The euro acted as a crucial shield against the shock waves inflicted by the worst economic and financial crisis in post-war history, but the crisis also shows the importance of addressing competitiveness divergences, according to the Annual Report of the Euro Area 2009 published by the European Commission.
"The euro acted as a crucial shield in the crisis, including for non-area members. But, alone, it does not solve internal and external imbalances. The euro area, and the eurogroup, must make a bigger effort to look at economic and budgetary policies as a matter of common concern and at tackling divergences in competitiveness," said Joaquín Almunia, Economic and Monetary Affairs Commissioner, adding: "The launch of a new framework for growth decided by the G20 leaders in Pittsburgh raises the stakes for the euro area to speak effectively with a single voice to ensure that its interests are duly defended at the global level."
The report highlights that the euro protected the eurozone from the exchange rate and interest rate turbulences that proved so damaging during past crises. The euro also played a valuable role as an anchor of sound macroeconomic policies for member states actively pursuing the adoption of the euro, or whose currencies are linked to the euro. The European Central Bank's capability to act swiftly in collaboration with major central banks has contributed to the stability of the international monetary system as a whole, it says.
"The crisis also exposed the vulnerability of some member states that have accumulated macroeconomic imbalances. The same benign macroeconomic conditions that facilitated the expansion of credit worldwide allowed some euro-area member states to finance fast but increasingly unbalanced economic growth, as the inflowing capital was not always channelled to its most productive uses.
"Conversely, countries in current account surplus were faced with an immediate fall in growth as soon as global demand faltered, given that the engine of domestic demand never really kicked in.
"Unfinished business in fiscal consolidation, financial supervision and the way member states coordinate their economic policies in EMU further amplified these vulnerabilities and weighed on the euro area's capacity to respond to the crisis," the report says.
The report points out that in order to make the most of the single currency euro area members need to better coordinate their macroeconomic policies, to broaden the surveillance to include macro-financial stability and competitiveness aspects and to increase their ability to speak with one voice.
The annual statement also argues for a more effective representation in international financial and economic organisations and fora. With the G20 being firmly established as the new platform for global economic policy coordination, the euro area's unique economic and institutional identity must be recognised. In this context, the report argues, the eurogroup must strive to develop a common position contributing to the implementation of the global framework for strong, sustainable and balanced growth, agreed by the G20 in Pittsburgh.
The Commission calls on member states to show the political will and leadership to turn common understanding into concerted policy action.
"The Lisbon Treaty will, hopefully, provide further impetus for improving euro area economic governance, by formally recognising the eurogroup and its President and by strengthening the surveillance role of the Commission," it says.