Ambassador Dr. Guenter Burghardt
Head of Delegation
Delegation of the European Commission to the United States

Federal Reserve Bank of the United States
Atlanta, GA
20 November 2003

Introduction

It is a great pleasure to return to Atlanta and speak at an event hosted by Jack Guynn and the Atlanta Fed. Two years ago, I accompanied former European Commission President Jacques Delors when he spoke in this very building, with Mr. Guynn again serving as host. When I last spoke with President Delors, he gratefully remembered the kind treatment he received. I am honored to benefit from your warm welcome myself today, and I am convinced that your continued friendship will condemn the Fed. to a steady stream of visitors in the future. It is also a great pleasure to note the presence of so many colleagues from the consular corps of EU member states, including Mr. René Marty, Consul General of France, who has been extremely helpful in organizing my visit.

Atlanta has a special importance to Europe as the economic and financial center of the Southeastern United States. It is of such importance, in fact, that the European Commission has made a small but we believe significant investment here. Georgia Tech and the University System of Georgia host one of fifteen “European Union Centers” located at universities across the US, selected through a quite rigorous competition and partially funded by the European Commission. The Georgia EU Center is among the best in our network, with impressive research, teaching and outreach programs, including a number of activities of great relevance to the business community.

In discussing the transatlantic relationship, it is important to note that it is composed of two building blocks, NATO and the EU-US partnership, which is the most comprehensive, the most powerful and therefore the most important strategic relationship in the world. However, given our setting, and the interests of many of those in attendance, I will focus on EU economic and monetary policies and their impacts on the transatlantic relationship. Of course I will also be pleased to address any questions you may have regarding other aspects of the EU and the transatlantic partnership, including foreign and trade policies. Let me begin, then, with the euro. 

Our Currency: The Euro

A single currency has long been a dream for many Europeans, as a potential symbol of European identity and unity.

Matching those ideals with concrete policies has been the secret of the incredible success story that is the European Union. It is a plot that even the most shameless Hollywood scriptwriter would shy away from: a continent rises from the ashes of war to form an ever closer and wider federation of nation-states collectively dedicated to peace, prosperity and partnership. But that is precisely what has happened.

More than fifty years ago, with the crucial support of the United States, Europe’s leaders resolved to ensure economic and political stability in their countries by eliminating the barriers that divided the continent. This determination to pool sovereignty and to increase cooperation among European nations eventually led to the establishment of the European Economic Community in 1958, the most important of the various founding treaties among initially six founding member states, now having grown today into the European Union of fifteen and, tomorrow, of twenty-five member states. A crucial milestone in the story of EU integration occurred in 1999 with the introduction of the euro and the creation of Economic and Monetary Union.

As Jacques Delors noted here two years ago, the euro embodies the most decisive deepening of the European Community since its establishment, and the introduction of euro notes and coins has increased the perception of an emerging European identity. Europeans now carry a tangible symbol of Europe in their pockets. The decision to launch the euro was a profoundly political act, but the underlying rationale was predominantly economic, namely that a single market requires a single currency.

In 1992 the Maastricht Treaty defined the roadmap to that Single European Currency—while the name "euro" was only decided in December 1995—a roadmap which worked remarkably well: public finances improved dramatically, price stability improved steadily and a culture of fiscal stability took hold in the European Union.

On 1 January 1999, eleven EU countries permanently locked their bilateral exchange rates and the euro became the official currency of these countries. On 1 January 2002, the dream finally became reality and euro notes and coins were in the pockets of 300 million Europeans across twelve different EU countries.

The euro area is now one of the two biggest economies in the world and the major economic partner of the United States. The euro area together, rather than its individual countries, is now considered by the rest of the world when international macroeconomic issues are discussed, for instance in the G-7, the IMF or the in the OECD. Furthermore, in just a couple of years, the euro has established itself as the second-most-important currency after the US dollar on the world's financial markets.

Is all this good news for Georgia? Certainly it is. With the introduction of the European single currency it is easier and cheaper for your businesses to operate in the euro area. This is no small matter: Georgia exported nearly 3½ billion dollars in goods to the EU in 2001, representing 23% of your total exports, and making the EU your largest export market beyond North America. Europe is also by far your largest source of foreign direct investment. As of 2000, European investment amounted to more than 18 billion dollars or 62% of total direct investment in Georgia. Taken together, the US Department of Commerce estimates that European trade and investment supports more than 150,000 jobs in Georgia, largely in highly skilled and well-paid sectors. 

