Mr. Trichet discusses Franco-German monetary cooperation and monetary
union Speech by the Governor of the Bank of France, M. Jean-Claude Trichet, on the occasion
of the fiftieth anniversary of the Land central bank of Rheinland-Palatinate and the Saarland in
Mainz on 2/6/97.
It is a great honour to speak in Mainz today and to celebrate the fiftieth
anniversary of the Land central bank of Rheinland-Palatinate and the Saarland. Everybody
knows that Mainz played a decisive role in spreading culture and ideas in Europe, in particular
thanks to the invention of printing by Gutenberg.
And the celebration of the fiftieth anniversary of your institution gives me the
opportunity to underline once again the prominent role played by the Bundesbank for the
stability, credibility and prosperity of the German economy. As you know, the Banque de France
deeply supports this culture of stability, which sets the basis for monetary cooperation between
France and Germany, the basis for European monetary union. The celebration of an anniversary
is a good opportunity to draw lessons from the past and to foresee the future. That is why I have
decided today to speak about Franco-German monetary cooperation during the last fifty years
and the prospects for monetary union. In this respect, the creation of the single currency on
January 1st, 1999 is a major event for our respective countries. Far from being a breaking off
with the past, the creation of monetary union is the logical crowning of Franco-German
monetary cooperation. Indeed:
- Franco-German monetary cooperation is based on solid foundations and has
steadily developed during the last fifty years (1)
- this cooperation will be crowned by the creation of monetary union in 1999 (2).
FRANCO-GERMAN MONETARY COOPERATION IS BASED ON SOLID FOUNDATIONS
AND HAS STEADILY DEVELOPED DURING THE LAST FIFTY YEARS
In order not to bother you by an unduly long speech, I will focus on the last fifty
years only! Nevertheless, one could easily demonstrate that our respective monetary histories
have been deeply linked since the Middle Ages. Indeed, Emperor Charlemagne enacted a bill
creating a unit of account common to its whole empire, which enshrined most of the present
territories of France and Germany. The global features of the system (in particular the
subdivisions) experienced an exceptional longevity of almost 1000 years.
The last fifty years constitute, however, a rather homogeneous period, during
which Franco-German monetary cooperation really developed. First, it is useful to underline the
solid roots and foundations of this cooperation. These foundations paved the way for the
emergence of a common destiny, which is best illustrated by the creation of the EMS. This
community of views and interests have been crucial in the decision to create a European
monetary union and a single currency.
I will first explain the solid roots and foundations on which Franco-German monetary
cooperation is based
Franco-German monetary cooperation is based on historical and economic
foundations.
The of Franco-German monetary cooperation can easily be
historical roots
identified.
Both countries had first to rebuild the whole economy in 1945, in a period when
sacrifices were difficult to impose on populations. Germany tackled these disturbances rapidly
and efficiently. The monetary reform implemented in 1948, aimed at definitively eradicating
inflation, paved the way for monetary stability and economic prosperity. A new currency - the
Deutschemark - was introduced, and a strong and independent central bank was founded.
France followed a similar strategy with the creation of the "nouveau franc" or
"new franc", whose nominal value was 100 "anciens francs" or "old francs". This reform
contributed to stabilizing the French currency, which did not experience any devaluation for ten
years.
In 1971, the collapse of the Bretton Woods system and the currency instability
which followed convinced European Governments that an exchange rate system had to be set up.
The first experience, known as the Snake, was not completely successful, but was the first step
towards a common monetary destiny between European countries.
As far as are concerned, our two economies have been
economic foundations
increasingly interlinked for decades.
First of all, the various obstacles to foreign trade in Europe have been
progressively lifted. Indeed, the Treaty of Rome signed in 1957 aimed at creating a common
market. The removal of all sorts of barriers to trade proved nevertheless difficult to achieve.
That is why the European authorities felt that another step was indispensable, and signed the
Single Act in 1987. By now all persons, goods, services and capital can move freely from one
country to another. This is the case for France and Germany.
Trade is a good example of this integration. The share of French imports coming
from Germany is currently about 19%, while the share of German imports coming from France
is about 15%. Each country is the other's first trading partner. Beyond these gross figures, it is
interesting to note that this trade is largely made of complementary goods as opposed to
substitutable goods, thus increasing interdependence.
This interdependence is not only commercial, it is more generally
macroeconomic. Econometric work has indeed shown that French and German GDPs are closely
correlated. This means that national economic policies cannot deviate excessively from each
other.
