Mr Duisenberg comments on the past and future of European integration:
a central banker's perspective
The 1999 Per Jacobsson Lecture by Mr Willem F Duisenberg, President of the European Central
Bank, held in Washington DC on 26 September 1999.
* * *
1. Introduction
I feel honoured to have been invited to give this year's prestigious Per Jacobsson lecture before such a
distinguished audience. The euro was launched successfully almost nine months ago. This was a
historic moment, with 11 countries voluntarily relinquishing sovereignty over monetary policy.
Technically the changeover proceeded remarkably smoothly. Former national money markets were
rapidly integrated, in no small measure due to the smooth functioning of TARGET, the new European
payment system which, generally speaking, worked well from the outset. The euro is traded on all
international financial markets. Moreover, the euro has been introduced in a climate of prevailing price
stability in the euro area. This is the result of a process of convergence in which there has been a
general decrease in European inflation rates over recent years, from - in the case of some countries -
significantly higher levels in previous years.
The introduction of the euro is neither an isolated nor a purely economic event. It is another, yet very
important, step in the process of European integration. The process began more than half a century
ago. The creation of the euro is not the end of that process either. Today, I should like to briefly look
back, but mainly look ahead. My perspective is that of a central banker. The nature of this perspective
will become clear in the course of my lecture.
Dealing with European integration and with the new European single currency is particularly
appropriate in the context of this lecture series. Per Jacobsson has spent his professional career
pursuing sound money. This is the very same challenge that faces us: making the euro a sound - that is
to say stable - currency.
2. The history of European integration
Let me first deal briefly with the history of European integration. This process has been strongly
driven by political motives. The main underlying aim was to avoid a recurrence in the future of the
wars which devastated 20th century Europe. To that end, central Europe's largest country, Germany,
should be firmly embedded in a European structure. As Thomas Mann has aptly put it: "a European
Germany, rather than a German Europe". Without a common European framework, tensions could
arise again between Germany and other countries, France in particular. European integration should
serve the objective of creating a peaceful, stable and prosperous Europe. The unification of Germany
almost a decade ago, and the removal of the iron curtain have placed Germany even further, as it were,
in the heart of Europe. These fundamental changes make clear that the motives for European
integration are no less valid today than 50 years ago.
The main vehicle for European integration has been economic integration, via the coal and steel
industry, from establishing a customs union, the European Monetary System, to the Single Market
programme and the introduction of the euro. "Trade, do not fight" or perhaps better "Trade and you
will not fight" was the basic philosophy. Given this background, it is striking that economists all too
often assess the costs and benefits of European integration in purely economic terms and in a rather
static context. This is clearly too narrow an approach.
Nonetheless, the economics of European integration are important. The political objectives can only be
met if economic integration is successful and placed on a sound economic footing. This is also where
the role of the central banker comes in. He or she should not and does not decide on the steps to be
taken in the integration process. That is in the realm of politics and is also market-driven. The central
banker advises and points out the conditions which have to be met for certain steps to be taken safely.
The reverse is also true: the central banker and central banks are for their part influenced by the
integration process, and the greater the level of integration in the monetary field, the greater the impact
upon them. The central bank and the central banker are operating in an environment, which is affected
by the ongoing integration process. This has to be taken into account. Moreover, the question arises as
to whether a single monetary policy ultimately calls for further integration in other areas.
In retrospect, it can be concluded that, thus far, the European integration process has, on balance, been
successful. In our part of Europe we have experienced peace since the process was initiated and we
have seen a continuous growth in earnings and wealth. The further process of gradual integration has
now culminated in the emergence of a single currency.
There is no room, however, for complacency. Looking back, let me also draw some more specific
conclusions:
1. The integration process has been marked by ups and downs, often in step with the course of
the business cycle or in connection with major shocks, such as German unification. The road
has been long and winding, sometimes bumpy.
