Mr. Tietmeyer considers the euro as a denationalised currency Speech
delivered by the President of the Deutsche Bundesbank, Prof. Hans Tietmeyer, to the
Österreichisch-deutsche Kulturgesellschaft in Vienna on 27/11/1997.
I
Currency is more than just a part of the economy. A currency is always a
reflection of its country, its politics and its culture. As Joseph A. Schumpeter, probably the most
versatile Austrian economist of this century, famously put it: a nation's monetary system reflects
everything which that nation desires, suffers, is. "Nothing reveals as clearly what a nation is
made of as what it does in monetary policy."
It is tempting to place Schumpeter's words -- just for a moment -- in the context
of a supranational currency (like the euro).
Then the proposition would be that a single monetary system reflects everything
that these nations (note the change from singular to plural) "desire, suffer, are".
For one thing, those words express the idea of a community which is bound
together by a common destiny. (Even though the verb "suffer" sounds somewhat emphatic.)
That is because the single currency binds the people in the participating countries together in
terms of money and currency, for better or for worse, for ever. After all, monetary union no
longer provides for an orderly secession.
For another, Schumpeter's words are a reminder of the necessary communality. If
the monetary system reflects what the peoples of those nations want, what they do, and what
they are, then it will be crucial to monetary union that the individual participating countries also
want and do the same things; in other words, that they attach largely identical aims and
expectations to the single currency and also act accordingly -- at least in terms of their basic
stance.
Otherwise, the single currency would contain the potential for conflict which
could easily lead to real tensions. And, sooner or later, such conflicts would have a detrimental
effect not only on the currency, but also on the economy, integration, and Europe's political and
social culture.
II
Under the terms of the Maastricht Treaty, European monetary union will
ultimately begin on January 1, 1999. The euro will then become the dominant currency in
Europe, at least in the money and capital markets.
Since the euro banknotes and coins will not be available until the end of 2001 and
the beginning of 2002, the national currencies will continue to play a dominant role in the
interim for wage and salary earners, consumers, retailers and probably among medium-sized
businesses, too. However, those national currencies will also be inextricably linked to one
another by irrevocably fixed conversion rates -- as in a single currency.
The decision on which countries are to be in at the start of monetary union will
not be taken until the spring of 1998, and will be based on the convergence situation, which will
then be verifiable; in the end, this binding decision will be taken by the heads of state or
government of the EU countries by qualified majority vote.
Out of respect for this decision-making process, which has been laid down in the
Treaty, I do not wish to indulge in speculation on the future membership. Instead, I would like
to go into more detail on the supranational nature of the new currency and the resulting
advantages and implications which follow from it.
The euro is intended to be a denationalised currency. In precise terms, that
implies two characteristics:
• the euro as a largely borderless currency,
• and the euro as a largely depoliticised currency.
The euro is intended to be a borderless currency in the sense that the national
borders within the supranational euro area will have no bearing either on the fixing of monetary
policy or on the use of the currency. It will be the common currency of all the participating
countries, and for that currency, there will be only one single, supranational monetary policy,
even if the national central banks will still be responsible for its implementation.
Moreover, the euro will provide a crucial boost to the opening-up of borders
across markets and economies in Europe which was already initiated by the Common Market. In
monetary union, the participating countries can no longer adjust the exchange rates against each
other.
This means that what were once major barriers for entrepreneurs and consumers
have now been eliminated: the exchange-rate risk, conversion and transaction costs. However,
one means of protection will also disappear -- and for ever -- namely, exchange rate adjustments
as the former last resort in the event of declining competitiveness or radical structural changes.
At the same time, the euro has also been designed as a depoliticised currency. The
European Central Bank is, by intention, to operate independently of political influence exerted
by governments, parliaments and other European institutions. It has a clear mandate to safeguard
the value of money. At all events, that is its primary task.
The monetary system is hence removed from the realm of everyday
policy-making. The objective of monetary stability is protected in a particular manner. And
policy makers cannot subordinate it to other objectives -- subject to expedience, the political
leaning of the government, or election dates.
By choosing that structure, the signatories of the Treaty made a conscious
decision to continue a tradition which, especially in the postwar era, has become established in a
number of countries in Europe whose currencies have shown a particular degree of stability.
