Mr Noyer discusses implications of the
introduction of the euro and some basic structural features of EMU
Speech delivered by Mr Christian Noyer, Vice-President of the European Central Bank, at the
European Institute in New York on 29 September 1999.
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Ladies and Gentlemen,
It is a pleasure for me to be able to address you today and to share with you some remarks about the
changes which Economic and Monetary Union (EMU) in Europe has brought about. In so doing, I
should like to focus my comments on the introduction of the euro and the immediate implications for
European and international financial capital markets, for central banking and the European economy
as a whole. However, the launch of a new currency, historic as it was, does not constitute a one-off
event. In fact, it is the longer-term dynamics of EMU which represent the great challenge for the years
to come. In the second part of my address I should therefore like to touch upon some basic structural
features of EMU - which have perplexed observers within the EU, but especially outside Europe -
namely, how a single monetary policy can indeed function in the absence of a unified political entity.
Before that, allow me to briefly explain our terminology, with which you may, as yet, be unfamiliar.
The "Eurosystem" is the name given to the European Central Bank (ECB) and the - at present - 11
national central banks of those countries which have introduced the euro. The "euro area" is the term
used to refer to these 11 countries. The "European System of Central Banks" also includes the central
banks of the four EU Member States which have not, as yet, adopted the euro.
The launch of the euro
On 1 January 1999 the European Union achieved a new and unprecedented stage of economic
integration. With the launch of the euro, 11 countries merged their monetary sovereignty and
transferred the task of conducting a common monetary policy to a supranational institution, the
Eurosystem.
This historic step was the culmination of a long period of preparation, the magnitude of which can
hardly be overestimated. EU Member States embarked upon an ambitious and sometimes painful
fiscal consolidation process; exchange rate crises and hostile public opinion in some countries had to
be overcome by a clear political conviction that the project would eventually succeed. At the technical
level, the banking and financial sectors, EU legislators and many others diligently prepared the
changeover to the new currency in cooperation with the ECB itself, its precursor organisation - the
European Monetary Institute - and the national central banks.
Indeed, the thorough preparation has paid off: the euro got off to a smooth start. Given the sheer scale
and significance of the project, it is, of course, unsurprising that it did not proceed entirely without
hitches; on the whole, however, there were no major complications. External developments such as the
initial depreciation of the euro against the dollar have attracted somewhat pessimistic headlines; but
there are, in fact, several reasons for some satisfaction. The Eurosystem, and specifically the
Governing Council as its main decision-making body, has taken up its responsibilities of formulating
and implementing the single monetary policy. In so doing, the Governing Council - which comprises
the 11 national central bank governors of the euro area countries and the six members of the Executive
Board of the ECB - has not only shown its determination to think and act for the euro area as a whole
but has also proven its capacity for decisive action - as exemplified by the decision to cut the ECB's
main refinancing rate to 2.5% in April.
With the launch of the single currency, the Eurosystem successfully began to operate a system of
centralised setting and decentralised implementation of monetary policy, using a new set of rules and
procedures. In line with its Treaty mandate, the Eurosystem has also assumed its wider tasks and
responsibilities, relating, inter alia, to the collection of statistics, the preparations for the issuance of
banknotes or the operation of payment systems.
The impact of the euro on financial markets
The introduction of the euro has brought about momentous change in the financial markets, not only
within the euro area, but also on a global scale.
• First, a functioning money market for the euro area as a whole is a precondition for the
successful operation of the Eurosystem's single monetary policy. In order to allow this euro
area money market to operate smoothly, the Eurosystem has established the requisite
cross-border transfer and payment systems. The progress achieved in overcoming the
previous fragmentation is highlighted by the rapid increase in transaction volumes within
money markets and the almost immediate normalisation of bid-ask spreads. Even at this
early stage there is every justification for observing that the euro money market has already
achieved considerable depth and a high degree of liquidity.
• Second, the advent of the new currency has also brought about a transformation of the
capital
European markets. Even though capital movements within the European Union had
already been liberalised by the early 1990s, the prospect of a truly pan-European capital
market was still remote. It was the advent of the euro which provided a decisive impetus
towards the further development of a single euro area capital market. This market is set to
become even deeper and more liquid over time, and hence more efficient.