2. Long ago European integration reached the point of no return. There is no alternative but to
continue down the path of integration. Economic integration has generated its own
dynamics. It is no longer completely dependent on political initiatives to propel it forward.
3. Overall, however, the political component of the European integration process is still
essential and should not be forgotten.
4. Politicians should clarify the objectives of the European integration process, explaining them
to European citizens and pointing out the steps envisaged in the years ahead. The role of
central bankers is to be critical, yet at the same time constructive. They should indicate the
economic consequences and the risks of certain steps, stipulating under which conditions
certain steps can safely be taken. It is better to take a step later, but successfully, than to take
it prematurely and then fail and fall back further. Such a role will not always make the
central banker popular. He or she will often be perceived as stepping firmly on the brakes.
Nonetheless, I am convinced that it is the best service he or she can provide in furthering the
progress of the integration process. It may sound paradoxical, but by continuously
emphasising the importance of fulfilling the convergence criteria, central bankers have
contributed to making possible the introduction of the euro. It has perhaps already been
forgotten by some, but this event was not considered very likely by many observers, even
close to the date on which it actually happened.
European integration is an ongoing process. It will continue. What does the future hold in store? Let
me now turn to this issue.
3. The future of European integration
3.1 Introduction
European integration is a task of great magnitude, and will remain so in the next century. It offers
many opportunities. It faces many challenges. I would classify these challenges in three categories and
look at them from the perspective of the central banker:
1. How to make the euro and Economic and Monetary Union (EMU) a success.
2. How to cope with the accession of new countries to the EU and the euro area.
3. How to develop the role of Europe, the European Central Bank (ECB) and the Eurosystem
(i.e. the ECB and the eleven national central banks of the EU Member States which have
adopted the euro) in the world.
I shall now discuss these challenges in turn.
3.2 How to make the euro and EMU a success
In the first category, I would make a distinction between what central bankers can do or what is within
their control, or what they can influence on the one hand, and what the outside world should do or is
likely to do with an impact on the central bank world, on the other.
3.2.1 The role of central bankers
The most important task and challenge for the Eurosystem is to build up a track record of actual price
stability in the euro area. Action speaks louder than words. Showing in practice that we are capable of
providing stable prices is what really counts. We have to ensure that European citizens are confident
that the euro is a currency, which can sustain its value over time, and that the ECB is an institution
which they can trust. The ECB should be perceived as an institution that says what it does and does
what it says.
The ECB and the Eurosystem should develop into truly European institutions. They should always
take their decisions and conduct their analyses from a euro area-wide perspective. Although some
good progress has been made in this regard, there is still room for further improvement. Additional
efforts will also be required in finalising the process of setting up and consolidating the ECB and the
Eurosystem. For instance, the ECB began life with a staff of around 400 persons, which in the
meantime has grown to more than 700. It is likely to grow further in the years ahead, but it has to be
recognised that there are limits to the pace at which the organisation can be expanded. It is fair to say
that at the moment the ECB is capable of fulfilling its tasks, but that the pressure of work in many
areas is still simply too high. As will become clear later in this lecture, some new tasks will have to be
taken up in the years ahead, while others need to be enhanced. While expanding, it has to be ensured
that the ECB remains an efficient organisation. What is more, the role of the ECB, as the central bank
representing the second largest economic area of the world with a population of 300 million people,
has to be shaped and elaborated further. Setting up the ECB is a fascinating process. It is like the
European integration process itself, but on a micro scale and under very great pressure of time. In
some respects, the process of establishing and consolidating the ECB and the Eurosystem could serve
as an example for the European integration process in a wider sense.
The Eurosystem will have to explain time and again what monetary policy can and cannot do. Our
mandate of maintaining price stability in the euro area in the medium term has to be emphasised
continuously. Our medium-term orientation should be underlined. It is not in the power of a central
bank to deliver price stability on a short-term basis. We cannot and should not respond to every twist
and turn in economic data. The Eurosystem's stance is not an "activist" one.