Even countries which, for a long time, had tied their currency regimes much more
closely to everyday policy-making have evidently come to recognise the advantages of
unpolitical monetary systems in the run-up to Maastricht. This does not, of course, rule out the
possibility of the earlier tradition occasionally rearing its head in some isolated issues.
Denationalisation and depoliticisation, though, are certainly linked in a particular fashion. At all
events, removing monetary boundaries in any form calls for a modicum of matching
depoliticisation.
This is true not just for the ultimate form in which boundaries are removed,
monetary union -- but it is particularly applicable to it.
But even the first steps in removing boundaries -- such as the transition to
convertibility -- reduce the leeway for a monetary regime which is simultaneously intended to
serve other political ends.
With convertibility, a currency exposes itself to a comparison of its stability with
that of other currencies. That means that external pressure towards stability begins to be exerted.
This was clearly recognisable when a number of European currencies made the transition to
convertibility in the 1950s and 1960s.
National political influence on the monetary system is restricted even more by
participation in an exchange rate system with fixed parities, regardless of whether a multilateral
system or a unilateral pegging to another currency is involved.
It is true that every country continues to have a national monetary policy to a
certain extent. However, if the national monetary policies -- for instance, owing to different
political leanings and preferences -- diverge too greatly, then the respective parities will no
longer be realistic.
In most cases, this results in unrest in the markets which sooner or later forces
parities to change. But if parity changes are frequent, participation in an exchange rate system
makes little sense; if anything, it becomes counterproductive.
If there are no more currency boundaries in monetary union, there can only be a
single strategy and a common orientation for the monetary system.
III
This uniform strategy and this common orientation can only be a currency which
is largely depoliticised, especially in a supranational monetary union in which the basic
structures of the nation state remain.
If monetary union is not embedded from the outset in a largely homogeneous and
political union which is constituted along the lines of national government, but is founded
instead on the basis of different nation states, that supranational monetary policy can only be
largely unpolitical, meaning disengaged from the political influence of nation states which goes
beyond the legal mandate to safeguard the stability of the currency. This is particularly valid as
long as there is no all-encompassing decision-making process at the European level -- and that
will probably not exist in Europe for a long time to come.
In addition, experience has shown that a depoliticised, consistent, long-term
strategy is also superior in two crucial respects to a discretionary approach which submits to
political expedience:
• by creating more confidence on the part of the markets, and
• above all, by being better able to provide stable money and to safeguard it on a long-term
basis.
Therefore, a depoliticised currency is most likely to provide the opportunity of
reaching a sustainable consensus among the countries participating in monetary union. After all,
special national political interests do not apply here. The only thing that counts is the common
objective of an enduringly stable currency.
It is precisely a consensus of that kind which underlies the Maastricht Treaty. In
future, Europe must safeguard and preserve it.
Therefore, it is also important to see to it that, in the course of the establishment
of monetary union and its institutions, there is no attempt at a sort of re-nationalisation.
That goes for the appointment of the executive staff of the future European
Central Bank as well as for how their tasks are construed.
As envisaged in the Treaty, neither the members of the ECB Executive Board nor
the presidents of the national central banks represented in the Governing Council are there to
represent national interests. Rather, they are the caretakers and guardians of the new single
currency -- no more, but also no less. And if a sort of accountability is considered necessary, it
should be to the European institutions (the European Parliament, for instance) -- as provided for
the Treaty.
Therefore, the question of the national origin and/or the distribution of the seats in
the ECB Executive Board by nationality should not be the key criterion for appointment -- at
least this is the idea behind monetary union, and this is the letter, and certainly the spirit, of the
Treaty.
Internally, too, the participating countries should not lean towards a
re-nationalisation. Of course, there will be a flow of information between a country's political
bodies and the respective central bank management in future, too. However, reporting
requirements on the part of the national central bank management would be a cause for concern,
if this were tied to the idea that the governor of a given central bank were a sort of representative
of that country's national interests regarding monetary policy in the Governing Council.
