct of monetary policy as a result of the influence on monetary aggregates of decisions by external agents.

The changeover to the euro brings with it the potential risk of a period of exchange-rate instability between the euro and other major currencies due to a number of factors:

  • The perception of the future direction of the ECB´s monetary policy: the bank´s place at the centre of the European System of Central Banks (ESCB), its regulatory independance and its statutory objective of maintaining price stability should however immediately establish its credibility;
  • A possible excess stock of dollars in central banks: since the latter are fully aware of the potential impact of their transactions on exchange markets, it can be expected that operations to reduce excessive dollar holdings, if any, will be carried out gradually and in close cooperation;
  • Reallocations of private portfolios following the introduction of the euro are a complex matter: however, opposing effects should combine to balance out the net effects.

In the long term, exchange rates are determined mainly by economic fundamentals (growth, inflation, productivity, budget balances, current balances, etc.), which are in turn influenced by the economic policies of the Union and also those of its partners.

The economic policy framework laid down in the Treaty should allow for easy monetary conditions while maintaining an appropriate exchange rate. European economic policies will therefore constitute a valuable point of reference in international economic affairs.

The completion of EMU is likely to lead to important developments in the international monetary system, principally by making it more symmetrical: the potential gains from macroeconomic coordination will tend to be more uniformly distributed among the partners.

Finally, EMU will also have implications for how international institutions such as the IMF operate matters concerning the representation of the Union within these organisations will have to be discussed and the compatibility of current practice with the provisions of the Treaty will have to be verified.

Related Acts

Communication from the Commission – “The euro area in the world economy – developments in the first three years” [COM (2002) 332 final – Not published in the Official Journal].

This communication takes stock of the developments in the first three years of the economic and monetary union (EMU) and the euro area in the environment of the world economy.

2009 Annual Statement on the Euro Area

2009 Annual Statement on the Euro Area

Outline of the Community (European Union) legislation about 2009 Annual Statement on the Euro Area

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

2009 Annual Statement on the Euro Area

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank of 7 October 2009 – Annual Statement on the Euro Area 2009 [COM(2009) 527 final – Not published in the Official Journal].

Summary

Following the economic crisis which began in summer 2007 and peaked in 2008, signs of stability are beginning to emerge in the financial system. Throughout the crisis, the euro has effectively protected the euro area from turbulent exchange and interest rate movements that have previously been so detrimental for European Union (EU) countries in times of financial market stress. The ability of the euro area to act quickly and coordinate with central banks has helped to stabilise the whole international monetary system.

The financial crisis has demonstrated benefits of euro membership, increasing its attractiveness for non-euro area EU countries. Benefits include domestic institutions being granted access to euro central bank liquidity.

However the euro is not able to shield the euro area from all economic problems – in particular those related to imbalances. The crisis emphasised certain weaknesses within the euro area. Imbalances within the euro area meant that some economies were left more exposed to the crisis than others. Prior to the crisis many euro area countries ignored the risk of imbalances, but the financial crisis has demonstrated the need for change.

The euro area’s response to the crisis

There was a lack of satisfactory supervisory arrangements, which failed to act quickly and provide a coordinated response when the crisis began. Initial responses tended to be primarily defined by euro area countries’ individual domestic considerations. In October 2008, the first Eurogroup summit helped to generate an EU-level response, whereby the Commission provided a common strategy for the implementation of national banking rescue plans.

The Commission has since presented its formal legal proposals for a new framework of European financial supervision. The objective of these proposals is to heighten the prudential supervision of individual financial institutions as well as the financial system as a whole.

Alongside the internal policies, the EU is also at the head of the regulatory reform of financial markets, helping to form and develop the initiatives and commitments of the G20.

Fiscal consolidation within the euro area, in accordance with the Stability and Growth Pact, meant that most countries were better able to deal with the crisis than before. However, fiscal consolidation was unfinished in some euro area member countries, where levels of public debt remained high and public finances become dependant on fiscal revenues. As a result, some euro area countries were unable to adequately contribute to the joint fiscal stimulus that the European Economic Recovery Plan set out.

As a result of their close economic and financial relationship with a common currency and single monetary policy, coordination is essential for countries in the euro area. The euro area’s response to the crisis could have been quicker and more effective if coordination between the member countries had been more efficient.

