Inflation expectations themselves have been remarkably stable, including during the recent period when oil prices jumped to levels no one could have expected only a year ago. This, by itself, illustrates the credibility achieved by the Eurosystem of Central Banks, after eight years of existence. Second, European households and companies are reaping the benefits of that credibility. Long term interest rates stand at a low level, 40 to 50 basis points below the level in the United States. So, even after the recent increases in short term rates, monetary and financial conditions remain extremely favourable for investment and growth. And indeed, we might be witnessing in Europe a period of sustained and stable growth, at least if current projections and surveys are proven to be right in the coming months. A third benefit of the Euro is the boost it gives to financial integration in Europe. In many segments, European financial markets have reached the depth and liquidity which, up to now, were the preserve of dollar markets. This stimulates productive investment, helps in restructuring (as witnessed by the current wave of M&As) and, more generally, allows a better allocation of savings and sharing of risks. As a consequence, the euro is becoming extremely attractive, as a vehicle, a transaction, an investment and a reserve currency. As you may know, as central bankers, we remain neutral as far as the internationalisation of the euro is concerned. We are neither encouraging, nor discouraging the process.
The key elements are the National Reform Programs which cover, for each country, the commitments taken over a 3-years cycle as regards structural reforms. EMU, with a single monetary policy and 13 governments responsible for budgetary policies, requires an institutional fiscal framework. It has to be simple, easy to implement, and able to ensure that fiscal policies are sound and sustainable, to avoid free-riding behaviours as well as neo-ricardian effects. The most widely-discussed surveillance process, because it is the most binding one, is the Stability and Growth Pact (SGP). The Pact may be defined as the “users instructions” for the obligation, defined in the Treaty, for EU Member States, to achieve a medium-term budgetary position of close to balance or in surplus, while maintaining the ratio of the annual government deficit to gross domestic product (GDP) at within 3 % and the ratio of gross government debt to GDP at within 60 %. Member States which do not respect these ratios face an “excessive deficit” procedure which may lead the Ecofin Council to take a series of measures which range from simple recommendations to financial sanctions. In 2005, the European Council agreed to reform the SGP. The important role of the SGP in terms of budgetary discipline is confirmed. The reform sets out the criteria for the implementation of the excessive deficit procedure and allows for more leeway in the timeframe for correcting excessive deficits. It does not, however, diminish the binding nature or the efficiency of the Pact.