• One particular area of the capital market in which the markets in euro area countries have
traditionally been considerably less active than in the United States is the corporate bond
and commercial paper market. The evidence of the last few months suggests that the
issuance of euro-denominated bonds has indeed exceeded dollar-denominated issues. These
data indicate not only the high level of confidence in the new currency, but also point
towards the gradual establishment of a deep and liquid bond market in the euro area in the
foreseeable future. Such a development should have a favourable impact on business activity
and might stimulate further consolidation by way of mergers and acquisitions.
• Third, the introduction of the euro also appears to lend new urgency to greater integration
and efficiency in equity markets. As consolidation within the financial service and banking
sectors has increased the size and geographical reach of intermediaries and fund
management institutions, they seem to be pressing for market-places to become more
concentrated in order both to reduce costs and to enhance liquidity. These developments
might eventually also lead to a closer coordination of trading practices and technology
among stock exchanges, and the planned link-up of eight exchanges in Europe appears to
point in this direction. Yet at the same time, the use of advanced information technology
renders the physical location of stock exchanges less relevant. A developing perception of
the euro area as an entity in itself is also reflected in the emergence of area-wide equity
indices which provide investors with opportunities to monitor area-wide equity positions as
well as, in some instances, positions in area-wide industrial sectors.
To sum up, the introduction of the euro has led to a perceptible shift in euro area (and EU) financial
markets; greater depth, liquidity and integration should improve their efficiency, and a more efficient
allocation of capital should mean improved financing opportunities for both sovereign and corporate
borrowers.
Having set out the immediate impact of monetary unification on financial markets, I should like to
give you a brief overview of the institution at the heart of managing our new currency, namely the
Eurosystem.
The role of the Eurosystem
Since 1 January 1999, the Eurosystem has had exclusive competence for monetary policy in the euro
area. In fulfilment of this task, the Treaty establishing the European Community assigns to the
Eurosystem the primary task of maintaining price stability. In order to guide expectations of future
price developments and to facilitate the public's assessment of the success of the single monetary
policy, the Governing Council has announced a quantitative definition of its primary objective: price
stability has been defined as a year-on-year increase in the Harmonised Index of Consumer Prices
(HICP) for the euro area of below 2%, to be maintained over the medium term.
The Treaty also states that the European System of Central Banks shall support the general economic
policies in the European Community, as long as it can do so without prejudice to the objective of price
stability. The very wording of the Treaty reveals its logic, namely that the best contribution which
monetary policy can make to high employment and economic growth is to maintain price stability.
In its very essence, Economic and Monetary Union is of course a European endeavour. However, even
at this stage it is clear that the introduction of the euro has implications for the global economy.
Figures relating to the official and private use of the new currency reveal that the Eurosystem will
have responsibility for an international currency of considerable standing. However, allow me to stress
in this context that the Eurosystem does not pursue a policy of actively encouraging or discouraging
the international use of the euro.
As has probably become clear from my remarks so far, we can derive considerable satisfaction from
observing how well the immediate challenges of the introduction of the euro have been mastered, both
by the financial markets and monetary policymakers. Allow me in the second part of my address to
concentrate on some of the longer-term challenges which the project of monetary unification will face.
One single monetary policy for 11 different economies
Looking at EMU from an external perspective, one might be tempted to ask: "It has worked so far, but
will it last?" Is it sustainable for the Eurosystem to conduct a single monetary policy while economic
policies continue to be shaped by 11 different governments?
The blueprint for economic and monetary union as set out in the Maastricht Treaty does indeed
envisage the establishment of a single monetary policy to be conducted by a new supranational
institution, the Eurosystem, with the ECB at its centre. Economic policies, on the other hand, have
essentially remained the competence of the Member States. At the time, many commentators doubted
the feasibility of a monetary union in Europe without some form of "political union".
Today, nine months into the life of the new currency, our first experiences allow us to paint the
following picture. From the very outset, monetary union in Europe has been conceived as a
complement to the Single Market, a logic neatly summarised in the title of the Delors Report study:
"One market, one money". Europe's Single Market already represents a remarkable degree of
economic integration. A plethora of common rules govern economic life in the 15 Member States and
create, to a large extent at least, a unified market serving 375 million people. The realisation of the free
movement of goods, services, capital and people has integrated national economies and rendered
national borders increasingly obsolete. A common competition policy has created a level playing-field,
and common norms and standards guarantee Europe-wide market access.
