Christian Noyer: Is the euro a success story?
Speech by Mr Christian Noyer, Governor of the Bank of France, at the Paris EUROPLACE
International Forum, Tokyo, 29 November 2006.
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It is a great pleasure for me to be here today and to have the opportunity to address such a
distinguished audience. I want to talk to you about a success story: the euro. As you well know, there
have been difficult times for European integration. The Treaty creating a Constitution for Europe was
not ratified last year and the future of political integration is fraught with uncertainties. Also, much
remains to be done, in terms of structural reform, if the European countries want to achieve the same
level of long term growth as other developed economies.
Nevertheless, I feel very optimistic. And the reason for this optimism is the euro. The single currency
has the potential to bring enormous benefits to European nations, which they can use to achieve a
high degree of stability and prosperity.
1) What are those benefits?
The first, and most obvious, is price stability. Over the last five years, inflation has stayed broadly in
line with the price stability objective set by the European Central Bank, i.e. inflation below but close to
2% over the medium-term. Gone are the days when European citizens had to worry about the
purchasing power of their savings. This stability goes beyond the behaviour of prices. Inflation
expectations themselves have been remarkably stable, including during the recent period when oil
prices jumped to levels no one could have expected only a year ago. This, by itself, illustrates the
credibility achieved by the Eurosystem, after only six years of existence.
Second, European households and companies are reaping the benefits of that credibility. Long term
interest rates stand at an historically low level, around 100 basis points below the level in the United
States. So, even after the recent increases in short term rates, monetary and financial conditions
remain extremely favourable for investment and growth. And indeed, we might be witnessing in
Europe the start of period of sustained and stable growth, at least if current projections and surveys
prove to be right in the coming months.
A third benefit of the Euro is the boost it gives to financial integration in Europe. In many segments,
European financial markets have reached the depth and liquidity which, up to now, were the preserve
of dollar markets. This stimulates productive investment, helps in restructuring (as witnessed by the
current wave of M&As) and, more generally, allows a better allocation of savings and sharing of risks.
As a consequence, the euro is becoming extremely attractive, as a vehicle, a transaction, an
investment and a reserve currency. As you may know, as central bankers, we remain neutral as far as
the internationalisation of the euro is concerned. We are neither encouraging, nor discouraging the
process. But, as a citizen, I cannot help and feel proud of having one the two main currencies in the
world.
In sum, benefits of the euro include a high degree of credibility of monetary policy reflected in the level
of long-term interest rates; diminished exchange rate volatility; completion of the single market and
encouragement to cross-border trade.
None of this, of course, can be taken for granted. Benign conditions currently prevailing on financial
markets can be reversed. External or internal shocks may be coming, which would impact negatively
European economies. The American economy could for example slow down more sharply than
anticipated. Fuelled by an excessive expansion of credit, some internal imbalances, although in no
way comparable to those in some other developed economies, could also develop in the euro area,
especially in the housing sector. But I have the strong conviction that we are fully equipped to deal
with any contingency, and, provided the necessary structural reforms are undertaken, keep the
economy on a path of growth and stability.
2) How have those successes been achieved?
A lot comes, in my view, from the institutional and operational framework in which monetary policy is
developed and implemented.
The independence of the ECB and of the 12, very soon 13, participating NCBs is enshrined in the
Treaty. They are institutionally, operationally and financially independent from European Community
institutions and national governments.
We have a clear and transparent definition of price stability: inflation below but close to 2% over the
medium-term.
The monetary policy framework of the Eurosystem is "medium-term" oriented. It rests on a two-pillar
approach: on the one hand the economic analysis examines cyclical, economic and financial
indicators related to the main determinants of short-term inflation; on the other hand the "monetary
analysis" looks at the behaviour of money and credit aggregates and provides a perspective on
longer-term inflation. Crosschecking the outcome of the economic analysis - broadening growth in the
euro area - with the monetary analysis - ample liquidity and strong monetary growth - supports the
assessment of risks over the medium to long-term horizon, which have led to the Governing Council's
decisions since December 2005.
Implementation is decentralized. Monetary policy decisions taken by the Governing Council of the
ECB are implemented by the NCBs.
This framework has proven its robustness and efficiency. But there are limits to what monetary policy
can deliver. Its main contribution to growth is to achieve price stability. Ultimately, however, whether
this will translate into higher growth in the longer run depends on reforms aimed at increasing the
economy's potential. Here European countries are making progress, although at too slow a pace.
3) How can EU Member States increase their growth potential?
In 2000, the Lisbon European Council designed a new strategy in order to promote competitiveness of
the EU and defined ambitious goals in that respect. The Lisbon agenda has introduced a multilateral
surveillance of structural policies. In 2005, EU Heads of Government re-launched the Lisbon strategy
with an enhanced focus on jobs and growth and a streamlined governance regime. The key elements
are the National Reform Programs which cover, for each country, the commitments taken over a
3-years cycle as regards structural reforms.
EMU, with a single monetary policy and 12 governments responsible for budgetary policies, requires
an institutional fiscal framework. It has to be simple, easy to implement, and able to ensure that fiscal
policies are sound and sustainable, to avoid free-riding behaviours as well as neo-ricardian effects.
The most widely-discussed surveillance process, because it is the most binding one, is the Stability
and Growth Pact (SGP). The Pact may be defined as the "users instructions" for the obligation,
defined in the Treaty, for EU Member States, to achieve a medium-term budgetary position of close to
balance or in surplus, while maintaining the ratio of the annual government deficit to gross domestic
product (GDP) at within 3 % and the ratio of gross government debt to GDP at within 60 %. Member
States which do not respect these ratios face an "excessive deficit" procedure which may lead the
Ecofin Council to take a series of measures which range from simple recommendations to financial
sanctions.
In 2005, the European Council agreed to reform the SGP. The important role of the SGP in terms of
budgetary discipline is confirmed. The reform sets out the criteria for the implementation of the
excessive deficit procedure and allows for more leeway in the time-frame for correcting excessive
deficits. It does not, however, diminish the binding nature or the efficiency of the Pact.
Let me conclude by mentioning how much we have achieved in Europe over the last fifty years. The
EU has reached a diversified but, broadly speaking, very ambitious level of integration: it is complex
because the degree of integration is largely dependent on which areas are at stake, it is ambitious
since, in some areas precisely, the system is completely integrated and relies on one single policy.
The euro, in that regard, is both the symbol of our achievements and our best hope for the future of
European integration.
Thank You.