The more successful we are at maintaining price stability, the more important it may become to
communicate the benefits of price stability. The memories of periods of high inflation with its
damaging consequences may fade. It cannot be taken for granted that the reason for the independence
of the ECB is widely known. Having such knowledge widely distributed is crucial for the maintenance
of price stability in the longer term. No central bank, however independent on paper, can maintain
price stability in the longer term in practice if not supported in the execution of its mandate and in its
independence by a large part of the population. This is certainly the case for a new and young central
bank which has the task of conducting monetary policy for an area consisting of eleven different
countries, with populations from different cultural, economic and historical backgrounds.
The euro is not and cannot be a cure for all European problems. The introduction of the euro will not
in itself solve the unemployment problem. Monetary policy is neither the cause nor the solution of the
unemployment problem. Structural reforms are needed to attack it. Fortunately, this insight is gaining
broader support. The challenge now is to translate it into sustained action. Carrying out structural
reforms is politically difficult, since they may be painful in the short term and only bear fruit over a
longer time scale. However, it is encouraging to note that those countries which have implemented
structural reforms have indeed been more effective in coping with the unemployment problem.
I shall continue to focus on the unemployment problem. Unemployment is a waste of resources, leaves
human potential unused, is a source of frustration and ultimately undermines the stability of our
societies. In a narrower vein, the existence of a high level of unemployment may also hamper the
conduct of monetary policy. It can all too easily lead to calls for an expansionary monetary policy as a
solution to a problem which monetary policy cannot solve. The central bank could become the
scapegoat for failure to take action in areas where action on the part of others is what is in fact
required. Making markets more adaptable is also necessary for making EMU work. Only flexible
markets will be able to cope with the asymmetric shocks which can sometimes affect any monetary
union. The policies needed to make EMU work are, at the same time, essential to reducing
unemployment. A single currency does not call for uniform wage developments or uniform economic
or social policies in general. On the contrary - where national or regional economic developments are
different, this should be reflected in different policy responses and wage developments. Moreover,
different reactions to similar problems make it possible to learn from each other.
The existence of a single currency and 11 fiscal authorities is a unique phenomenon. This can only
work if the Member States strictly apply the Stability and Growth Pact, which calls for the reduction
of government deficits to close to balance or to create a surplus in the medium term. In this way, room
is created for letting the automatic stabilisers work in response to both asymmetric and symmetric
shocks. Such a fiscal policy is required not only for EMU. It has its own merits. The ageing of the
population calls for such a policy line independently of EMU. The need for fiscal consolidation is not
just the result of creating the euro, but would be a key element in any sound fiscal policy in the euro
area. It remains to be seen whether the Stability and Growth Pact goes far enough in compensating for
the absence of one fiscal authority in the European Union. We should be ready to learn from
experience and adapt our institutional framework if and when the need arises. This applies, of course,
in a more general sense. EMU has been well prepared, but actually playing the game is always
different from preparing the game plan, important as this may be. A good game plan is necessary, but
not sufficient to win the game. While it is as yet unknown whether the Stability and Growth Pact will
be the last word on fiscal policies in the euro area, it is certain that a failure to adhere strictly to the
Pact would be a recipe for all manner of problems.
The Eurosystem has adopted a monetary policy strategy which is tailored to the unique conditions of
introducing a new currency. Our two-pillar strategy, with its emphasis on monetary developments and
a broadly based outlook for price stability, takes into account that economic behaviour may change as
a result of the introduction of the euro itself. In other words, it takes into account that the start of EMU
constitutes a structural break. This already indicates that after some time our experience with
conducting monetary policy within this framework will have to be carefully evaluated. Over time our
strategy may evolve, perhaps in the direction of greater emphasis on one of the pillars. However, this
has to be a cautious process, since one of the main functions of a monetary policy strategy is to
provide a tool for clearly communicating monetary policy preparation and decisions. Thus, you cannot
change your monetary policy strategy as you would change suits. Continuity must be a feature of any
monetary policy strategy.
