Ten years of monetary union in retrospect
1 January 1999 saw the start of the third and final phase of European Economic and Monetary Union (EMU). Ten years on, membership has expanded from the initial 11 members to reach 16 countries by January 2009. This article reviews the first decade of monetary union from a number of angles. Monetary policy under EMU managed to secure historically low inflation, thereby creating the conditions for sustainable economic growth. Despite large relative price movements stemming from globalisation, inflation expectations remained well-anchored at levels consistent with price stability. The high degree of price stability did not come at a cost in terms of less stable economic activity as both inflation and output volatility have declined markedly in the euro area over the past decade, as was the case in other industrialised countries too. The current financial turmoil nevertheless poses a serious challenge for monetary policy and it may well require swift and rapid action, as already illustrated by the Governing Council’s decisions to cut interest rates. Also, the Eurosystem’s operational framework has been used flexibly in order to accommodate euro area banks’ demand for liquidity. Before EMU, financial crises tended to hit countries with poor macroeconomic frameworks harder, so monetary union and its unified policy framework have clearly prevented financial turmoil putting even further pressure on individual Member States. Fiscal policy during the first ten years of monetary union cannot be described as an unqualified success as not all Member States reached their initial targets and their subsequent medium-term objectives set out in their respective Stability Programmes. Taking into account the consequences of population ageing, such fiscal policy shortcomings might endanger the sustainability of public finances in future. The introduction of the euro lowered trade costs within EMU, leading to higher international trade flows which in turn fostered price convergence. Financial market integration varies considerably across different market segments with markets closer to monetary policy displaying further integration. The standard of living in the euro area is well below that in the US and has not changed much during the first decade of monetary union. Further structural reforms and the deepening of the Single Market should strengthen Europe’s productive potential and the higher labour market participation rates should be sustained. Growth and inflation differentials in the euro area are relatively small in relation to historical trends and when compared with other monetary unions. Although these differences are not necessarily problematic, the good functioning of a monetary union depends crucially on the efficiency of adjustment mechanisms, such as the competitiveness channel that works through the real effective exchange rate, as illustrated by Germany and the Netherlands, for instance. The overall balance of Belgium’s participation in EMU is positive. However, the recent sharp surge in inflation raises questions about the functioning of product markets, in particular for energy, and also highlights the importance of wage moderation. Big challenges lie ahead for EMU. First and foremost, the financial turmoil poses a significant challenge for monetary policy and for safeguarding financial stability. Secondly, population ageing requires further consolidation of public finances. Structural reforms in product and labour markets can help make this budgetary challenge more manageable and further raise standards of living. Finally, the enlargement of monetary union to other EU Member States might entail more heterogeneity in the euro area, thus requiring efficient national adjustment mechanisms.
Volume (Year): (2008)
Issue (Month): iv (December)
|Contact details of provider:|| Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles|
Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Web page: https://www.nbb.be/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
Journal of Economic Literature,
American Economic Association, vol. 37(4), pages 1661-1707, December.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
- Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
- Olivier Blanchard, 2004. "The Economic Future of Europe," NBER Working Papers 10310, National Bureau of Economic Research, Inc.
- Domenico Giannone & Lucrezia Reichlin, 2005. "Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it?," Macroeconomics 0511016, EconWPA.
- Giannone, Domenico & Reichlin, Lucrezia, 2006. "Trends and cycles in the euro area: how much heterogeneity and should we worry about it?," Working Paper Series 595, European Central Bank.
- Berger, Helge & Nitsch, Volker, 2008. "Zooming out: The trade effect of the euro in historical perspective," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1244-1260, December.
- Helge Berger & Volker Nitsch, 2005. "Zooming Out: The Trade Effect of the Euro in Historical Perspective," CESifo Working Paper Series 1435, CESifo Group Munich.
- Berger, Helge & Nitsch, Volker, 2005. "Zooming Out: The Trade Effect of the EURO in Historical Perspective," Discussion Papers 2005/5, Free University Berlin, School of Business & Economics.
- Mirabelle Muûls & Mauro Pisu, 2009. "Imports and Exports at the Level of the Firm: Evidence from Belgium," The World Economy, Wiley Blackwell, vol. 32(5), pages 692-734, 05.
- Mirabelle Muûls & Mauro Pisu, "undated". "Imports and exports at the level of the firm: Evidence from Belgium," Discussion Papers 07/28, University of Nottingham, GEP.
- Mirabelle Muûls & Mauro Pisu, 2007. "Imports and Exports at the Level of the Firm: Evidence from Belgium," CEP Discussion Papers dp0801, Centre for Economic Performance, LSE.
- Mirabelle Muuls & Mauro Pisu, 2007. "Imports and exports at the level of the firm: evidence from Belgium," LSE Research Online Documents on Economics 19711, London School of Economics and Political Science, LSE Library.
- Mirabelle Muûls & Mauro Pisu, 2007. "Imports and Exports at the Level of the Firm : Evidence from Belgium," Working Paper Research 114, National Bank of Belgium.
- Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
- Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 388, European Central Bank.
- Luc Aucremanne & Jef Boeckx & Olivier Vergote, 2007. "The liquidity management of the Eurosystem during the period of financial turmoil," Economic Review, National Bank of Belgium, issue iii, pages 27-41, December.
- Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
- Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbb:ecrart:y:2008:m:december:i:iv:p:21-44. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.