That is not the case. Every member of the Governing Council (regardless of
whether he/she belongs to the Executive Board or is the governor of a national central bank) has
a personal responsibility, namely for the long-term stability of the euro throughout the monetary
union. The governor of a national central bank must not even be bound by his own bank in the
sense of an "imperative mandate".
That is also the logic behind the "one person -- one vote" rule in the Council. If
the governors were the defenders of national interests in monetary policy decision-making, it
would have been a much more obvious thing to weight the individual votes in terms of the
respective share of capital -- as is done in the IMF, for instance. A structure of that kind was
consciously rejected, in view of the desired denationalisation of money.
After all, the euro must not become merely the sum of national orientations and
interests. It must become an independent currency which safeguards monetary stability
throughout the euro area.
The euro cannot peg itself externally and thus attract credibility and stability from
without, as smaller currencies could before. Rather, it must first set a stability benchmark itself.
And to that end, a consensus on stable money or a stable exchange rate, important
as it may be, is not enough.
There will always be situations in which monetary policy makers have to take
decisions which -- at least momentarily -- will have an adverse impact on one group or another
in society and which do not conform with the intentions of one government or another.
It is precisely in such difficult moments that the European Central Bank must also
be able to take decisions and have the capacity to act in its area of competence. It cannot and
must not wait for a general social and political consensus.
Decisions regarding stability policy do require courage every now and then, even
though they are, of course, guided by sound judgement.
In such critical moments, I hope that Sarasto's wish in Mozart's "The Magic
Flute" will be granted to the future President and the Vice-President (and, of course, the other
Governing Council members, too):
"Oh, Isis and Osiris, send
the spirit of wisdom to the young couple!
You who guide the wanderers' steps,
strengthen them with patience when in danger".
(Whether or not that immediately leads you to believe that the European Central
Bank resides "in these holy halls" is something I shall leave up to you.)
The independence of the future European Central Bank by no means implies, of
course, that it will be detached from the Community or from the general public. (Much as the
Bundesbank today is involved at the centre of German public life and public debate.)
It is precisely that independent position which requires the central bank to engage
with the general public, to explain its monetary policy, and to make its motives and strategy as
transparent as possible. It is not least for that reason that the Bundesbank is advocating a
pre-announced monetary target for European monetary policy, by which it must then allow itself
to be judged.
Conversely, I can assure you that the general public, too, is keeping a close watch
on monetary policy and subjecting it to a critical assessment. It notes every word which is
written and spoken (and, in some cases, precisely those words which remain unspoken).
I therefore believe that an independent central bank tends to be subjected to closer
scrutiny by the public than some areas of policy. And this is as it should be. After all, a
depoliticised currency is a currency which has remained as close to people as a borderless
currency.
But the crucial point is: a borderless currency must go hand in hand with a
depoliticised currency. As a denationalised currency, the euro needs both elements.
IV
In the eyes of some analysts, the euro brings the monetary policy experiments of
this century full circle.
The century began and will end with a denationalised money. At its beginning,
there was the gold standard. At its end, there will be the euro.
The currencies on the gold standard were borderless owing to the fixed parities
and to gold as a common point of reference.
They were depoliticised in the sense that the anonymous mechanism of pegging to
the gold standard forced corrections to the gold standard. Independent central banks followed a
clear monetary mandate, namely that of maintaining gold parity.
Historians may argue over whether the days of the gold standard were indeed a
golden era. At all events, the experience of the past cannot simply be transferred to the
present-day situation.
At that time, wages and prices were more flexible than they are today.
Above all, the position of the state within and vis-à-vis the economy was
different. The government ratio tended to be below rather than above ten per cent back then;
today, in most European countries, it is over fifty per cent.
That has implications for adjustment potential and flexibility. Naturally, it is
primarily the private sector which must shoulder the burden of adjustment in the event of
exogenous shocks and changes in competitiveness.
At the time of the gold standard, the private sector still made up the lion's share
of the economy. Nowadays, by contrast, the burden of adjustment is concentrated on just under
half of the economy. The fact that society in general has little desire to allow market
mechanisms to act on their own is reflected precisely in today's government ratio.