Although the primary task of the ECB and the Eurosystem is to conduct monetary policy, there are
also other tasks. It is only natural that up to now we have very much focused on our primary task, and
there is thus ample scope for further reflection upon and implementation of these other tasks. In this
context I am referring to the task and role of the ECB in maintaining financial stability. All modern
central banks are active in this area. They are involved in legislative processes relating to the financial
sector and play a role in designing the market structure, in surveying the financial markets and in
monitoring key players in the financial sector. The ECB is already involved in the first two areas. It
has an advisory role in respect of legislation concerning the financial sector. With regard to the market
structure, an active role is being played in the context of payment and securities settlement systems.
The other two roles could be developed further in the years to come.
The European financial markets, especially those for longer-term instruments, are not yet fully
integrated. There is not, as yet, a completely single market for financial services. Pan-European banks
are not yet a dominant feature of the European financial landscape. However, the situation is clearly
dynamic. The introduction of the euro did not trigger this process, but is certainly giving it a boost.
Mergers and restructuring are taking place, albeit on an as yet predominantly national level. However,
this may, and probably will, change. The European Commission is taking many initiatives to further
enhance the single market for financial services. These initiatives are highly welcome. Financial sector
issues will tend, more and more, to become European issues. It is hard to predict the pace of this
process, but its direction is clear. This conclusion underlines the importance of the ECB's further
strengthening its ability to deal with matters relating to financial stability. Banking supervision is a
national responsibility, although intensive international cooperation does exist, inter alia - though not
exclusively - at a European level. Given the current European financial landscape, the decentralised
structure of banking supervision in Europe can be defended. However, in the years to come the
question of whether the adequacy of this framework is undermined by developments in the financial
sector will have to be closely monitored and analysed. It is reassuring that the Treaty on European
Union contains a provision which enables the Council of Ministers to further enhance the role of the
ECB in the field of banking supervision.
In the relatively near future the introduction of the euro banknotes and coins will be on the agenda.
This is another important step in the process of introducing the euro, albeit not so much for economic
reasons. The decisive step was of course taken this year through the irrevocable fixing of exchange
rates, but it is the step to be taken in early 2002 which will make the euro visible and the significance
thereof should not be underestimated. The introduction of the banknotes and coins will offer a further
opportunity for informing European citizens about the euro and EMU in general.
Open communication with many parties - from the economics professor to the members of the
European Parliament and ordinary European citizens - is high on the agenda of the ECB and the
Eurosystem. Our wish is to be open, transparent and, as far as possible, predictable. This is basically
the case for three reasons. First, a central bank which is understood will be more effective. Second, in
a democratic society the other side of the coin of central bank independence is that the central bank
should be accountable for its actions in fulfilling its mandate. Third, a clear framework for external
communication will structure and discipline internal debates. Our aim is to be predictable but let me
make one thing quite clear: ultimately, it is achieving our objective of price stability which is of
overriding importance. In other words - although we will try to avoid such a situation - we shall not
refrain from surprising the markets by taking an unexpected measure if we firmly believe that this is
necessary. It has to be kept in mind that monetary policy is different from mechanics: it always
involves judgement. If that were not the case, a good personal computer would be a better central
banker than an ordinary human being.
