Christian Noyer: A founder's perspective on the euro as a global
currency
Speech by Mr Christian Noyer, Governor of the Bank of France, at the joint conference "The
euro at ten: the next global currency?", sponsored by the Peterson Institute for International
Economics and Bruegel, Peterson Institute for International Economics, Washington DC,
10 October 2008.
* * *
Good afternoon. It is a great pleasure to be here today with so many friends and colleagues
to celebrate ten years of the Euro as a global currency. I must confess this is not exactly my
idea of a quiet and peaceful anniversary. When I was privileged to be designated as ECB's
first Vice President, I would never have imagined that I would be sitting now, as a member of
the Governing Council, dealing with the worst financial crisis in the last eighty years. Actually,
one of the main gratification of the job during the crisis has been the quality of our collective
interaction and deliberation in the Governing Council, based on our willingness, in very
challenging circumstances, to share judgments and exchange views in a spirit of friendship
and mutual respect. I am very proud to be part of such a group. Together, we have been able
to make quick decisions and adjust flexibly to fast changing environment, without ever giving
up on our mandate and our mission.
Obviously, the Euro area, like the rest of the industrialised world, is going through a very
rough patch. We can only imagine what would be the situation if we still had fifteen different
currencies, with so many bilateral exchange rates potentially as volatile as other asset prices
currently are. That single thought experiment is enough to show how much Europe benefits
from having a single, truly global, currency.
Two days ago, we took two very important decisions. First, in an unprecedented move
concerted with all major central banks, we decreased our policy rate by 50 basis points.
Then, in a separate deliberation, we further adjusted our liquidity provision framework. I will
spare you the technicalities. Suffice it to say that, as a result, banks will have regular access,
against collateral, to unlimited amount of liquidity at the policy rate i.e. 3.75%; this, at least
until the end of January 2009.
Let me briefly comment on those two decisions.
First, on liquidity provision. Since the crisis broke out, central banks have tried and restore an
orderly functioning of money markets. Even when modalities are different, there has been a
convergence in objectives and frameworks. Central Banks have stepped up their supply of
funds at longer maturities. Some have broadened the range of collateral accepted in their
secured lending operations. They expanded the scope of eligible counterparties so as to
ensure a wider dissemination of funds. Importantly, major central banks conducted
coordinated actions to provide longer-term funds to address dollar funding needs of non-US
banks, thereby ensuring an adequate distribution of liquidity across borders.
Yet, after more than a year of crisis, credit markets remain very fragile, normal interbank
relationships have not been reestablished, and those frictions could destabilize the financing
of the corporate sector, thus further threatening economic growth. With our last decision, we
have given financial intermediaries full assurance that their liquidity needs will be met, in an
environment of total clarity and absolute predictability. We hope that this will contribute to
reduce uncertainty and restore confidence between counterparties, which is a prerequisite to
a functional money market. This may depend on more than simple liquidity provision. But
central bank's ability - and willingness - to use their capacity are a major source of stability
in the financial system, and should be seen as such, both by market participants and the
general public.
Second, on monetary policy. We have participated in a concerted action by major Central
Banks This is a major, and unprecedented, move to restore confidence, but one, I want to
emphasize, fully and absolutely consistent with our mandate. It is obvious to all observers
that the overall environment has dramatically changed in the last three weeks. Declining oil
and commodity prices, together with stagnant activity have significantly altered the inflation
outlook. Based on current conditions, we can expect "instant" inflation rate to come under our
definition of price stability somewhere in the middle of 2009. In addition, long term inflation
expectations, as measured by the "5 years in 5 years" break even (or swap) inflation rate,
has dropped significantly under 2%, perhaps reflecting the credibility created by our past
actions. To be sure, we must remain vigilant as regards wage developments and the still
possible second round effects from past price surges. But, overall, I would asses that our
new monetary stance is in line with what is necessary, in current conditions, to fulfill our
mandate.
Let me now elaborate on two other set of policies, which, although not directly linked to the
currency, contribute to underpin the strength and stability of the euro area.
The crisis has given a new impetus to discussions on the proper architecture of financial
supervision. In Europe, with market integration moving at a quick pace, supervisory
structures will have to adapt. I am a strong supporter of the Lamfalussy process and believe
that current efforts to improve and develop it deserve all our attention. But I would also argue
that the process must be conducted with pragmatism and a constant look at reality rather
than by reference are some theoretical scheme and vision, and I would like to take this
opportunity to mention two lessons that I draw personally from events of the last 12 months.
First, there are clear advantages in having banking supervision close to (or at least not too
far away from) the Central Bank. I think this is now a conclusion shared by all Central
Bankers in the world, whatever the regulatory environment they live in. An intimate
knowledge of the banking sector and of different financial institutions is extremely helpful in
managing periods of tensions and stress on money and credit markets. Central Banks have
had to make almost instant judgment on the provision of liquidity in different forms and
different maturities. There are circumstances where being able to assess the
creditworthiness of market participants and the effective amplitude of their needs is of
extreme help. More generally (and somehow academically), in times of crisis, the distinction
between liquidity and solvency problems becomes both more important and much more
difficult to make. Having, so to speak, all the cards in your hands, minimizes the risk of
making mistakes.
Second, as concerns the supervision infrastructure, it seems to me that clear, simple, robust
and pragmatic arrangements have performed better than more sophisticated and elaborate
schemes. As you know, I had myself to face a situation of acute crisis and make decisisions
in real time, concerning a major, and internationally active, financial institution. At no time did
I have the feeling that our current arrangements were deficient and prevented me for getting
the necessary information and making the necessary decisions. As you also know, seen from
a public interest perspective, we could solve the situation without any significant disturbance
to capital market. Nobody knows about the future. But I tend to come out from this episode
with some confidence in the appropriateness of our current arrangements.
In addition to Central Banks, Governments in all countries have judged appropriate to act
and try to restore financial stability through a broader set of policy actions. Initiatives have
been taken first, to recapitalize banks through infusion of public money and, second, to foster
confidence in deposit guarantees. In an European framework, such actions involve mainly
national decisions which had to be made, in many cases, with some urgency. Hence the
impression that, at least initially, the coordination may not have been perfect. But things are
falling progressively into place and I am confident that any remaining issues will be quickly
dealt with, according to the roadmap and joint principles recently adopted by ECOFIN
Ministers.
So I would encourage all market participants to take a step back and, as Jean-Claude Trichet
said "collect themselves" to look at the whole package of measures which have been
publicized. True, they have been announced through a succession of public statements. But,
taken together, they represent decisive steps and a coherent package towards restoring
confidence. I am convinced that their impact on the real economy and future growth is going
to be extremely significant.
Overall, it is fair to say that the euro has passed the test and comes strengthened out of the
current difficulties. The Eurosytem will keep fulfilling its priority mandate of price stability
while also contributing to the broader objective of financial stability. Governments are
increasing their cooperation. So the eurozone has shown it is well equipped to live up to its
responsibilities as a truly global player in the international monetary system of the 21st
century.
I thank you for this opportunity to present my views.