Making the most of the euro Positive momentum must be maintained

• Pages: 65-66

Page 65

Almost two months after the successful launch of euro notes and coins in the 12-member euro area, IMF First Deputy Managing Director Anne Krueger says Europe now needs to tackle outstanding economic reforms more forcefully to ensure that monetary union delivers on its promise. Speaking at the Royal Institute of International Affairs in London on February 25, she refrained from commenting on the pros and cons of U.K. entry into the euro area but observed that a "strong and prosperous European economy is essential to a strong and prosperous world economy." Edited excerpts from Krueger's speech follow. The full text can be found on the IMF's website (www.imf.org).

Let me begin by acknowledging what a remarkable achievement monetary union has been to date. Europe's progress toward a single currency over the postwar period has been likened to the emotional roller coaster of a television soap opera: every advance accompanied by inflated rhetoric about Europe's glorious future; every setback greeted with exaggerated predictions of conflict and disaster.

But with the changeover to euro notes and coins, the drama has successfully reached its "season finale," thanks to determined political leadership and economic convergence.

The challenge now is to ensure that this positive political and economic momentum is maintained in the years to come.

Page 66

Fortunately, macroeconomic policy in the euro area is built upon firm institutional foundations.Despite initial skepticism in some quarters, the European Central Bank (ECB) has clearly established its independence and commitment to price stability. The ECB faced a difficult policy environment last year, with growth slowing and inflation above its target range. It responded appropriately, lowering interest rates modestly to begin with and then responding more resolutely when September 11 unsettled financial markets and dealt a blow to business and consumer confidence.

Economic turning point

We now appear to be at or near a turning point in global economic activity-always a difficult juncture at which to set monetary policy. For now, the risks to medium-term price stability seem pretty evenly divided. If recovery proves sluggish, additional easing could be required. But the inflationary impact of an unexpectedly rapid recovery or a move away from wage moderation could argue for a touch on the brakes. For the time being...