Mr Welteke's following address on
Europe and the euro: the view from Asia
Co-speaker's address by Mr Ernst Welteke, President of the Deutsche Bundesbank, following the
lecture held by Joseph C K Yam, Chief Executive of the Hong Kong Monetary Authority, at the
XII International Frankfurt Banking Evening, held on 14 March 2000.
* * *
I
Mr Yam,
First of all I would like to thank you for coming here and for giving us a very interesting Asian
viewpoint of Europe and the euro.
As Chief Executive of the Hong Kong Monetary Authority, you have successfully steered your way
through some turbulent times in the financial markets since the Authority was set up in April 1993.
We Europeans also need a perspective from outside so that we can objectively assess our ambitious
historic project of monetary union. For that reason alone, I feel it would be arrogant of me to offer a
"reply" to your evaluation because the very concept of a "reply" implicitly suggests disagreement
even if that is not intended. And so the organisers of this event and I have agreed that, in future, the
reply from the Bundesbank President will be dropped from the agenda.
In the field of economic and financial policy there is no "ideal path" which should be followed by all
countries in all circumstances. The economic and political settings in individual countries are simply
too diverse. The cultural and social conditions also often differ widely.
That is why it is so important to compare notes and to learn from one another.
II
The respective economic developments in Europe and in Asia have likewise been characterised by
very different conditions in the past few years.
Whereas in Europe various national currencies, supported by convergent economic and monetary
policies, were increasingly harmonised and finally moulded together in a monetary union, some of the
exchange rate pegs in Asia were strained to breaking point.
Hong Kong was and remains one of the exceptions. Even during the financial and economic crises in
South-East Asia in 1997/98, it managed to maintain its exchange rate peg to the US dollar.
Hong Kong was like a rock in a stormy sea. For many foreign investors at the time it was - and
remains - a firm anchor in the Asian markets.
But in fact, defending the currency board regime was by no means an easy task. In mid-1998 many
investors were wondering whether Hong Kong really would defend its exchange rate come hell or
high water. For many this was the key question during the Asian currency crises.
Mr Yam, the successful defence of your currency succeeded not least because of your partly
unconventional policy. This entailed breaking the golden rule that a monetary authority should not
intervene in the equity market.
You successfully intervened in the equity and futures markets with large official purchases amounting
to about 15 billion US dollars, or 6% of market capitalisation at the time, in order to put an end to the
speculative "double market play" in the equity and foreign exchange markets.
In the process Hong Kong put its free-market reputation on the line. But the intervention achieved its
aim. It resulted in an easing of interest rates and a levelling-off of the drop in equity prices. The dollar
peg was maintained. And Hong Kong remains a liberal and open market economy.
This monetary policy success also had, I believe, an important psychological impact: the "small" Hong
Kong Monetary Authority showed the global financial markets that speculating against the monetary
authorities can be unsuccessful.
Central banks are not a helpless prisoner of global financial markets - even if they have tied their
hands through a commitment to an exchange rate target. The initiative - in the monetary field as in
other areas - remains with the policymakers.
Naturally, the respective situations in Hong Kong and in Euroland are not directly comparable. Hong
Kong is a small open economy for which the existing exchange rate regime is the sole option "to
counteract large, unexpected shocks from the global capital movement", as you, Mr Yam, constantly
point out.
By contrast, the euro area is one of the largest currency areas in the world. Together, the participating
countries account for more than 15% of global GDP.
This aggregate volume has given the European countries a new responsibility for the stability of the
global economic and financial system. They can and should face up to this challenge with
selfconfidence - including when it comes to occupying top posts in international organisations such as the
IMF.
Obviously, the question of the appropriate exchange rate regime for the euro area is posed in a
completely different context.
The idea of establishing a system of fixed exchange rates between the major currencies - the dollar, the
euro and the yen - is a non-starter under present circumstances. Economic and cyclical developments
in the various currency areas are too diverse, but so, too, are the political priorities. None of the three
regions I just mentioned is willing to subjugate its domestic policy to a fixed exchange rate.
Exchange rates need a certain room to manoeuvre so that they can equalise differences between
different economies.
The ESCB therefore does not pursue an exchange rate target. Its monetary policy is oriented
exclusively to the risks to internal price stability. The exchange rate does play a certain role, however,
because key import goods - such as raw materials and energy - are invoiced in dollars.
The decisive factor, however, is always the overall monetary policy setting. This is something which
the Governing Council of the ECB will analyse thoroughly at its next meeting on Thursday.
III
Mr Yam, another factor which has doubtless contributed to your successful monetary policy track
record is the proximity to the market of the Hong Kong Monetary Authority, which is also responsible
for supervising the financial markets and the banking sector.
