Jürgen Stark: The adoption of the euro - principles, procedures and
criteria
Speech by Mr Jürgen Stark, Member of the Executive Board of the European Central Bank,
at the Icelandic Chamber of Commerce, Reykjavik, 13 February 2008.
* * *
I
Ladies and gentlemen,
It is a great pleasure for me to attend this conference, together with distinguished guests and
speakers. In my remarks, I would first like to set out the European Union's approach towards
the adoption of our single currency, the euro. I will then spell out the EU's and the ECB's
stance on unilateral euroisation. I will conclude my remarks with a brief overview of the
potential economic costs and benefits of unilateral euroisation.
The EU's approach towards the adoption of the single currency
The creation of the single currency has been a long and truly historic process. Sixty years
ago, Europe was marred by political disarray and economic disorder. With the Treaties of
Paris and Rome, Europe's leaders started the construction of a united Europe on the ruins of
the Second World War. Since then Europe has achieved a lot:
•
One of the most important achievements is the Single Market, with the free flow of
goods, services, capital and people across national borders. Consumers in Europe
benefit from the larger supply of goods and services. The European companies
benefit from the enlarged markets.
•
Another milestone was the creation of the Economic and Monetary Union, at the
beginning with 11, then 12 and 13 and 15 members since January this year.
The Treaty establishing the European Community assigns the European
o
System of Central Banks the primary objective of maintaining price stability.
The ECB has managed to gain and maintain trust of the public and of
market participants by delivering price stability. Although the single
monetary policy faced a number of significant challenges, the ECB
managed to stabilise the HICP inflation on average at 2,1 % from
19992007. This compares with an inflation rate of 3 % in the nine years
preceding the EMU.
o The inflation expectations in the euro area have been anchored in line with
the ECB's definition of price stability: below but close to 2%. This
underlines the high reputation the ECB's monetary policy has gained over
time.
II
Given the topic of my speech, the principles, procedures and criteria that govern the adoption
of the euro, I would like to underline the key principles for joining the euro area at the very
outset:
1. A country must first be a member of the European Union before it can adopt the
euro. The EU Treaty lays down the criteria that European States have to respect
before they can apply for EU membership.
2. The roadmap and the conditions for the adoption of the euro are laid down in the EC
Treaty. Only based on the principle of a high degree of sustainable convergence an
EU member state can adopt the euro.
3. Each and every one of the countries participating in the European monetary union
has followed one and the same route towards the adoption of the single currency,
based on the principle of equal treatment.
As regards procedures, the road to the euro consists of two stages. As I said, all 15
participating countries have gone through the same stages, and have been required to fulfil
the same criteria:
Stage one is the accession to the EU. EU-membership requires the fulfilment of the
Copenhagen criteria.
•
Alongside a number of political criteria that require stable institutions guaranteeing
democracy, the rule of law, human rights and the protection on minorities, as laid
down in Art. 6 of the EU Treaty,
•
candidate countries need to have a functioning market economy, able to
withstand competitive pressures within the EU.
•
Moreover, the candidate country has to fully implement the EU's rule-book, the
so-called acquis communautaire.
The fact that a country must first join the EU before it becomes a member of the euro area is
not a coincidence. It is a deliberate approach, which underlines the fact that the EU is more
than a mere economic undertaking. After all, a currency is a key attribute of sovereignty.
Sharing a common currency implies sharing a common political destiny.
Stage two is euro area accession.
A country that has joined the EU has the obligation to eventually join the euro area. However,
it does not adopt the euro immediately upon its accession to the EU. Instead, it becomes
what is called in EU-term a "Member State with a derogation". Countries in the derogation
phase have a number of obligations.
•
Upon accession of the EU, new Member States are required to treat their exchange
rate policy as a matter of common concern and to pursue price stability as the
primary objective of monetary policy. The Treaty foresees that at some point
following accession, new Member States will join the Exchange Rate Mechanism II
(ERM II).
•
Moreover, they have to regard their economic policies as a matter of common
concern. The economic policies of these Member States become subject to
coordination and surveillance at the EU level. This is an essential preparation for the
monetary union. Members that once adopted the single currency have to put more
emphasis on coordinating economic policies because monetary policy is no longer
under national responsibility.
III
But policy coordination is not sufficient. To join the euro area, Member States must fulfil a
number of legal and economic convergence criteria.
The legal convergence criteria oblige the euro area applicant countries to put in place the
legal foundations for participation in the monetary union, of which central bank independence
is a cornerstone.