After the collapse of the gold standard, three trends initially prevailed in the
following decades -- and it was no accident that those trends coincided:
• Firstly, the currency became increasingly (re-)politicised. It became associated more closely
with other non-monetary objectives.
Secondly, the heyday of the independent central bank came to an end in just about every
•
country; in many countries, that was the case until only just recently.
• Thirdly, the politicisation of money went hand-in-hand with an increased isolation of the
currency and the economy from external influences. International links declined
significantly.
Therefore, a central motive of the Bretton Woods System, adopted in 1944, was
to promote world economic integration by means of orderly monetary conditions. And in this
sense, the system performed good service.
Regarding the criteria of borderless and depoliticised money, the Bretton Woods
System was, as it were, a wanderer between the worlds.
Money was not truly without borders. Until well into the 1960s, capital controls
were an instrument frequently employed by a large number of countries. Indeed, in many cases
such controls were being used precisely in Europe, too, until the end of the 1980s.
And currency was not entirely depoliticised in the Bretton Woods System, either.
It was not only determined by the dominant position of the United States and whatever political
views prevailed there at any given time. Many capital controls also mostly concealed differing
political strategies and preferences.
In the long term, the monetary system created after World War II was not
depoliticised enough in order to keep pace with the increasing denationalisation of currency
brought about by increasingly efficient and powerful international financial markets.
At any rate, it was often the case that the rules of the fixed-rate system were not
observed.
• Countries running deficits were often too hesitant in correcting their balances of
payments.
• Exchange rates were adjusted too late in most cases.
• And, above all, by the mid-1960s onwards, the US dollar, the key currency, was
increasingly failing to fulfil its role as an objective point of reference for stable money
-a role which only an unpolitical currency could have performed.
It was thus no great surprise that the Bretton Woods System finally collapsed in
1973. Fixed exchange rates accompanied by differing preferences were something the
increasingly developing and emancipated financial markets no longer allowed.
V
The 1970s then witnessed the great contest of monetary strategies -- particularly
within Europe, too -- especially once the first oil crisis began to pose major challenges.
On the one hand, there was the concept of political money. The objective of
monetary stability took a back seat. Monetary policy was to promote other objectives:
employment, absorption of the oil shock, in some cases even foreign policy and foreign trade
objectives.
On the other hand, there was the concept of unpolitical money. Regaining internal
monetary stability and safeguarding it -- in other words, the "natural" objective of monetary
policy -- prevailed. Particularly independent central banks -- such as the Bundesbank and the
Swiss National Bank -- put this stance into practice.
In Germany, that was an important test for the concept of unpolitical money,
introduced in 1948 with the currency reform and secured institutionally by the independence of
the central bank.
The outcome has left no room for doubt in economic terms. Countries with
unpolitical money have not only had lower inflation rates, but also less unemployment. And, on
the whole, they were also able to handle the oil shock and the unpredictability of the US dollar
and other currencies much better. Besides, they were able to acquire an increasingly high stock
of confidence on the part of the financial markets, resulting in relatively low capital market
rates.
This positive experience is something you in Austria have also gained. The
reasoning behind your hard-currency policy -- if I understand it correctly, as an outsider -- is
likewise based on the realisation that inflation does not solve any problems.
Austria has been consistent in applying this hard-currency policy -- even during a
period which was somewhat difficult (the second half of the 1960s). On the whole, this has led
to the financial markets and the public having a justifiably high degree of confidence in the
schilling.
The question of whether monetary policy can be employed to promote and secure
jobs also crops up every now and then in Germany as well as in your country.
On the one hand, this seems understandable. A high degree of monetary stability
has been achieved at the moment worldwide. By contrast, high unemployment is a pressing
problem, especially on the European continent.
However, for those who have been following monetary policy practice over the
past decades, the debate sometimes seems quite eerie. For monetary history has indeed
pronounced a clear-cut judgement: maintaining monetary stability over the medium and long
term is undoubtedly the best contribution monetary policy can make to employment, even if
monetary policy by itself can neither secure nor create employment.
For some time now, Europeans have been increasingly interested in findings in
the United States, where, for some time now, a rather dynamic upswing, a relatively tight labor
market, and yet a comparatively low rate of inflation have coincided.
What can and should we in Europe learn from that?