These foundations progressively convinced France and Germany that they needed a common
monetary destiny
As I said earlier, the collapse of the Bretton Woods system led European
Governements to organize monetary relations between each other. France and Germany were
among the most prominent actors in this strategy. I personally see two main elements in this
common destiny: the creation of the European monetary system (EMS) in 1979 and the
emergence of a conceptual convergence between our two countries as regards monetary issues.
The creation of the in March 1979 highlights best
European Monetary System
the cooperation between France and Germany. The EMS not only provided exchange rate
stability through the setting-up of formal fluctuation bands between currencies; it also organized
a monetary solidarity between countries, by providing compulsory interventions and related
financing facilities.
Although the very first years of the EMS were characterized by several currency
realignments, due to insufficient nominal convergence between countries, the system
progressively contributed to exchange rate stability. German monetary policy, based on stability
and credibility, proved to be efficient. In this context, the French authorities fully endorsed the
objectives and disciplines of the EMS and embarked on monetary and exchange rate stability.
The years that followed were characterized by increasing convergence between
countries and fewer realignments. All countries, including new participants in the system,
adopted similar strategies. Although satisfactory in theory, this stance was nevertheless difficult
to follow for some economies still facing imbalances, and in particular a lack of
competitiveness.
This explains partly the crises that occurred in 1992 and 1993. I cannot forget
how efficient Franco-German cooperation was during this difficult period.
This concrete cooperation has also been made possible by the emergence of a
as regards monetary issues. Since 1987, the central rate of the French
conceptual convergence
franc within the European exchange rate mechanism (ERM) has been unchanged, and a virtuous
disinflation process has been taking place. This policy has allowed French short-term and
long-term interest rates to decline steadily and to stand at similar levels to those reached by the
best performers within the EMS. And a consensus has emerged in France that monetary policy
should be shielded from short-term influences and short-termist strategies and placed in the
framework of a medium and long-term strategy of credibility.
In this respect, a decisive step was the decision to grant independence to the
Banque de France in late 1993. This reform was based on a new perception by the French
populace of the role of a central bank in a developed country. The last three years have shown
that independence was not merely a theoretical concept; the Banque de France has adopted its
monetary policy and has made its own decisions, according to the law without any interference
from the Government. The Banque de France has steadily increased its credibility among market
participants and other observers.
The stability culture that has developed in France during the last decade is deeply
rooted in French society itself. A strong consensus now exists in favour of a stable currency
backed by an independent central bank and contributing to preserving the purchasing power of
the currency, and thereby the purchasing power of citizens.
That is why Franco-German monetary cooperation made the case for European monetary union
more obvious
Indeed it is clear that a single market is more efficient if it is backed by
exchange-rate stability. Excessive exchange-rate volatility and misalignments are invisible
barriers to trade, since they increase uncertainty and create inappropriate and erratic competitive
fluctuations. Moreover, in an environment characterized by free capital movements, isolated
monetary strategies are made more difficult. There is thus a need for monetary coordination,
whose ultimate form is the creation of a monetary union and a single currency. France and
Germany have had no difficulty in understanding this development and are deeply involved in
the preparatory work for EMU.
The Maastricht Treaty contains clear and efficient monetary provisions by setting
specific deadlines for the creation of a single currency and by organizing three separate stages
for this process. These stages allow for a progressive but logical move to monetary union, which
ensures that the single currency will rest on solid foundations.
Moreover, the independence of the European System of Central Banks, made up
of the European Central Bank and national central banks which is fully warranted by the Treaty,
will guarantee price stability and the credibility of the single currency.
Last, the Treaty allows for a balanced policy mix based on an independent
monetary policy and appropriate fiscal discipline (in this respect, the stability and growth pact is
a useful "user guide" to the provisions of the Treaty and not a new constraint coming from
nowhere).
We are now in the implementation phase of the monetary provisions of the
Maastricht Treaty. The concrete preparations of monetary union are the responsibility of the
European Monetary Institute. The preparatory work is well on track and will allow the ESCB
to perform its tasks right from the start of Stage Three in January 1999; moreover, the EMI is
often consulted by other European authorities, who pay careful attention to the advice it
provides; this was notably the case for the changeover scenario adopted by the Heads of State
and of Government in Madrid in December 1995, and for the elaboration of draft regulations
concerning the legal framework for the use of the euro. Here again, France and Germany are
playing a very active role in these preparations, and as early as tomorrow I will meet President
Tietmeyer in Frankfurt, together with our colleagues, to attend the monthly EMI Council
meeting.