The economic convergence criteria ensure that the applicant countries have established
economic conditions that are conducive to the maintenance of price stability and the
coherence of the euro area. The framework of analysis comprises developments in prices,
fiscal balances and debt ratios, exchange rates and long-term interest rates, together with
other factors. A number of general rules are used in the application of these criteria.
1. The individual criteria are interpreted and applied in a strict manner.
2. The criteria constitute a coherent and integrated approach. They must all be
satisfied. The Treaty lists the criteria on an equal footing and does not suggest a
hierarchy.
3. The criteria must be met on the basis of actual data.
4. The application of the criteria should be consistent, transparent and simple.
5. Convergence must be achieved on a sustainable basis and not at a given point in
time only.
This approach is firmly based on economic arguments. It is generally recognised that a
monetary union requires sustainable macro-economic convergence among the participating
countries. Once a country joins a monetary union, it loses the possibility to use the nominal
exchange rate as an instrument to correct a loss in competitiveness. As monetary policy
decisions in the EMU are taken in the light of the economic conditions prevailing in the entire
area, economic convergence is required to ensure that a country's economy is sufficiently
prepared for the monetary union.
In other words, fulfilling the convergence criteria in a sustainable way ensures that the
country can integrate smoothly into the monetary union, without a risk of disruption for the
Member State itself or the euro area as a whole.
The convergence process and the fulfillment of the criteria are therefore
• not used to exclude countries by putting up extra hurdles for them to pass;
•
they are used to ensure that their inclusion occurs smoothly and to the mutual
benefit of the country in question and the euro area as a whole.
IV
Once a country is able to fulfil these legal and economic criteria in a sustainable manner, it
joins the euro area. However, the adoption of the euro is not the end of the story. It is merely
the end of the beginning. Indeed, joining the euro is not in itself a recipe for success.
Countries need to pursue the right policies in order to thrive in the euro area. Joining the
EMU removes the national instrument of nominal exchange rate adjustment. This implies
increased flexibility of national economies and increased responsibilities for the co-ordination
of the national economic policies of the member states, because they have to compensate
for the elimination of this adjustment channel.
Against this backdrop, the institutional framework in the EC Treaty for the EMU does not only
set a new institutional framework for monetary policy but also for the economic policies of the
member states:
•
The main tool for co-ordinating the policies are the so called "Broad economic policy
guidelines". They set the overall frame for the economic policies of the Member
States.
•
Building on this co-ordination framework the EU leaders agreed on a wide-ranging
program of structural reforms - the so-called Lisbon Strategy in 2000. The
strategy's aim is to gearing national policies towards macro-economic stability and
micro-economic flexibility.
•
In addition to the co-ordination of economic policies the EC Treaty has put in place a
framework for stability-oriented budgetary policies. The main element of this
framework is the Stability and Growth Pact, which requires Member States to
pursue sound fiscal policies. The economic policy guidelines and the budgetary
rules are important so as to facilitate the adjustment to economic shocks in the
absence of a national monetary and exchange rate policy.
V
The EU's position on unilateral euroisation
The EU's roadmap for euro adoption is solid and indispensable. Accordingly, it is not
surprising that the EU has taken a negative position towards unilateral euroisation by a
candidate country or a Member State with a derogation.
In November 2000, the ECOFIN Council - bringing together the Economics and Finance
ministers of the EU Member States - formally adopted the position that unilateral euroisation
is not compatible with the Treaty and cannot be a way to bypass the convergence process
foreseen by the Treaty for the adoption of the euro.
The ECB fully subscribes to this position of the EU Council. Allowing a Member State or a
future Member State to take a "short-cut" to the euro, rather than following the official
roadmap, could be detrimental to that country and possibly the euro area. Because
1. a sustainable convergence that is conducive to the maintenance of price stability
and the coherence of the euro area may not have been achieved.
2. It would breach the principle of equal treatment.
3. It would not ensure that the country in question pursues the right policies to thrive
under the euro.
This raises the question of the approach to be taken towards countries, which would in
principle qualify for EU membership (Art 49 TEU) but do not formally aspire to join the EU
and are thus not candidate countries. This is the category of countries like Iceland. Here,
both the rule of law and the principle of equal treatment provide answers.
1. The Treaty does not provide a framework for euro adoption by non-candidate
countries. Explicit exceptions are only made for a limited number of countries which
legally used a legacy currency before the euro was introduced, and whose
economic and financial structures were closely intertwined with a euro area Member
State.
2. From the point of view of equal treatment, it would be difficult to conceive that the
EU would be more open towards euroisation by non-candidate countries than by
candidate countries or Member States with a derogation. This is also the line
followed by the ECB.