Global Impact of the Euro

Several indicators provide a quite concrete reading of the euro’s global impact. Following the introduction of the euro, there was a huge surge in euro-denominated bond and note issues. At the end of 1998, the outstanding amount of bonds and notes denominated in the legacy currencies of the euro accounted for barely 28% of world issues, compared to 45% for dollar-denominated bonds and notes. Four-and-a-half years later, by mid-2003, the gap had become relatively small: the share of issues in dollars had fallen to 43%, while the euro’s share had increased to 41%.

An even more spectacular development took place on the money market. At the end of 1998, money-market instruments denominated in the euro's predecessor currencies accounted for just over 17% of world issues, compared to 58% for dollar-denominated instruments. By mid-2003, the share of issues in dollars had fallen to 30%, while the share of euro issues had climbed to almost 46%. Overall, euro-denominated debt issuance has increased enormously in a very short span of time.

How can such an increase in the role of the euro be explained? Interestingly, it is probably the creation of the euro itself and, in particular, the pooling of investor demand from the twelve euro area member states. The establishment of a single monetary market and the progress made towards further financial integration within the euro area also bring benefits to non-euro area residents (for instance, US citizens) and, in particular, to non-euro area issuers, as they can take advantage of a larger investor base and enhanced opportunities to diversify their sources of funding. Evidence collected by the European Central Bank on the structure of the international bond market suggests that it is mostly large private companies, in particular from the United States, that are  issuers of euro-denominated bonds.

The same confidence in the euro is also visible in the official sector, through use as an anchor or reference currency in the exchange regimes of non-EU countries. Over fifty countries operate managed exchange-rate arrangements that include the euro as a reference, either in isolation or in conjunction with other reserve currencies.

The types of arrangements adopted by non-member countries range from currency boards to managed floats. These countries are located mainly in Europe and Africa. The main reason why these countries have adopted the euro as a reference currency is, obviously, their extensive trade and financial links with the euro area.

As a reserve currency, the euro accounted for almost 15% of official reserves in 2002. Admittedly it still played a much smaller role than the US dollar, whose share amounted to 65%. By holding large amounts of US dollars, the European Central Bank itself contributes to the prevailing role of the US currency as an official reserve currency.

In the last couple of years, however, central banks in major economies that hold large reserves have also been raising their euro holdings. For example, the Central Bank of Russia has doubled its euro holdings to 20% of reserves. The Bank of Canada also increased its euro holdings, as did central banks in Asia. It was reported that Taiwan has increased its euro holdings from 20% to about 35% of total reserves, and it is estimated that a third of Singapore's reserves are held in euro. China is also increasing its euro holdings. This situation is of course a moving target, and very recent trade-motivated currency interventions that have taken place against the US dollar in some Asian countries may have had the effect of counterbalancing some of that portfolio restructuring.

To me it is rather clear that the sustained strength of the euro in the last eighteen months is a reflection, among other things, of the trust and confidence that private and public operators put in the European currency.

Part of this trust and confidence comes from the credibility that the European Central Bank has been able to build in its first five years of existence. Most of the “ECB watchers,” including our friends in the US, have increasingly come to understand and to respect our monetary policy. The ECB has also become better at explaining it. I do not deny that further progress can be made, since it is an ongoing process. However, it is clear that things are on the right track. As ECB President Wim Duisenberg said in his farewell speech last month, “even in its infancy, the ECB showed itself to be a mature central bank.”

The maturity of the ECB in its infancy was also demonstrated in the aftermath of the September 11 attack, when the European Central Bank immediately added liquidity to the system through a huge swap arrangement with the Fed. This event has made clear that the two major central banks in the world have the capability, if need be, of guaranteeing to a large extent global economic and financial stability.

External Representation of the Euro

However, this enhanced profile in the monetary sphere has not yet translated into an appropriate external representation of the euro area. Despite the fact that the euro area is today the largest trading partner, main aid donor and second largest GDP producer in the world, its influence in the shaping of global economic decisions does not yet correspond to those capabilities. To borrow an American analogy, we are punching far below our weight.

I think that the time has come for the members of the euro area to tackle this problem—indeed, Jacques Delors said the time was ripe in 2001! It would make sense, in my view, to move towards a single representation for the euro area in the international financial institutions, since its economies are increasingly integrated. We have a common monetary policy, a common trade policy and fiscal policies that, although still the competence of member states, are increasingly coordinated. With regard to the G-7, it is paradoxical that the European Commission, which monitors the economic developments in the euro area, is excluded from the discussions on this topic. Therefore I am again in full agreement with Jacques Delors when he points out that “these unwieldy arrangements are inefficient and severely erode the negotiating position of European interest” and that “the euro-zone has to find a better way of streamlining its external political representation.”

