Editor’s Blog: Produced in collaboration with the EU Buzz team
In any competitive global economy a strong currency with an effective regulatory foundation underpins the credibility and investment potential of that economy. Of course, most economies are currently seeing the impacts of the Covid-19 health pandemic, and Europe is no exception, having had a double dip recession in April this year. The next quarter is expected to show growth and thereafter the €750m NextGenerationEU rescue package anticipated to encourage sustained growth across the EU – But, will this also work to strengthen the European Union’s partial monetary zone and its currency?
The monetary union of 19 Member States of the European Union is the Eurozone, where these countries use the euro (EUR €) as their currency and have a monetary authority called the Eurosystem. Not all 27 Member States of the European Union are part of the Eurozone – Each of the others using their own currency, which makes the concept of a Single Market a bit of an anomaly. Although it was intimated that all countries of the EU would be obliged to join the Eurozone, this has not yet happened.
The free movement of money across the Union has been enabled by a banking system managed by the European Central Bank (ECB) for the Eurozone. The ECB sets economic policy, inflation and bank rates. However, there is no actual common representation, governance or fiscal policy for the currency union – Some co-operation does take place through the Eurogroup, which makes political decisions regarding the eurozone and the euro. The Eurogroup is composed of the finance ministers of eurozone states, and occasionally, in emergencies, national leaders also form the Eurogroup.
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain are all currently members of the Eurozone. Four countries not inside the European Union, Andorra, Monaco, San Marino, and Vatican City; have formal agreements to use the euro as their official currency. Kosovo and Montenegro, two potential EU accession countries, have adopted the euro unilaterally, but these countries do not officially form part of the eurozone and do not have representation in the European Central Bank (ECB) nor in the Eurogroup.
To ensure a strong currency and Europe’s economic resilience following the pandemic, the leaders of the European Union must now set ambitious economic objectives, ones which its international allies can also have confidence in. There is a significant shift occurring in the global power play arena, and the European Union is at risk of losing its prominent position if it cannot demonstrate stability. This means the European Union must address its failings.
To begin with, 8 European Union countries have not yet qualified to use the euro because their financial systems are lacking in some manner, with the exception of Denmark. Established convergence criteria or requirements consisting of four macroeconomic indicators that focus on price stability, sound and sustainable public finances, the durability of convergence, and exchange rate stability are required before a country can join the Eurozone. This presents great confusion for third countries and global markets looking to understand the difference between the European Union and the Eurozone and questions why those countries lacking in the financial convergence criteria to join the euro have been allowed to join the European Union?
Furthermore, the European Union still does not have a single market for financial services. It has no Banking Union nor Capital Markets Union leaving it unable to compete with other global currencies, and probably more importantly at the moment, rendering it less attractive for investment and as a place to do business. Corporations today are global and attempting to conduct business in the European Union with its multiple sets of rules and financial regulations, and differing tax systems per country, is not positioning any of Europe’s nations as optimal destinations for business.
Clear messaging in a global fora is a prerequisite to demonstrate strength and confidence in the economy. The lack of clarity regarding the limitations of the euro and the European Union’s declining influence on the political and economic global stage are weakening both the value of EU currency and of the EU itself. Additionally, digital currencies and the EU’s intentions for the use of such currencies, alongside the protection of personal data and user privacy, still need to be clarified. Whilst much talk is made of green bonds and sustainable investments, there appears to be a mismatch between these proposals and European business competitiveness and innovation within the global context. Thus a more transparent communication is needed on the Eurozone and on the ambitions for the euro.
Amidst the fight for survival of the second wave of the Coronavirus pandemic, on 19 January 2021, the European Commission presented its Communication on “The European economic and financial system: fostering openness, strength and resilience.” The aim of the Communication is said to be to enable Europe to play a leading role in the global economic and financial system – This, however, can only be achieved if the European Union addresses its own financial competences and failings as an immediate priority. Emerging from this latest economic and social crisis will require the European Union to “walk the talk” if it is to make headway towards international leadership in the financial world and give the euro the credibility it deserves.