The way forward – a broader macroeconomic surveillance

The crisis has demonstrated the need for euro area member countries to progress on and apply the EMU@10 reform agenda. In this communication of 7 May 2008 the Commission proposed a reform policy agenda to improve the functioning of the Economic and Monetary Union (EMU) against the fast-changing global environment, ageing populations and increasing energy and climate change concerns. The external policy area of the reform agenda proposed that the euro area should play a prominent role in global economic governance.

Imbalances within the euro area were not dealt with prior to the financial crisis. A broader surveillance is therefore required to establish a coordinated policy response. This broader surveillance should include financial market developments. Too much debt in the private sector resulted in unsustainable economic trends. Such financial imbalances need to be discovered and treated earlier.

The surveillance must be broadened to ensure sustainable public finances. Low growth together with an increasing debt puts public finances in a precarious position at a time when the impact of ageing is beginning to emerge. A concrete strategic commitment is required to achieve a strengthened fiscal cooperation, which adequately balances concerns of stabilisation and sustainability in accordance with the Stability and Growth Pact.

Coordination across policies and euro area countries must be improved to allow judicious exit strategies. Such coordination must consist of common understandings on the appropriate timing, pace and sequencing of normalisation of policy settings.

Enlargement, two years after – an economic success

Enlargement, two years after – an economic success

Outline of the Community (European Union) legislation about Enlargement, two years after – an economic success

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Enlargement > Enlargement 2004 and 2007

Enlargement, two years after – an economic success

Document or Iniciative

Communication from the Commission to the Council of 3 May 2006 – Enlargement, Two Years After – An Economic Success [COM (2006) 200 final – Not published in the Official Journal].

Summary

The 2004 enlargement has led to considerably more diversity and a significant increase in the number of citizens and Member States of the European Union (EU). This ambitious step in the history of Europe was marked by the integration of ten new countries (EU-10): Cyprus, the Czech Republic, Estonia, Hungry, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) with different economic, political and social roots.

The economic forecasts made prior to accession were generally positive. On the one hand, they predicted economic growth for the new Member States and benefits, although more limited, for the old Member States (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom). On the other hand, they defused the fears relating to the costs of enlargement for the new Member States and the repercussions for the old Member States.

The objective of this Communication is to check whether, two years after the enlargement, these economic forecasts have proved correct and to identify the advantages and the challenges which remain on the pathway towards European integration.

GROWTH AND STABILITY

The period 1997-2005 was marked by strong economic growth in the new Member States (3.75% on average, as against 2.5% in the EU-15). The income of the new Member States, whilst being substantially lower than that of the old Member States, has put on a spurt, rising from 44% to 50% of the EU-15 average in 1997. In general, their growth rate has continued in line with the forecasts and has been particularly fast in countries with the lowest income to start with. The employment market has also benefited from this phenomenon, with an upturn in 2005.

This new growth has contributed to the macroeconomic stability of the new Member States, with positive repercussions for their economic policies and their public finances. The integration currently under way and the strengthening of the coordination procedures have contributed to economic policy discipline. In addition, the credibility of economic policy is enhanced, which is confirmed by interest rates which are now closer to those of the EU. Developments in public finances have been less uniform on account of the transition-related reforms. The excessive government deficits, still characteristic of some of the EU-15 economies, have been corrected in most of the new Member States. Public debt is higher in the EU-15.

INCREASING ECONOMIC INTEGRATION

As regards trade, integration with the new Member States started in the early 1990s with bilateral agreements which liberalised 85% of trade between the two blocs. Between 1993 and 2005, the opening of these economies led to a considerable increase in trade on both sides. During this period, the old Member States increased their trade with the EU-10 countries by 6 percentage points, whilst their imports from the new Member States rose by 13 percentage points. These trade flows are characterised by more labour-intensive products from the EU-10 countries, in exchange for goods with greater technology content from the EU-15.

The old Member States continue to run a trade surplus with the EU-10 countries, which benefit from lower production costs. The trade deficit of the EU-10 countries has declined drastically in recent years and is not considered to be alarming in relation to the economic catching-up needed in these countries. However, the Commission considers that this imbalance must be the subject of close political surveillance, especially in the countries which are also recording high inflation.