FRANCO-GERMAN MONETARY COOPERATION WILL ULTIMATELY BE CROWNED
BY THE CREATION OF A EUROPEAN MONETARY UNION IN 1999
I am personally convinced that the creation of monetary union in 1999 is the
logical consequence of economic, monetary and financial developments that have been taking
place during the past years. The increasing integration of the European economies - and in
particular those of France and Germany - called for a single monetary policy and a single
currency.
I am also convinced that monetary union will successfully go through, right from
1999 since:
- it is a credible process;
- it will create an environment of stability.
EMU is a credible process
Indeed, the case for a European monetary union is based on solid economic
grounds, and it will be implemented in a realistic way.
EMU is not just some abstract concept dreamed up by a few people. It is based on
When the exchange rate stability provided by the Bretton Woods
solid economic grounds.
system and by the barriers between national financial markets disappeared in the 1970s, a
number of European governments became progressively convinced of the need for a single
currency. The Maastricht Treaty is indeed the result of past major initiatives, such as the Werner
Report in 1970 and the Delors report in 1989.
The removal of all tariff and non-tariff barriers to trade has made Europe the
largest market in the world. The EU accounts for 21% of total world trade, against 17% for the
US and 10% for Japan. The benefits of the sheer size of the Single Market are plain to see. The
allocation of savings and investments is more efficient, competition is stronger, and the greater
liquidity of financial markets makes more capital available at lower cost to finance profitable
ventures.
No doubt the European Monetary System and its Exchange Rate Mechanism have
helped curb exchange rate instability and eradicate the inflation culture that prevailed in some
countries; yet the current level of economic and business integration calls for the Europeans to
take a further step towards monetary integration, for the benefit of all European economic agents
and citizens.
The benefits of the single currency are clear. It will reduce uncertainty and
facilitate production and investment decisions. It will make price comparisons across Europe
more transparent and reduce transaction costs. In addition, the single currency area will enjoy
price stability and sound public finances, which will lead to a high level of confidence and to
low market interest rates. Last but not least, the euro will be a major international currency and
this will facilitate international monetary cooperation.
EMU is not only based on solid economic grounds. It is also a
realistic economic
EMU is based on convergence criteria which have to be met on a sustainable basis. The
process.
fulfilment of the convergence criteria is not only a legal condition for participating in EMU but,
of course, corresponds to the sound policy management which is in the interest of all Member
States.
I am convinced that EMU will create an environment of stability
I know how important the is to the German people. This
concept of stability
culture of stability, which explains to a large extent the economic success of your country, is
shared by many Governments, central banks and citizens all over Europe, not least in France.
I know that the German people have expressed some qualms about the
disappearance of the Deutschemark and its replacement by the euro. But I will try to convince
you that the euro will be as stable as the Deutschemark, as stable as the French franc today, for
the sake of European economic prosperity and growth. Indeed, EMU will contribute to
reinforcing stability in Europe. EMU will bring legal, fiscal and monetary stability.
EMU requires a sound legal basis to foster the credibility of the changeover to the
single currency. The Madrid European Council asked the Commission to prepare a draft Council
regulation on the legal framework for the use of the euro.
This regulation is of the utmost importance. Market participants need legal
certainty, not only as regards the new instruments in euro, but also as regard the continuity of
instruments denominated in the former national currencies or in ECU. Besides financial markets,
legal certainty is also important for citizens, as the emergence of a new currency is inevitably, at
the first stage, a source of uncertainties.
In this respect, technical preparatory work on the legal framework for the
use of the euro is almost achieved. The European regulations that have been drafted and should
be endorsed by the European Council in Amsterdam clearly state that the euro will be the
currency of the European monetary union as from the 1.1.1999 . As a consequence, the national
currencies, in particular notes and coins, will continue to circulate during a transitional period, as
subdivisions of the euro. Two other key elements are that the changeover will ensure the
continuity of existing contracts denominated either in national currencies or in ECU and that the
ECU will become the euro at a rate of 1 to 1.
Besides legal security, EMU will reinforce in Europe.
monetary stability
The Maastricht Treaty provides for a monetary framework very similar to that
prevailing in Germany and in France. The primary objective of the European System of Central
Banks (made up of the European Central Bank and national central banks) will be price stability.
The ECB Council of Governors (only those of countries participating in monetary union) will
decide independently the level of official interest rates. Representatives of the European Council
may attend the ECB Council meetings, but they will not participate in the voting procedure.