If Europe succeeds in making its labour markets significantly more flexible, and
if competitive pressure in the goods markets rises significantly; and if this causes the wind of the
global markets and of worldwide competition to be conveyed more strongly internally via
flexible, highly competitive structures, and the European economy is given a breath of fresh air,
then the conditions for sustained price stability in Europe will improve. Then, perhaps even the
European Central Bank can get by with relatively low interest rates in future in order to keep
inflation in check.
The key to that, though, is certainly not a lax or pseudo-employment-oriented
monetary policy (which would, in actual fact, backfire), but more market economy and
competition.
And the road to more competitive structures is only through a stable, i.e. tight,
money.
It is true that the great master of Viennese popular theatre, Johann Nestroy, once
philosophised:
"The Phoenecians invented money -- but why so little of it?"
However, the central bank must limit the supply of money and set the interest
rates accordingly. That is its task.
It is also true that Arthur Schopenhauer once said:
"There are people who would pay any price for money."
Yet philosophers are not always right, especially when it comes to analysing the
economy. The same applies to Schopenhauer's dictum; otherwise, it would be virtually
impossible, above all, to manage the money stock by using interest rates.
VI
The disintegration of monetary policy strategies in the 1970s did not only have
the economic implication that countries had diverging degrees of economic success.
There was an important European policy implication, too. The plan to implement
a phased monetary union that we developed in the Werner Group in 1970 soon foundered; not
only on differing monetary strategies, but also on the lack of willingness of at least one country,
at that time, to surrender national sovereignty.
In its day, in fact, the Werner Plan had two advantages over today's Maastricht
Treaty:
Firstly, the six-nation EC of the time was relatively homogeneous in economic terms.
•
• Secondly, with regard to its strategy for integration, the Werner Plan was more consistent
than the Maastricht Treaty. It envisaged a marked intensification of both political and
monetary integration.
But, in the final analysis, at that time there was neither the willingness to realise
this deeper political integration nor a convergence in monetary policy.
The monetary union, which had already been planned for the 1980s, did not come
into being.
The lack of convergence in the 1970s was not even enough to keep a larger
monetary arrangement together. In the end, all that was left was the "mini-snake".
The exchange rate mechanism (ERM) of the European Monetary System, newly
formed in 1979, was also not very stable to begin with. It was not until 1983 that an important
change took place in the history of monetary integration in Europe.
With Finance Minister Delors at the helm, France changed course towards a
clearly non-inflationary policy. Others followed.
This step, initiated by France, paved the way
for a gradual convergence of inflation rates at a low level in the 1980s,
•
for increasingly stable exchange rates within the ERM,
•
• and, finally, for making a further-reaching monetary union conceivable again.
At all events, in 1988 the Delors Group was commissioned to develop a
framework taking account of the new conditions.
VII
The Maastricht Treaty, negotiated in the early 1990s, gave a sound legal structure
to the idea of monetary union -- even if some critics, not without reason, occasionally described
it as a torso, in light of the fact that the structures of a political union were lacking.
In order to really comprehend the Maastricht Treaty and its significance, I feel
two things have to be realised:
The first realisation is that the essential elements of the Maastricht Treaty did not
fall into Europe's lap. They are the result of experience, and not just of the positive kind.
The same applies to a sufficiently well-founded economic convergence which the
Maastricht Treaty rightly calls for. Over long stretches of Europe's postwar history, this
convergence has tended to be absent.
This has changed at least in some respects. It was a decidedly arduous process
which led to today's high level of monetary convergence.
However, despite a large number of major advances, the level of convergence is
regrettably much lower in the area of public finance, at least if the looming future burdens posed
by demographic trends and the mounting debts which have already been run up are taken into
account.
It was also difficult at that time to anchor the concept of a depoliticised currency
in the Treaty. Differing national traditions regarding the perceived role of the state and society
understandably played a part in that.
This idea naturally fits in particularly well with the German tradition of
decentralised structures. It has been and still is more difficult for other countries on account of
their traditions and structures -- despite the obvious economic superiority of this concept.
And the second realisation is that Maastricht is not merely the logical continuation
of a historic trend. Monetary union is a quantum leap in qualitative terms.