Since the mid-1990s, the number of foreign firms and the stock of foreign direct investment (FDI) have risen sharply in the new Member States, which is further evidence of the increasing openness of their economies and their integration in the EU. Specifically, FDI in the new Member States exceeded EUR 190 billion in 2004, most of which was financed by the old Member States. Germany is the leading investor, especially in Hungary, Poland and Slovakia, while the Nordic countries are the main investors in the Baltic States. The services sector receives the lion’s share of FDI (55%), followed by traditional manufacturing (37%), although modern manufacturing is becoming an increasing focus of attention.

The new Member States, especially those of Central and Eastern Europe, have recorded substantial progress in the financial sector. The surge in credit growth confirms this development, although loans outstanding and stock market capitalisation remain below the average levels in the euro area.

Cross-border investment and the penetration rate of foreign banks have exceeded the levels in the old Member States. Keener competition has cut the cost of borrowing (especially mortgages) and narrowed net interest margins, although differences are still obvious depending on the country (around 0.5% in Hungary, Latvia and Slovakia; about 3% in Poland and Slovenia).

Banks in the old Member States have benefited from accession as it has enabled them to gain access to these new growth markets and to diversify their portfolios. The investments of Austrian banks in Central and Eastern Europe and of Nordic banks in the Baltic States confirm this trend.

GRADUAL ADJUSTMENT

FDI and relocation

The concerns about relocation have proved to be unfounded: the outflows of FDI and their impact on employment are not significant.

The Commission considers that the new Member States only receive a small proportion (4%) of FDI outflows from the EU-15. The bulk of FDI outflows are destined for the other Member States (53%) and the United States (12%). In addition, since the outflows of FDI to the new Member States largely come under privatisation programmes, they would not bring about replacement of existing activities.

Different studies have shown that the annual job turnover attributed to relocation comes to 1%-1.5%. Relocation has in fact allowed an increase in the competitiveness of the firms of the EU-15 by leading to lower job creation (estimated at between 0.3% and 0.7% in Germany and Austria, which are among the largest investors in the EU-10 countries).

Nevertheless, through its Communication on restructuring and employment, the Commission encouraged Member States to make best use of the Community instruments (including the Structural Funds) to offset any repercussions on certain sectors or in certain regions.

Relocation is influenced only to a lesser extent by corporate tax rates. The factors which prompt the transfer of business activities, capital and jobs to the new Member States include cheaper labour costs and economies of scale. The impact of taxation should be assessed, considering all the aspects involved (including labour taxation, the tax base, overall transparency and integration of the corporate tax system). However, the taxes paid by companies as a share of GDP have remained fairly stable in the past decade.

The opening of the borders of the old Member States to nationals of the EU-10 was one of the most significant and sensitive issues of the 2004 enlargement. Nevertheless, the fear of migratory flows on a massive scale and significant distortions on the labour market now appear to be unwarranted.

Initially, all the Member States of the EU-15, except Ireland, the United Kingdom and Sweden, introduced forms of derogation from the principle of the free movement of persons and workers that had been authorised by the Accession Treaties for the transitional period (7 years). In the EU-10, only Poland, Slovenia and Hungary adopted national restrictions for EU-15 nationals. In 2006 four Member States of the EU-15 (Greece, Spain, Portugal and Finland) lifted these restrictions (which comprised quota systems and work permit schemes) and six others (Belgium, Denmark, France, Italy, the Netherlands and Luxembourg) eased them.

In general, the presence of citizens from the new Member States in the migratory flows was distinctly less than that of citizens from third countries. This phenomenon also arose in Austria and Germany, which have become the preferred destinations of EU-10 nationals. The highest percentage of EU-10 nationals is to be found in Ireland, where they account for 2% of the total population.

The Member States which did not introduce restrictions for EU-10 workers also put up the best performance in terms of employment.