Monetary union will be characterized by a single monetary policy and national
fiscal policies. In this context, the issue of is crucial. Sound
fiscal discipline and coordination
fiscal policies will help the ESCB to maintain price stability. Coordinated fiscal policies will
contribute to a balanced policy mix in Europe. Fiscal discipline will prevent free-rider strategies
by countries running large deficits and raising funds at low interest rates, thanks to the
credibility and stability of other countries.
This question of European fiscal discipline is important in the context of the
main
which are presently enumerated, particularly from outside Europe, in the analysis of
criticisms
the concept of EMU. Without being exhaustive in this listing, I personally see four major
criticisms:
First, it is sometimes argued that EMU will lead to greater rigidity, in diverting
attention from the necessary structural reforms and inducing an inward-looking posture over
Europe at the very moment when global competition is of the essence.
Secondly, the difficulty of delivering an appropriate "policy-mix", the monetary
policy being by definition concentrated in the hands of the ECB and the ESCB when, at the
same time, the absence of a federal government and therefore of a federal budget leaves the
fiscal policy of the Union in the hands of 15 different governments.
Thirdly, the difficulty of absorbing "shocks" in a particular member economy,
whether this shock is of a domestic or an external nature. This difficulty stems in particular from
the absence of the automatic stabilizers of fiscal transfers because there is no federal budget.
Fourthly, it is stressed that there are important costs associated with the transition
towards EMU, namely the necessity to reduce overall fiscal deficits in the run-up to the single
currency in accordance with the Maastricht fiscal criteria and the necessity to embark on an
excessively tough monetary policy after the creation of the single currency to ensure the global
credibility of the ECB, which in this view will start from scratch.
Let me respond to these criticisms and try to demonstrate that the Europeans have
embarked upon a coherent economic and monetary strategy, responding as accurately as possible
to the various questions I have just listed and paying due attention to the special nature of the
European endeavour.
As regards the first criticism, which I call the "diverting from structural reform"
argument, I really think that it rests on a misunderstanding of the very nature of the Monetary
Union: the essence of EMU is the completion of the single market, which has been one of the
boldest structural reforms ever launched in industrialized countries. On top of the common
market which was the initial concept of the Treaty of Rome, the single market is marshalling the
elimination of all non-tariff barriers, of all those barriers that are of a structural nature and are
hampering the smooth circulation of goods, services and capital throughout the European Union.
In order to meet the single market targets, workshops have been set up everywhere in Europe in
all sectors of the economy and in all capitals to embark on the modernization and harmonization
of regulations of all kinds. It is a major medium-term endeavour and an indispensable economic
impetus to foster competition, economic growth and job creation throughout the single market.
In this perspective, the single currency appears as the last decisive messier for the
completion of the single market, eliminating the last barriers that still exist within the European
Union: no more additional costs for transactions, no more exchange risks, either justifiable or
not amenable to appropriate hedging, and no more costs associated with these hedging
mechanisms. Throughout the single market, there will be the same visibility of all prices, thus
permitting immediate price comparisons, cost comparisons and therefore fostering competition
in all markets.
My conclusion on this point is that the single currency will not prevent Europe
from embarking on eliminating economic rigidities, inducing market flexibilities and generating
measures to cope efficiently and successfully with global competition. On the contrary, the
single currency endeavour will help foster the structural reforms that are needed in Europe to
improve growth prospects and job creation and counter unemployment.
The second and third criticisms are based upon the argument that the Europeans
will not set up an optimum currency area like the US because of the absence of a federal
government and a federal budget and therefore that there is no possibility of ensuring an
appropriate consolidated fiscal policy and ensuring shock absorption through automatic
stabilizing transfers.
In my eyes, the Maastricht Treaty gives a pertinent response to these pertinent
questions. The thrust of the spirit and of the letter of the Treaty is that everything is done to
construct the euro area as an optimum currency area.
First by ensuring that it incorporates economies that have already proved being
convergent in the fiscal field as well as in the monetary and financial fields. This is why the
so-called five Maastricht criteria are important. Not only can one expect that a particular
economy meeting the five criteria is clearly eligible to belong to a currency area composed of
other economies with the same fiscal, monetary and financial features but one can also expect
that the business cycles in these economies are likely to be largely synchronized.
Convergence from the very beginning of the single currency is a necessary
condition to create an optimum currency area. But convergence is not only necessary at the
moment of the selection of member economies. It is also necessary afterwards in what we could
call the permanent regime of the euro. And then the stability and growth pact is of the essence. It
calls for each country to remain in a sound position as regards its fiscal behaviour.