Monetary authorities must have their finger on the pulse of the financial markets. After all, monetary
policy decisions have direct implications not only for the money market but also for the foreign
exchange and capital markets - both nationally and globally.
Today, given interlinked markets and internationally active credit institutions, instability can spread
more easily. This tendency is being reinforced by the fact that some credit institutions are acquiring
new, truly global dimensions - as is illustrated by the announced merger of Deutsche Bank and
Dresdner Bank here in Germany.
Hence there is a much greater onus on central banks than in the past to take on responsibility for the
financial stability of the financial markets, too. They have to focus their efforts in this context on crisis
prevention.
Central banks need to monitor the markets constantly so that they can detect crisis signals at an early
stage. For this they require prudential supervisory information on system-relevant individual
institutions at first hand. This is why they also have an oversight function for the payment system, for
that could pose substantial systemic risks to the banking sector if major market players were to
experience disruptions in their payment operations.
In Germany it is the Bundesbank which, by virtue of its involvement in banking supervision or as the
government's fiscal agent, is able to inject the necessary market competence and market proximity
into the monetary policy decision-making process.
In all the discussion about the tasks and future structure of the Bundesbank, therefore, it must be
assured that the German central bank remains anchored in the financial markets.
The reform of the Bundesbank must lead to more streamlined structures and to a strengthening of the
Bundesbank within the ESCB. Germany, as one of the major industrial nations in the world and the
largest economy in Europe, has a vested interest in having a potent and efficient central bank which is
able to represent German interests effectively, both within the ESCB and internationally.
A reorganisation of the Bundesbank must not fritter away the high esteem and trust in which this
institution has been held by the general public for many decades. The Bundesbank must remain an
anchor of stability and trust for the German public - particularly during the period of changeover to a
new currency. Its effectiveness depends on the quality of its arguments and on having a strong
organisation that carries a great weight.
I assume that these aspects will be given due consideration by the politicians. One thing is certain, at
any rate: the Bundesbank's work in the fields of banking supervision and debt management stands up
well to international comparison.
I believe that proposals to outsource functions from the Bundesbank fail to take due account of the
expertise and considerable synergies that exist within the Bundesbank.
In banking supervision, for example, we are closer to the market, we have a nationwide network of
branches and we have the experts needed - not to mention an ideal location in the banking centre of
Frankfurt.
The tasks of exercising microprudential oversight of banks and ensuring the stability of the banking
system are ideally combined if the central bank is also involved in supervisory activities. So there are
many good reasons for concentrating banking supervision operations within the Bundesbank.
Regarding a cross-sector coordination between banking supervisors, securities trading supervisors and
insurance supervisors, I think that a national "Joint Forum" is a solution that would be both
costeffective and capable of being rapidly implemented.
In the field of debt management, too, the Bundesbank has a rationally structured system of interlinked
functions.
Like every fiscal agent, we currently advise the issuer, manage new issues, carry out market
smoothing and price management operations on all German stock exchanges and oversee both the cash
and securities legs of securities settlements. A debt agency, however, would have to be supplemented
over and above the new department at the Federal Ministry of Finance - by a body that performs the
banking functions.
IV
Mr Yam, the introduction of the euro just over a year ago truly marked an historic turning point, both
for the global financial markets and for Europe.
The euro has rightly triggered a debate on the future responsibilities and structures of the national
central banks in the Eurosystem.
But the policymakers responsible for those areas of policy which remain in national hands must
likewise adapt to the new setting.
Competitive pressures are being intensified by the growing transparency on the goods and labour
markets in the euro area. This is turning an even brighter spotlight on differences in the
governmentdefined operating framework and on national structural problems.
Divergent economic and employment trends now have to be accommodated primarily by the national
economic, financial, wage and social policies. That requires greater overall flexibility on the respective
goods and labour markets.
And in view of the fact that government debt remains high, all levels of government should continue
to step up their efforts aimed at reducing their deficits. Not least, that will enable them to enlarge their
freedom of action in fiscal matters. The Stability and Growth Pact is the yardstick for the euro-area
countries in this respect.
These are not monetary policy tasks - they have to be tackled by the other policymakers in their
respective fields.
By pursuing its goal of ensuring internal price stability, European monetary policy is supporting the
other policy fields and, in the process, is laying the basis for sustained economic growth and
employment.
The Hong Kong Monetary Authority is pursuing a quite different aim, namely safeguarding the
external value of the currency, that is the stability of the exchange rate, in which you, Mr Yam, have a
successful track record over a number of years.
The Eurosystem has completed its first successful year. The inflation rate was well below 2%.
And I hope that the Hong Kong Monetary Authority will likewise continue its successful performance
in the years to come.
I would like to close by thanking you once again, Mr Yam, for attending the Twelfth International
Frankfurt Banking Evening and for delivering your interesting speech.