Body of EU law and challenges to be met

There are still challenges to be taken up in the following fields, in which in general there is a considerable degree of integration:

  • Internal market: The new Member States have integrated most of the European legislation on the internal market, lagging behind only in respect of competition. Transposition facilitates trade, investment and the development of the financial sector in the EU-10 Member States.
  • Agriculture: The enlargement has brought progress to the agricultural sector of all the Member States, facilitating trade within the EU and supporting the modernisation of agriculture in the new Member States. As a result of the contribution of the members of the EU-10, European agriculture has grown in importance in terms of area, production and number of farmers. The fears regarding the negative effects of the enlargement on the agricultural sector have proved to be unfounded. Nevertheless, the productivity of the members of the EU-10 remains distinctly lower than that of the rest of the EU. There is still a significant difference in terms of employment: in Slovakia and the Czech Republic, 4% of the population work in agriculture, compared with 19% in Poland.
  • Employment and social cohesion: The new Member States have not experienced problems in integrating EU legislation in employment and social policy, as far as labour law, health and safety at work, equal opportunities and anti-discrimination are concerned. However, major challenges remain in the new Member States in terms of combating unemployment, promoting social dialogue and ensuring social protection. The employment situation, which has improved since the 1990s, still features a high unemployment rate (13.4%), although the seriousness of the problem varies considerably from country to country. The schemes of the new Member States, which are supported by the European Social Fund, must make a considerable effort to achieve the targets set out in the Lisbon Strategy for growth and employment.

LIMITED BUDGETARY IMPACT

The budget of the Member States has been affected only to a limited extent by the enlargement. The financial support of the EU for the new member countries started fifteen years before their accession and gathered pace in 2004 and 2005. Today, the contribution of the EU-10 Member States to the European budget remains below the amounts they receive in terms of aid. On the other hand, the contribution of the old Member States to improving the well-being of the EU-10 countries represents only 0.1% of their GDP. In the financial framework 2007-2013, this level of assistance is set to increase substantially, while remaining limited in relation to the GDP of the EU-15. Moreover, the Schengen facility and the compensation facility have contributed to avoiding pressure on the national budgets of the new Member States.

In conclusion, thanks to the 2004 enlargement, the EU economy has become more dynamic and ready to take up the challenges of globalisation. This enlargement has extended the internal market and increased the benefits for European companies and consumers without causing any significant distortion on the product or labour markets. Careful preparation over the decade preceding access played an important role.

Turkey: the Commission recommends opening accession negotiations

Turkey: the Commission recommends opening accession negotiations

Outline of the Community (European Union) legislation about Turkey: the Commission recommends opening accession negotiations

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Enlargement > Ongoing enlargement > Turkey

Turkey: the Commission recommends opening accession negotiations

In its Communication of October 2004 the European Commission finds that Turkey sufficiently fulfils the Copenhagen political criteria and recommends opening accession negotiations with Turkey. It does however set certain conditions for opening negotiations. It suggests a strategy based on three pillars.
In the Commission’s view the final objective, accession, is clear but it cannot be guaranteed in advance.

Document or Iniciative

Communication of 6 October 2004 from the Commission to the Council and the European Parliament: Recommendation of the European Commission on Turkey’s progress towards accession [COM(2004) 656 final – Not published in the Official Journal]

Summary

The Commission considers that Turkey sufficiently fulfils the Copenhagen political criteria and suggests opening accession negotiations subject to certain conditions. It also proposes – for the first time – establishing a tight framework for the negotiations using a three-pillar strategy.

The Commission stresses that accession cannot take place before 2014, and that it must be thoroughly prepared to allow for smooth integration and to avoid endangering the achievements of over fifty years of European integration.

Opening negotiations subject to conditions

In the light of the changes that have taken place in Turkey in recent years, the Commission considers that it sufficiently fulfils the Copenhagen political criteria. It has made substantial progress with political reform, in particular through the far-reaching constitutional and legislative changes adopted in recent years in line with the priorities set out in the Accession Partnership. However, the Law on Associations, the new Penal Code and the Law on Intermediate Courts of Appeal have not yet entered into force. Moreover, the Code on Criminal Procedure, the legislation establishing the judicial police and the law on execution of punishments have yet to be adopted.

Turkey is making serious efforts to ensure proper implementation of these reforms. Nevertheless, legislation and implementation measures need to be further consolidated and broadened. This applies specifically to the zero tolerance policy in the fight against torture and ill-treatment and the implementation of provisions relating to freedom of expression, freedom of religion, women’s rights, International Labour Organisation (ILO) standards including trade union rights, and minority rights.