We are daring to start anew what did not succeed in the 1970s. And this time it
must succeed, and this success must be enduring.
Participation is final. Under the terms of the Treaty, there is no longer an escape
hatch -- no matter what economic or political developments a given country may undergo. That
is what makes it different from an exchange rate system or unilateral exchange rate pegging.
This monetary finality, if you will, means putting a crucial political and economic
framework in place for future generations, too.
Maastricht enshrines the concept of a depoliticised currency, and hence stable
money, as the primary objective for the central bank, for all time. Under the terms of the Treaty,
once a country has entered into monetary union, it no longer has the option of trying a different
path.
And each of the participating countries is in intra-European competition for ever
without being able to adjust its exchange rate or to adapt central bank rates to its own economic
situation.
Of course, these monetary restrictions -- technically speaking -- already result
from a tight exchange rate pegging.
Only, with a fixed exchange rate corridor, a country still has it in its power to
decide on those self-commitments -- but that will no longer be so once monetary union
commences.
Under the conditions of the 21st century, it will certainly not get any easier to
maintain economic convergence and to safeguard a country's own competitiveness.
• One reason is that competition will continue to increase, in Europe and most certainly all
over the world. The technological driving forces of globalisation will continue to exert
an effect.
The other reason is that just about all the European countries -- more or less -- are still
•
facing great structural challenges which are still a long way from being overcome, such
as persistent unemployment.
The countries have to work hard to find solutions. The national governments and
parliaments should not forget the words of your fellow Austrian, Karl-Heinrich Waggerl:
"Ask for God's blessing for your work -- but do not ask Him to do the work
Himself as well."
The subject of convergence in monetary union therefore does not just present
itself -- as economic textbooks call it -- in external shocks which affect individual countries to
varying degrees.
The key issue here is for countries to tackle the structural challenges they are
facing, which are identifiable now, in a similar manner and at a similar pace.
Otherwise, "internal shocks" would ensue. The individual economies would grow
apart. But not due to an external event hitting a given region like a comet. Rather, because
monetary union would smoulder inside, giving rise to tectonic tension.
At any rate, it will probably not suffice to set aside the topic of convergence by
using the learned argument that a country which is in competition and does not have access to
central bank money and credit has no choice but to maintain its competitiveness and keep its
public finances in shape.
It is basically correct that a country's policy makers can also rise to the occasion,
as it were, along with the challenges of competition.
But of course, a country -- just like an enterprise -- can also founder as a result of
failing to meet those challenges, if its starting position is too unfavourable. The difference is that
an enterprise then just disappears from the market, whereas a country naturally continues to
exist.
If a country were to encounter difficulties with the conditions of monetary union,
then an economic problem would arise. And -- let us not deceive ourselves -- that would soon
create a political problem.
Europe must avoid that problem as far as possible. Therefore, monetary union
requires a minimum level of convergence on the part of all its participants, both before accession
and, of course, most certainly thereafter.
VII
The euro will have to be a denationalised currency; there cannot and must not be
any doubt about that.
It will thus be in keeping with an increasingly borderless economy. And therein
lie the key economic arguments in favour of the euro. The path to monetary union offers Europe
major new opportunities.
In a Europe which is heading towards a single market, and in a world which is
converging in economic terms, a large single monetary area offers major advantages -- always
provided the euro remains enduringly stable.
Monetary union and the single currency, the euro, will not just mean the
elimination of many risks and costs. If it becomes and remains sufficiently stable, the euro also
has great prospects of building on the D-mark's position as a world currency. And, it can
improve the efficiency of the European single market and, moreover, give further impetus to
political integration.
Those great opportunities and advantages of that historic step into monetary union
are not qualified by pointing to the reality of today's situation in Europe and the resulting
challenges.
As a denationalised currency, the euro will be embedded in a political Europe
which is still largely characterised by national structures.
As a borderless currency, the euro will encounter bordered national economic,
social and tax policies still searching for answers to the borderless economy.
And, as a depoliticised money, the euro will encounter a political reality in which
some people and groups still expect enormous, and fundamentally unrealistic, favours from the
welfare state.
Both are a sign of tensi