Certainly, Europe's Single Market is yet to be fully completed: a number of sectors have yet to be
fully liberalised and brought into the remit of common rules. Nevertheless, the notion of a unified
"European economy" has acquired real substance, not least in the wake of the prominent "1992
Programme".
But is the degree of economic integration achieved so far with the Single Market sufficient for the
proper functioning of a monetary union on a lasting basis? From the Eurosystem's point of view, the
Europe-wide economic "governance" is of particular importance in a number of policy areas.
First, the completion of the Single Market in the area of financial services is paramount to the
functioning of Monetary Union. In fact, euro area financial markets began the process of integration
even before the introduction of the euro, and a large amount of work is currently under way to further
develop a prudent, harmonised regulatory framework and to harmonise market practices.
Harmonisation of, for example, repurchase agreements, national company laws (including bankruptcy
laws) and other aspects of the legal and regulatory framework are set to enhance legal clarity and
certainty and thereby improve the efficiency and stability of the financial markets.
Beyond the realm of financial markets, a functioning Economic and Monetary Union will require an
increased awareness on the part of all Member States of the spillover effect of their national policies,
especially their budgetary policies. Without this, the Eurosystem's single monetary policy would face
severe pressures. In order to anchor responsible fiscal policies in the EMU rule book, the Treaty itself
contains stipulations which oblige Member States to treat national economic policies "as a matter of
common concern" and subject them to a multilateral surveillance procedure. These rules derive
additional force from the existence of sanctions in the event of persistent excessive deficits. The
stipulations have been further refined and made more effective by the Stability and Growth Pact
agreed in 1997.
Our first experiences with these EU-level economic policy instruments show that the consolidation of
public finances has indeed become a priority for all Member States, and that efforts, although not
always sufficiently ambitious, have been undertaken to achieve balanced budgets in the medium term.
Given Member States' high overall debt burden, the Eurosystem continues to call for heightened
efforts to this end, especially in times of cyclical upturn such as the one we are experiencing at the
current juncture. But even so, striving towards sound public finances, combined with the Eurosystem's
stability-oriented monetary policy, should help to create favourable macroeconomic conditions such as
Europe has not enjoyed in the past.
However, the euro area economies will only achieve higher growth rates and cut their chronically high
unemployment rates in the long run if the necessary structural reforms are enacted. Not least due to the
constraints imposed by the single currency, there now appears to be a growing recognition among
policymakers in Europe that over-regulation of labour markets, perverse incentives created by some
elements of the welfare systems and rigidities throughout the economy urgently need to be addressed.
In so doing, Member States are increasingly willing to learn from each other, to accept "peer pressure"
and study examples of "best practice".
That said, it would be ill-advised to overrate the need for coordination, for example, with regard to
social security or direct taxation systems: a healthy competition between national economic policies in
such fields can certainly produce superior results. The process of economic convergence in the euro
area, despite great progress over the past years, is not yet complete and will not be so for the
foreseeable future. Under these circumstances, Member States must retain sufficient room for
manoeuvre to allow for differentiated policy responses.
In any case, developing an awareness of the euro area dimension of domestic economic policy
decisions will be a gradual process. In this context, there should be no illusions: adapting to the new
conditions of the single currency - where monetary policy is exogenously set by the Eurosystem - will
demand a steep learning curve from policymakers, businesses, trade unions and the public at large.
Conclusion
I should like to conclude by remarking that the establishment of Economic and Monetary Union marks
an outstanding historical achievement, a new quality in the process of Europe's integration. While we
can certainly look back on the first few months of this endeavour with considerable satisfaction, we
are aware that the task of making EMU a success will be an ongoing one. But, as my remarks have
revealed, there is every reason for optimism: the euro's success is built on sound foundations. Further
improvements are, of course, necessary, but we are confident that they will be accomplished. Clearly,
the Eurosystem's stability-oriented monetary policy is a principal ingredient of a successful EMU, in
which the euro enjoys both the trust of citizens as well as the confidence of investors.