In view of the overall progress already achieved with reforms, and provided that Turkey brings into force the outstanding legislation mentioned above, the Commission recommends that accession negotiations be opened. It proposes that when opened, they should be organised around three pillars.

Three-pillar negotiations

The first pillar concerns cooperation to reinforce and support the reform process in Turkey, in particular in relation to the continued fulfilment of the Copenhagen political criteria. The EU will therefore monitor the progress of the political reforms closely. This will be done on the basis of a revised Accession Partnership setting out priorities for the reform process. Starting at the end of 2005 there will be an annual general review of the progress of political reforms. To this end, the Commission will present a first report to the European Council in December 2005.

The Commission may also recommend suspending the negotiations if there is a serious and persistent breach of the principles of liberty, democracy, respect for human rights and fundamental freedoms or the rule of law on which the Union is founded. If such a recommendation is made, the Council may, by a qualified majority, decide to suspend negotiations.

The second pillar concerns the specific way in which accession negotiations with Turkey are to be approached. They will be held in the framework of an Intergovernmental Conference consisting of all Member States of the EU. For each chapter of the negotiations, the Council must lay down benchmarks for the provisional closure of negotiations, including a satisfactory track record on implementation of the acquis. Existing legal obligations relating to alignment with the acquis must be fulfilled before negotiations on the chapters concerned are closed. Long transition periods may be necessary.

In some spheres, such as structural policies and agriculture, specific arrangements may be needed. The Commission is considering permanent safeguards concerning the free movement of workers. Turkey’s accession is also likely to have an important financial and institutional impact. The EU will therefore need to define its financial perspective for the period from 2014 before negotiations can be concluded.

The third pillar entails enhanced political and cultural dialogue between the people of the EU Member States and Turkey. This includes a dialogue on cultural differences, religion, migration issues and concerns about minority rights and terrorism. Civil society should play the most important role in this dialogue, which the EU will facilitate.

Assessment of issues raised by Turkey’s possible accession

As well as the Regular Report on Turkey and its recommendation, the Commission has also presented a detailed impact study on issues raised by Turkey’s possible accession to the European Union. The study concludes that Turkey’s accession would be a challenge for both the EU and Turkey. If well managed, it could offer important opportunities for both. The necessary preparations for accession would last well into the next decade. The EU will evolve over this period, and Turkey should change even more radically. The Community acquis, i.e. the whole body of EU policies and legislation, will develop further and respond to the needs of an EU of 27 or more. Its development may also anticipate the challenges and opportunities of Turkey’s accession.

Background

Relations between the EU and Turkey go back a long way. In 1963 Turkey and the European Economic Community entered into an Association Agreement which referred to the possibility of membership. In 1995, a customs union was formed and, in Helsinki in December 1999, the European Council decided to grant Turkey the official status of an accession candidate. It considered at that point that the country had the basic features of a democratic system but displayed serious shortcomings in terms of human rights and the protection of minorities.

Against this background, in December 2002 the Copenhagen European Council concluded that the European Council of December 2004 should decide on the basis of a report and a recommendation from the Commission whether Turkey fulfilled the Copenhagen political criteria and, accordingly, whether the EU would open accession negotiations with Turkey.

Related Acts

EEC-Turkey Association Agreement (1963), Official Journal No 217 of 29.12.1964.

Conclusions of the Brussels European Council of 16 and 17 December 2004

The European Council decided that the European Union would open accession negotiations with Turkey on 3 October 2005. The negotiations will be based on the three pillars proposed by the Commission in its recommendation of October 2004.

COMMISSION ASSESSMENT

Commission report COM(98)711 final
Not published in the Official Journal

Commission report COM(1999)513 final
Not published in the Official Journal

Commission report COM(2000)713 final
Not published in the Official Journal

Commission Report COM(2001)700 final – SEC(2001) 1756
Not published in the Official Journal

Commission Report COM(2002)700 final – SEC(2002) 1412
Not published in the Official Journal

Commission Report COM(2003)676 final – SEC(2003) 1212
Not published in the Official Journal

Commission Report COM(2004)656 final – SEC(2004) 1201
Not published in the Official Journal

This summary is for information only and is not designed to interpret or replace the reference document.