In stage 3 of the European Economic and Monetary Union (EMU), member countries replaced their national exchange and monetary policies with common policies determined by EU institutions, including the European Central Bank (ECB). This institutional change had immediate procedural and operational implications for IMF surveillance.
The key issue is that only countries are members of the IMF, and EU institutions have no obligations under the IMF’s Articles of Agreement to discuss their policies with it. However, euro-area countries must make sure that the IMF is able to carry out its mandate under the Articles, and an Article IV consultation with a member cannot be completed without the IMF having an opportunity to assess core policies—such as monetary and exchange rate policies—that fall within its jurisdiction.
Therefore, in late 1998, just before the start of stage 3 of EMU, the IMF Executive Board decided that discussions with representatives of the relevant EU institu-tions—the ECB, but also the Council of Ministers, which has prerogatives in the area of the exchange rate—needed to take place as part of the Article IV consultations with individual euro-area countries.
In practice, the current frequency of Article IV consultations with individual euro-area countries—generally a 12-month cycle—has been maintained. Staff missions visit these countries and report to the Executive Board on national economic developments and the policies that are shaped and implemented at the national level (notably, fiscal and structural policies).
In addition, twice a year IMF staff hold discussions with the EU institutions responsible for common policies (monetary and exchange rate policies). Although these discussions are held separately from the discussions with individual euro-area countries, they are considered an integral part of the Article IV process for each member. Board discussions of individual euro-area countries are clustered, to the extent possible, around the time of the discussions with the relevant EU institutions. While the key policy discussions are essentially at the ECB in Frankfurt, IMF staff also visit the European Commission in Brussels to provide a context on EU- and euro area-wide developments.
Staff reports on these discussions are issued to the IMF Executive Board. One of these reports provides the basis for a Board meeting on the monetary and exchange rate policies of the euro-area countries in the context of the Article IV consultation with these countries. This discussion typically takes place every fall. A follow-up report on the second set of discussions is normally issued each spring for the information of the Board; it provides the context for bilateral consultations with the euro-area countries whose reviews do not coincide broadly with the annual Board discussion of the euro area. It is expected that this second report will not give rise to a Board meeting, but any Executive Director can call for a formal discussion of the matters covered in the paper.
At the end of each mission, the staff team prepares a concluding statement that is left (and discussed) with the president of the ECB and the Eurogroup—the informal group of finance ministers in the euro-area countries. This short paper contains preliminary remarks and highlights themes that are usually more fully explored in the subsequent staff reports.
The recently released concluding statement argues that, while the internal dynamics of the euro area remain robust, a weaker external environment heightens downside risks to the outlook. Domestic demand growth is projected to hover around 3 percent on the back of tax cuts, steady employment creation, and high corporate profitability. Against the background of a sharper-than-expected slowdown in the United States, a faltering recovery in Japan, and some turnaround in the euro exchange rate, the external sector will, however, contribute less this year to GDP growth than in 1999-2000. Overall, growth in the euro area is likely to decline from the 3.4 percent annual rate in 2000 to about 23/4 percent in 2001.
In this context of slower global growth and reversing oil prices, the staff argues, the risks to medium-term price stability are receding, and headroom may be emerging for cutting interest rates, especially if the global slowdown proves deeper than currently anticipated or if the euro appreciates sharply. However, a wait-and-see attitude in monetary policymaking seems appropriate for now, given that currently some indicators of inflationary pressure are still in excess of ECB targets.
IMF surveillance of the euro area exemplifies its increasing interest in regional and multilateral surveillance. This interest is also reflected in the procedures for monitoring the other monetary unions among IMF members, notably the West Africa Economic and Monetary Union (WAEMU), the Central African Economic and Monetary Communities (CAEMC) (which jointly comprise the CFA or Communaute financiere africaine), and the Eastern Caribbean Central Bank (ECCB). The IMF’s Executive Board holds yearly discussions on monetary and trade policies of the CFA, while developments in the ECCB are reported to the Board but are not for now the subject of a formal Board meeting.