Mr Duisenberg presents the ECB's Annual Report 1998
to the European Parliament
Introductory statement by Dr Willem F Duisenberg, President of the European Central Bank, to the
European Parliament in Strasbourg on 26 October 1999.
* * *
I have great pleasure in presenting the first Annual Report of the European Central Bank to the
European Parliament at today's plenary session. Almost ten months have passed since the euro was
successfully introduced and the ECB took over full operational responsibility for the single monetary
policy. Many of us feel that, with the launch of the single currency, the process of European
integration has gained a new quality. Indeed, the transfer of a core competency of the modern state,
namely monetary policy, to a truly European and independent organisation such as the ECB must be
regarded as a historic event which marks an unprecedented degree of economic and political
integration within the European Union.
The smooth transition to this new era of European integration and the successful operational start of
the ECB was the outcome of several years of intense and thorough preparation. The Annual Report of
the ECB gives a detailed account both of the final preparatory work conducted by the Eurosystem in
the run-up to the introduction of the single currency and of the main economic and monetary
developments within the European Union in 1998 and in the first few weeks of 1999.
To mention some of the issues addressed by the Annual Report, it explains the Eurosystem's
stability-oriented monetary policy strategy, the operational framework for the implementation of the
single monetary policy and the foreign exchange rate policy framework of the euro. The Report also
contains chapters on the other tasks conferred upon the Eurosystem by the Treaty establishing the
European Community, including the implementation of statistical requirements for Stage Three, the
Eurosystem's responsibilities in the area of payment systems, the preparations for the introduction of
the euro banknotes, the Eurosystem's tasks related to banking supervision and financial stability and
the Eurosystem's cooperation with other international and European institutions and forums.
However, since the information contained in the Annual Report is of a self-explanatory nature, it
might be more useful if I concentrate my remarks on some of the issues addressed by the draft
Resolution prepared by your Committee on Economic and Monetary Affairs. I shall then be happy to
answer any questions you might have.
1. Accountability and transparency of the ECB
I should like to start by commenting on the discharge of the ECB's accountability vis-à-vis the
European Parliament. The Treaty establishing the European Community contains various provisions to
ensure the democratic accountability of the ECB, one of the cornerstones of which is certainly the
presentation of the Annual Report to the European Parliament and the Council of the European Union.
However, apart from this annual exercise, the ECB and the European Parliament have established
several other contacts.
First and possibly most importantly, I should like to mention the regular hearings held by the
European Parliament's Committee on Economic and Monetary Affairs. Within the scope of these
hearings, which - in line with the European Parliament's rules of procedure - take place on a quarterly
basis, I provide detailed explanations regarding both our assessment of current economic and
monetary developments and the decisions taken by the ECB. Transcripts of these hearings are
published on the websites of both the European Parliament and the ECB. Moreover, the European
Parliament has invited members of the Executive Board of the ECB and staff of the ECB to participate
in additional hearings on a number of specific issues, including the external representation of the
Eurosystem, the preparation of euro banknotes and statistical matters.
Furthermore, the ECB has also had the opportunity to welcome delegations of members of the
European Parliament's Committee on Economic and Monetary Affairs to its premises in Frankfurt.
The ECB attaches great importance to these visits and will be pleased to continue to host such events.
However, since these visits to the ECB are of a more informal nature, it goes without saying that they
have to be considered as an additional tool for communication between the two institutions and cannot
be seen as a substitute for regular public hearings at the European Parliament.
In setting up its communication policy, the ECB decided to go beyond the transparency requirements
of the Treaty. Thus, while the Treaty requires the ECB to publish a quarterly report on its activities,
the ECB has decided to publish such a report on a monthly basis, the Monthly Bulletin, which gives a
detailed presentation of economic and monetary developments.
In addition, there are a number of other communication tools that the ECB regularly uses. First, let me
mention the extended press conferences that the Vice-President and I hold immediately after the first
meeting of the Governing Council of the ECB every month, transcripts of which are also accessible
via the ECB's website. You may also be aware of the broad range of publications that the ECB has
issued on specific subjects related to its fields of responsibility. I should like to draw your attention, in
particular, to the ECB's series of working papers, the aim of which is to disseminate the findings of
the ECB's internal research. Finally, various statistical data, as well as the speeches held by the
members of the Executive Board, can also be accessed via the ECB's website.
The ECB's communication policy gives clear priority to maintaining and enhancing the credibility of
the Eurosystem and confidence in the euro, both of which are crucial elements in the successful
conduct of monetary policy. In this context, one should always bear in mind the fact that the
Governing Council acts as a collegial body, and that all decisions have to be communicated to the
public in a clear and consistent way. Speaking a common language is particularly important for a
central bank operating in a monetary union comprising several countries. Contradictory indications
about the decisions taken by the ECB and the underlying reasons might trigger unwarranted market
expectations and increase uncertainty, thereby running counter to the very objective of being
transparent with regard to the conduct of monetary policy. I should like to stress that the information
provided at the press conferences held after the meetings of the Governing Council, together with the
analysis contained both in the ECB Monthly Bulletin and in the other channels of communication I
mentioned earlier, comes very close, in substance, to the publication of "summary minutes". In view
of the broad variety of publicly available information issued by the ECB, it is my firm belief that the
ECB can stand comparison with other central banks in the field of transparency.