This brings me to another question: What would happen if a country nonetheless adopts the
euro? I am aware that unilateral euroisation is being discussed in Iceland as a possible
option.
I would like to emphasise that the ECB, in line with the official position outlined above and
consistent with our mandate, would neither encourage nor facilitate such a move. Countries
which unilaterally introduce the euro would do so in their responsibility and at their own risk,
without committing the EU or the ECB. The ECB would thus pursue a policy of
nonengagement and non-support towards these countries.
VI
Economic costs and benefits of unilateral euroisation
Let me take a closer look at the economic costs and benefits of unilateral euroisation. I will
focus my remarks on euroisation in general, and will not look specifically at the case of
Iceland.
Admittedly, euroisation could bring some potential benefits for the country concerned.
•
Most notably, the country would import the ECB's credibility, which could possibly
lead to a lower inflation rate.
•
Euroisation would also eliminate exchange rate risk. In turn, the country in question
may benefit from lower interest rates.
•
On the micro-economic side, euroisation would lead to lower transaction costs, and
might provide a boost to trade and financial integration.
These benefits can, however, not be taken for granted. Most of these benefits can indeed
only be reaped if they are supported by sound economic policies.
• For instance, inflation may still be running high in case of pro-cyclical fiscal and
wage policies. Accordingly, euroisation cannot be a substitute for stability-oriented
policies.
•
Again, this underlines the importance of having in place a stability-oriented
macroeconomic framework, such as the one established at EU level.
What are the possible costs and risks of euroisation?
•
First of all, the country in question may face an inappropriate monetary policy stance
in case of diverging business cycles. The loss of an independent monetary policy
and the exchange rate instrument may make it more difficult for the country in
question to respond to idiosyncratic shocks, or to correct a loss of competitiveness.
•
The country in question could also run into logistical difficulties, since it would
exclusively depend upon private arrangements with credit institutions for a number
of key services, such as banknote handling and the execution of high-value
payments. It would also render it more difficult to extend the lender of last resort
function to its own credit institutions.
•
Finally, the country would also lose seigniorage revenues.
In short, unilateral euroisation is not a panacea. Its benefits are uncertain, whereas the costs
are real, and the risks serious. In particular, it should be stressed that euroisation is not a
"quick-fix" for structural problems or external pressures. Admittedly, euroisation would
provide some shelter against adverse winds coming from the outside.
In a way, the euro can be likened to the armours worn by knights during the Middle Ages. Of
course, an armour provides a shield against external hits. However, an armour can also limit
the freedom of action and restrain flexibility. It can give a false sense of security.
The effects of euroisation are similar. It can attenuate external pressures in the short run. But
it does not solve the problems underlying these external pressures. If no action is taken to
solve these problems, the pressures will be building up.
What about a partial euroisation sponsored by the private sector, as opposed to an official
euroisation? I will not dwell much on this issue. Clearly, the potential benefits are more
limited, whereas some of the costs may be less acute. Similar experiences with dollarisation
in some countries show, however, that such a partial euroisation entails some serious risks
for citizens, business, banks and the government alike.
Conclusion
Let me conclude.
1. As I explained, the structured convergence process towards the adoption of the euro
which is laid down in the Treaty provides the best guarantee for a smooth inclusion
and a mutually beneficial life in the monetary union. Against this background,
unilateral euroisation is something which we would not support because this would
be a way circumventing the stages foreseen by the Treaty.
2. I would like to point out that the house of EMU is built upon solid foundations. The
house of EMU is open to newcomers; it is not a "closed shop". However, we would
like to welcome the newcomers through the front entrance, and not via the
backdoor.
3. Since Iceland is a European state, it is of course entitled to apply for EU and
subsequently euro area membership. I was asked to provide you with some more
information about the time frame of this latter scenario. As Iceland is a member of
the European Economic Area, its accession to the EU could proceed relatively
smoothly.
As for accession to the euro area, the minimum time between joining the EU and
joining the euro area is two years. This is because the exchange rate convergence
criterion foresees that an applicant euro area country must participate for at least
two years - without severe tensions - in the Exchange Rate Mechanism II. This
should allow the applicant country to demonstrate that it can manage its economy
without recourse to excessive currency fluctuations, thus mimicking somewhat the
conditions under a monetary union.
4. Iceland would join the euro area once it fulfils all the convergence criteria. At that
point, the Central Bank of Iceland would become part of the Eurosystem, its
governor would have a seat at the table of the ECB's Governing Council, and
Iceland's economy would be considered in taking monetary policy decisions for the
enlarged euro area as a whole.
Thank you very much for your attention.