Reviving Growth in the EU

Let me now turn to the economic situation in the European Union.

While the European Union has been able to establish an enviable record of stability thanks to the euro, there are areas where the Union has not matched the success of the euro. Growth is the main one. Europe cannot be satisfied with its performance of past years, and it must increase its potential growth in the years ahead.

Per-capita income convergence vis-à-vis the United States halted in 1970. Since then, the EU per-capita income level has stood at around 70% of that of the US. Meanwhile, spurred by a successful transition to the knowledge-based economy, the US posted a higher growth rate in the 1990s than during the previous two decades.

I see the EU's low growth rate as a symptom of an economic malaise and a signal that structural reforms are needed. It is important to stress that this need is now increasingly recognized as the key element for enhanced growth in Europe. EU leaders have thus set a kind of “headline” economic goal for Europe: improving competitiveness and economic dynamism by embracing knowledge and innovation and by ensuring environmental and social sustainability in the long run. This also means supporting the EU macro-economic framework with a coordinated strategy of micro-economic and social reforms and regular monitoring of their implementation.

The goal of this strategy is to improve the way the markets—all markets—function, thus enhancing flexibility in the euro-area economy and ultimately increasing its potential growth and reducing structural unemployment. After three years of disappointing growth, the EU economy is now showing signs of recovery. We trust these will be confirmed in 2004 and 2005, when the EU will hopefully be able to achieve its potential growth again.

Our strategy to revive growth is based on four priorities:

First, increasing investment in research, education and training. This is why EU leaders have set themselves the goal of raising EU investment in R&D to 3% of GDP by 2010, with two-thirds coming from the private sector.

Our second priority for action is to extend labor market reforms. These are necessary reforms to raise employment and productivity.

Our third priority is to create an integrated financial market that will allow capital to flow where the returns are the highest in the EU and, in doing so, encourage the most efficient and productive firms to expand and raise employment. Over the past four years, the EU has developed new legislation to allow banks, fund managers and insurers to operate on a pan-European basis. In the last year alone we have adopted legislation giving pension fund managers much greater freedom to invest on a cross-border basis, and we also hope to agree legislation that would allow issuers to raise capital on the basis of a single prospectus across the EU. Work on adopting common international accounting standards is also progressing quickly, and new rules on corporate governance are also being looked at. We believe that a single financial market could add in the region of 1% to the EU’s combined GDP.

Our fourth priority is to address environmental pressures and to introduce reforms which will allow Europe to take the lead in environmental technologies. This is a field that has a huge untapped potential and that will increasingly be a major source for economic growth.

I know that in the United States there is the strong perception—I would argue a misperception—that Europeans are not very keen to introduce structural reform. It is true that in Europe we put more emphasis on social solidarity and that our social safety nets are bigger. We may have more reluctance than in the US to implement structural reforms that weaken elements of the social contract that is at the basis of the economic and social structure of many of our member states. It is indeed a complex exercise to reconcile strong growth with relatively low levels of income inequality. There are no easy answers.

But make no mistake: we know that we have to fix a number of problems in Europe and we are on our way in fixing them. Already in the last couple of months we have addressed problems with our pension system.

Let me repeat that Europe does not have a bias against structural reform—this is a misperception that is not consistent with the historical record. On the contrary, the European Union has gone through huge structural reforms that have provided permanent benefits and caused dramatic economic and social transformations. Take for instance the creation of the Single Market, which has contributed to the creation of millions of new jobs and accelerated economic growth in the European Union. And look at the euro, which is heightening competitive pressures, making prices more transparent and eliminating exchange rate risks. Here the European Commission has also proposed to the ongoing “intergovernmental conference” now considering the draft treaty for a European Constitution that economic policy coordination should be strengthened to ensure the sound public finance policies necessary for sustained economic growth.

Our path to the revival of growth and structural reform, where institutional innovation plays a key role alongside markets, may sound unusual here in the United States, but it has worked remarkably well in the last fifty years and I’m sure it will provide new momentum in the years to come.

Enlargement and the European Economy

New momentum for growth will also be provided by our ten new member states. On 1 May 2004—less than six months from now—eight Central European countries and two Mediterranean countries will become full-fledged members of the European Union.