2. Publication of forecasts and national data relating to the euro area
In this context, I should also like to comment briefly on the request to publish the ECB's internal
forecasts. First, it would clearly be premature to consider such a step since the Eurosystem has yet to
gain experience with its forecasts. More time will be needed before we can assume that all the
technical issues have been addressed properly, and the publication of forecasts can be considered
without endangering the ECB's credibility. I am confident that we can achieve this in the course of
next year. Let me also emphasise that the role of the ECB's internal forecasts in the decision-making
process should not be overestimated. Such forecasts constitute one piece of information made
available to the Governing Council, but certainly not the only one. The role of the ECB's internal
forecasts within the monetary policy strategy of the Eurosystem therefore differs from the role of
inflation forecasts in a strategy of direct inflation targeting. Finally, I should like to recall that the
Monthly Bulletin - especially in its extended quarterly version - provides a forward-looking analysis,
including reviews of the outlook for price developments.
The ECB has also been asked to publish reports featuring national data relating to countries
participating in the euro area. However, the publication of such data would be misleading since the
single monetary policy cannot be directed at country-specific situations. On the contrary, the
Eurosystem must take a euro area-wide perspective in its assessment of the economic situation in
general and the outlook for price stability in particular. Publication by the ECB of detailed reports for
each country participating in the euro area would run counter to the necessary creation of an area-wide
perspective in the conduct and discussion of monetary policy. However, it should be recognised that
the national central banks of the Eurosystem continue to produce their own regular reports that address
national economic and financial developments in some detail.
3. The ECB's contribution to the general economic policies in the Community
I should now like briefly to expand upon another issue which I know to be a fundamental concern of
the European Parliament, namely the contribution of monetary policy to the general economic policies
in the Community. The Treaty provides for a fundamentally sound allocation of objectives and policy
instruments between the monetary and governmental authorities in Europe. The Eurosystem is
responsible for maintaining price stability. To this end, the Eurosystem has adopted a monetary policy
strategy that is forward-looking and acts promptly to address threats to price stability. The Treaty also
states that, without prejudice to its primary objective of price stability, the Eurosystem shall support
the general economic policies in the Community.
By maintaining price stability, monetary policy makes the best contribution it can to achieving a high
level of output and employment in the medium term. Price stability has beneficial effects on general
economic performance - including growth and employment prospects - through many channels, of
which I should like to mention the following:
• first, in an environment of price stability, the market mechanism will allocate resources more
efficiently to their most productive uses. Markets function most effectively when relative
price signals are not distorted by fluctuations in the general price level;
• second, a climate of price stability reduces the inflation risk premia in interest rates,
particularly in longer-term rates, and thereby improves the conditions for financing
investment;
• third, lasting price stability serves the interests of social justice and helps to protect the
weakest members of our society, such as pensioners and the unemployed, who depend on
fixed incomes and who cannot protect themselves against the costs of inflation with other
assets, such as property or shares.
Broad agreement exists that there is no long-term trade-off between price stability and economic
growth. Attempting to use monetary policy to raise real economic activity above its sustainable level
will, in the long run, simply lead to ever higher inflation, not to faster economic growth. Such an
attempt will simply forfeit the benefits of stable prices which I have just outlined and would therefore
prejudice growth and employment prospects over the medium term.
While the contribution it makes through maintaining price stability must not be overlooked, monetary
policy clearly cannot solve the serious structural unemployment problem in the euro area. Other policy
areas have the instruments needed and are thus responsible for solving the structural problems.
Decisive action in this field is certainly required to improve growth and employment prospects.
Safeguarding sound government finances is a means of strengthening the conditions for price stability
and achieving strong sustainable growth which is conducive to employment creation. In this context,
the Stability and Growth Pact sets the right incentives for the conduct of sound and disciplined fiscal
policies across all participating Member States. In addition, structural reforms in labour and goods
markets, as well as a moderate development of wage costs, can best address the root causes of
currently high unemployment in Europe.
The clear division of policy responsibilities I have just described enhances the credibility of monetary
and economic policies in Europe, increases transparency and facilitates accountability. It provides the
proper incentives for the policymakers in individual policy areas. If all parties concerned respect the
fundamental allocation of these responsibilities and act accordingly, the achievement of the objectives
of all policy areas will be the natural outcome of their individual policy choices.