There is a paradox enshrined in the stability and growth pact: implementing the
Maastricht Treaty provisions, including sanctions vis-à-vis past behaviour, it places more power
in the hands of the „centre", which is in that case the Council, say Brussels, vis-à-vis member
states than is the case, for example, for the US government vis-à-vis Texas or California.
The absence of a significant federal budget and the absence of a federal
government have driven the Europeans to embark upon a direct coordination of their national
fiscal postures, through direct peer pressures and decisions within the Council of Ministers.
This very bold construction, which has no worldwide equivalent in the world, will
simultaneously permit through the decision-making process that has been decided in Dublin:
- to ensure that we have a sound consolidated fiscal policy at the level of the euro
area even without a federal budget,
- and to ensure that each particular economy reloads the fiscal cannon in order to
be able to cope with domestic or external shocks even without the automatic stabilizers of the
transfers built into a federal budget.
Ensuring a sound consolidated fiscal policy at the level of the Union and
reloading the fiscal cannon at the level of national economies are the two major goals of the
stability and growth pact monitored by the Stability Council and decided, in accordance with the
Treaty, by the Council itself.
As regards the costs associated with the transition towards the euro, which were
the fourth major criticism, I will confine myself to two main remarks relating to the fiscal side as
well as to the monetary side.
From a European perspective, the strategies of fiscal retrenchment that have been
decided within the European Union are to be implemented in any event, whether the Maastricht
Treaty existed or not. There is no doubt that even in a pure, selfish, domestic approach in each of
the European countries, meeting the fiscal criteria would be welcome for the sake of the
economy, for the sake of the appropriate financing of the competitive sector, for the sake of the
credibility of the signature of the State, for the sake of the confidence in the currency and
therefore for the sake of growth, job creation and the fight against unemployment. All European
governments are saying that Maastricht or no Maastricht, they would pursue their sound fiscal
policies and strategies.
In the case of France, the proof is even easier. For it was in June 1982 that France
adopted the 3 % rule, on the basis of a multipartisan consensus and for domestic reasons, ten
years before the ratification of the Maastricht Treaty.
As regards the monetary side of the coin, shall I also say that we in the Banque de
France would pursue exactly the same kind of monetary policy based on low inflation, exchange
rate stability, a high level of credibility and confidence, and therefore a low level of long-term
interest rates. Implementing what our law says, namely price stability, through exchange rate
stability and the monitoring of our domestic monetary aggregates, the French independent
central bank would meet spontaneously on pure domestic considerations the three Maastricht
criteria that are in our monetary and financial domain, namely a low level of inflation, a low
level of long-term market rates and exchange rate stability.
For these reasons, I see no extra cost associated with the fiscal and monetary
policies that are consistent with progress towards monetary union.
The question of the costs associated with the launching of the ECB and the ESCB
is also important. The question arises only to the extent that the ECB is supposed to start from
scratch and has to build credibility on its own. But it is certainly not the spirit nor the letter of
the Maastricht Treaty; it is certainly not the very nature of the monetary concept of the single
currency.
The single currency is neither supposed to start from scratch, nor to result from
the averaging of the various currencies that exist within the European Union. It must clearly and
it will according to the convergence concept, have the legacy of the most credible and solid
currencies participating in the ERM mechanism. The euro, in any case, must be as solid and
credible as are the most credible currencies in Europe.
*
* *
In conclusion, I would like to make three points
- Firstly, it is not only monetary union that we are preparing actively, but also
economic union, i.e. political union in the economic field. We should not forget that the Treaty
itself provides for a higher degree of political union than is usually acknowledged, with the
concept of coordination of economic policies and the provisions for fiscal discipline and
sanctions. The stability and growth pact grants important powers to the Council - i.e. the Council
of national Governments which is the equivalent in Europe of a federal government in a political
federation.
- Secondly, one should not underestimate the degree of monetary stability already
achieved by European countries. Monetary stability is not only a project for the future, it is
already a major achievement in many European countries. For example, seven countries have
been participating in the ERM without any change in their central parities for more than ten
years.
- Thirdly, it is a false perception to view the necessary fiscal consolidation and
monetary stability as constraints imposed by the Maastricht Treaty against the very interests of
European countries. We would be implementing the same economic policies if there were no
Maastricht Treaty, since they are based on some principles of sound economic management
which are necessary to create jobs and tackle the problem of unemployment.
Finally, economic and monetary union and the creation of the euro will crown
economic and monetary cooperation between European countries, notably France and Germany
which are the two pillars of it, and will foster prosperity, stability and peace in the European
Union.