This is first and foremost an event of the greatest political significance. It signals Europe's reunification after fifty years of division, more than fulfilling the original investment of US assistance via the Marshall Plan. The EU’s enlargement process has now extended that stability, after the EU’s own investment of the equivalent of two Marshall plans in Central Europe, paying additional dividends to the US in the form of an increasingly capable global partner.

The coming enlargement does pose a number of challenges. In economic terms, it amounts to integrating two areas with a very large gap in income and productivity. The acceding member states have a within-country income distribution relatively similar to that of the current fifteen member countries. But their average income level is considerably lower than that of the current members.

The new member states represent 20% of the population of the present fifteen member states, but only 5% of their GDP. This means that on enlargement, total inequality within the EU is bound to rise by about 20%—twice as much as the increase in inequality due to the accession of Spain, Portugal and Greece in the 1980s.

Fortunately, we have been very successful in our experience of previous enlargements. Countries like Spain, Portugal, Greece and Ireland have, to various degrees, all caught up with the most advanced EU countries. As a consequence of their EU membership, Ireland, Spain and Finland are among the most dynamic economies not only in Europe, but also in the World. Thanks to these successful integration experiences, we are confident that, mutatis mutandis, we shall be able to replicate them with the ten new member states. This will provide the European Union—and its partners, including the US—a huge opportunity through the establishment of an integrated economic area encompassing more than 450 million consumers. That economic area will in turn be doubled to around one billion when the EU’s “near abroad” network of Customs Union and Association agreements are included with countries such as Turkey, Russia and those of the Southern and Eastern Mediterranean.

Though with a population of some 70 million the new member states represent less than the equivalence of the Netherlands economy of some 15 million, their rate of annual economic growth is twice that of the current EU member states. Not surprisingly, most economic studies show that the different size and dynamism of the two areas will result in greater macro-economic gains in the new member states than in the current members. Estimates indicate a positive impact of some five to eight percentage points of GDP for the new EU countries and slightly less than one percentage point of GDP for the current EU members as a whole.

EU-US Economic Partnership

Against this background, I think that it should be evident why the economic partnership between the European Union and the United States is indispensable, but here are a few more examples to underline this point. Today, the combined EU and US GDP is around 60% of the world total, while we constitute only around 10% of the world’s population. Together, we command 40% of world trade, and our bilateral economic relationship is worth just short of $3 billion per day in trade of goods, services and foreign direct investment. Even more important is our cumulative mutual investment stake in each other’s economy. In 2000, Europe’s investment stake in the US represented 75% of all European investment abroad and roughly 60% of all foreign direct investment in the United States. Meanwhile, the US investment stake in Europe grew to roughly half of all US investment abroad, and in 2001, this investment yielded half of all foreign earnings for US companies. 

Clearly, the two biggest economies in the world cannot afford to go it alone or to engage in trade wars. The EU needs a strong economic rebound in the US to jump-start its economy, but the US recovery will not be sustainable if the euro area does not follow.

While it would be a mistake for the European Union to be complacent about its weak growth (and we are not), the US should not underestimate the imbalances it is facing, in particular in terms of the current accounts deficit. You would be wrong to think that “It may be our deficit, but it is your problem.” The orderly adjustment of existing global imbalances should always be considered an issue of shared interest. This means that, while the European Union has to strengthen its effort to grow faster, the US needs to start to tackle its savings-investment gap, a gap that at present is largely a public one, reflecting the increase in fiscal deficit. We can only succeed in this respect if we act as partners, rather than as antagonistic competitors.

The same is true for trade policies. It is my strong conviction that, not only must we comply with commonly agreed WTO rules, but we should also persevere in our joint efforts to bring the Doha Development Round to a successful conclusion. Here again it is also important that we look at the transatlantic dimension, as well as the global one. There are a number of barriers to the free flow of capital across the Atlantic, and we believe that there are real benefits to investors and to our economies if we can remove some of these. That is why we are engaged in an intensive dialogue with US regulators, including the Treasury Department, the Federal Reserve and SEC, to identify areas where progress could be made.

Above all, we must strive to seek some form of regulatory consistency between our two jurisdictions to remove significant legal risk for transatlantic business, such as has arisen recently with the passage of the Sarbanes-Oxley Act. With goodwill on either side, we are hopeful that we will be able to remove unnecessary barriers to market integration, while still providing the very highest standards of protection for consumers and investors. In that spirit, our dialogue on financial market issues is a real win-win for the EU and the US, unlike some other areas of joint endeavor.

With a single currency and integrated financial markets on our side, we in the EU hope that the transatlantic partnership will continue to serve as a motor for our mutual economic growth.

Thank you. I look forward to your comments and questions.