In this regard the Eurosystem supports the idea of a dialogue between monetary policy and other
policy areas in the form of an open exchange of information. However, such a dialogue should be
clearly distinguished from any attempts to coordinate policies ex ante, so as to achieve a certain
"policy mix", which would blur the fundamental responsibilities I described. Such coordination would
tend to decrease accountability, reduce the transparency of the policy framework for the public and
increase uncertainty about policy actions, potentially threatening to destabilise the economy. Finally,
the debate on a "balanced and appropriate policy mix" should not be used to deflect attention from the
structural reforms that are urgently needed to address the euro area's serious structural unemployment
problem.
4. The ECB's contribution to financial stability
The ECB's contribution to financial stability, and in particular the question of the provision of
emergency liquidity to financial institutions in distress, is another issue upon which the interest of the
European Parliament is focused. Allow me to explain some of the main considerations in this regard.
The main guiding principle within the Eurosystem with reference to the provision of emergency
liquidity to individual financial institutions is that the competent national central bank would be
responsible for providing such assistance to those institutions operating within its jurisdiction. The
ECB does, however, have to be informed of this in a timely manner. In addition, in operations of
relevance to the single monetary policy, the decision-making bodies of the Eurosystem will be
involved in assessing the compatibility of the envisaged operations with the pursuit of monetary
stability. In the case of a general liquidity crisis resulting from a gridlock in the payment system, for
instance, the direct involvement of the Eurosystem could be expected.
For the markets it would be sufficient to know that there is a clearly articulated capability and
willingness to act if really necessary. It is not common practice among central banks to disclose the
conditions and practicalities of emergency liquidity assistance arrangements. In particular, there are
typically no official documents describing the conditions under which emergency liquidity would be
extended or what procedures would be followed. Indeed, ex ante commitments would be
counter-productive in this field, since they would restrict the ability of the central bank to act to
contain systemic disturbances with unforeseen features. Moreover, this policy of "constructive
ambiguity" can limit the associated problem of moral hazard.
5. Improving cross-border retail payment services in the euro area
Finally, I should like to turn to a different issue which has also been raised by the European Parliament
on several occasions, namely the question of cross-border retail payment services in the euro area. The
ECB is aware of the criticism that has been expressed with reference to the low level of efficiency and
high costs involved in the processing of such payments and fully shares the concerns expressed by the
European Parliament in this regard. The current situation is particularly unsatisfactory in the area of
cross-border credit transfers, whereas the situation in the area of cross-border card-based payments
raises fewer concerns.
As you will be aware, one of the basic tasks conferred upon the Eurosystem by the Treaty is the
promotion of the smooth functioning of payment systems. However, the involvement of central banks
in retail payment systems is, in general, less pronounced than in large-value payment systems, mainly
because retail payment systems entail significantly lower systemic risks. Nevertheless, the Eurosystem
is concerned with efficiency issues related to cross-border retail payments.
At present, the performance of cross-border retail payment systems is clearly lagging behind the
policy objectives of Economic and Monetary Union and, indeed, the expectations of many European
citizens and small enterprises. After the introduction of the euro banknotes and coins on 1 January
2002, these differences in service levels for national and cross-border payments within the single
currency area will become even more apparent.
Against this background, the ECB strongly advocates the creation of a single payment area in order to
fully reap the benefits of the single currency. In order to give a clear signal to the banking industry and
the public, the ECB published a number of objectives in September which it expects the industry to
fulfil and which should contribute towards substantial improvements. The current inadequacies are
linked, in part, to the still predominant recourse to correspondent banking and the lack of adequate
interbank infrastructures. More efficient funds transfer arrangements have been set up in recent years,
but they are too fragmented and economies of scale are very limited. One pre-condition, therefore, for
achieving a substantial enhancement in the processing of cross-border retail payments is undoubtedly
the fact that the banking industry must implement common technical features in the processing of
funds between banks.
However, this is unlikely to be sufficient. The banking industry must also improve substantially its
internal procedures for processing cross-border payments, as well as its communication with the
customer. This, in turn, requires a more extensive use of automation and standardisation. In this
respect, I should like to draw attention to the standards agreed within the framework of the European
Committee for Banking Standards, which I consider to be of particular importance. The ECB is
organising meetings with all parties involved in order to bring the implementation of the standards
forward.
Once the conditions related to interbank processing and internal procedures have been met, it should
be possible for the banking industry to decrease substantially the price of cross-border credit transfers
and to reduce the execution time to that needed for domestic payments plus one day.
The ECB expects the banks in the euro area to achieve substantial improvements by 1 January 2002 at
the latest. The ECB will act as a catalyst for change and will, together with the national central banks
of the Eurosystem, discuss these issues with the euro area banking industry in order to play a
supportive and coordinating role in this regard. At present, an operational involvement of the ECB
does not appear to be justified since there are some indications that the general appreciation of the
problem by the private sector is now increasing. The ECB will, however, closely monitor further
developments in this area and will inform the European Parliament and the general public about the
progress achieved.