An important starting-point for our communication policy is that the Governing Council of the ECB is
a collegiate body where decisions are taken from a euro area-wide perspective. What we wish to
communicate are the decisions of that body, not those of individuals. This does not rule out also
presenting the arguments for and against a certain decision. That is what we do in substance. Every
month the Vice-President and I hold a press conference immediately after the meeting of the
Governing Council. In an introductory statement I explain our decisions and on what basis we have
taken them. This is followed by a question and answer session with a large number of journalists. Both
the introductory statement and the questions and answers are published on our Website, almost
without delay. I believe this arrangement is both a unique and - from our perspective - demanding
one. In addition, we publish a Monthly Bulletin in all 11 official languages of the European Union. We
publish an Annual Report and there are many speeches, interviews and publications. At quarterly
intervals I appear at a hearing before the European Parliament. Nobody should doubt our intention to
be open and transparent. Unfortunately, the debate on this issue has often focused on our practice of
not publishing the minutes of Governing Council meetings. In substance my introductory statements
are not so different from what other central banks would call minutes. And they are published
immediately. As to the substance of what we publish, two issues remain. First, we do not reveal voting
records for several reasons. As I said, the Governing Council is a collegiate body. What is relevant are
the final decisions of that body and the underlying arguments, not the individual positions. Publishing
individual positions can easily distract from what is really important. What is of paramount
importance in the European context is that members of the Governing Council do not represent a
particular country or their national central bank and that decisions should always be based on euro
area-wide considerations. This is a new principle and everything should be done to ensure that it is
adhered to. Publishing voting records could easily lead to placing monetary policy debates in a
national context and even to putting pressure on individual Council members.
The second issue is that, for the time being, we do not publish our economic forecasts, including our
inflation forecast. Again we have several reasons for not yet doing so. It is crucial that our monetary
policy strategy be well understood. Publishing inflation forecasts could easily be interpreted as the
ECB following a strategy of direct inflation targeting. This is not the case. Inflation forecasts have no
exclusive role in our monetary policy discussions and decisions. They are among many other
indicators which we analyse in the context of the second pillar of our strategy. Publishing inflation
forecasts could make them become self-fulfilling prophecies. This may hamper monetary policy where
forecast inflation is incompatible with maintaining price stability. Finally, due to the structural break
which the introduction of the euro constitutes, some time will be required to obtain estimates which
are sufficiently reliable for publication. At the same time, I would acknowledge that, if presented
clearly within the context of our strategy, forecasts may also enhance our transparency. Thus we
should indeed consider publishing forecasts at some point in the future.
In our external communications we aim to speak with one voice. The collegiate character of the
Governing Council underpins this principle and facilitates the process of ensuring that monetary
policy decisions are transparent. This is not always easy and here we are clearly in a learning phase.
This is the case on a more general level too. Communication is more an art than a science. We will
certainly try to learn from experience. Verbal discipline and transparency are not contradictions: they
should be two sides of the same coin. We aim to be predictable. This will be easier if we can predict
how the media will interpret and publish our communications. This is not yet always the case.
Communication should not be a one-way street. The ECB must also take note of and be sensitive to its
environment in order to be effective in its own policies. Let me therefore now turn to the issue of our
wider environment.
3.2.2 The environment
Monetary policy cannot be conducted in isolation. The ECB cannot operate on an island. It needs a
strong European foundation. This is an issue which touches upon much more than just the framework
for monetary policy or even for EMU. In the longer term having a single currency means that
ultimately we are sitting in the same boat. It is inevitable that sometimes the single monetary policy
will not be perfectly tailored to a certain region or even to a certain country. This is the case in all
monetary unions. Optimal currency areas do exist in textbooks, but not in practice. Thus, for a
monetary union to be viable, the absence of perfectly tailored policies will have to be accepted. This
may sometimes require a feeling of belonging together - social cohesion if you like. I believe this may
be even more fundamental than the discussion on the establishment of political union, which is often a
poorly defined concept. Increasing political integration and creating or changing joint political
institutions may help to foster social cohesion but, like the ECB, these institutions cannot operate in a
vacuum. They also require a certain amount of social cohesion. Moving solely on the political front
may not be enough and it may not be the first or even most important thing to be accomplished.
Fostering this process of enhancing social cohesion is not a simple task. It is not something which can
or should be imposed from above, but it can, to a certain extent, be guided. It is a process which must
be both evolutionary and spontaneous. Its pace cannot be forced. This would be counterproductive. In
the end it is a matter of clarifying and further developing elements of a common European culture.
This implies articulating and emphasising the many things which Europeans already have in common,
but also building up more common experiences. Such experiences can serve to cement intra-European
relations. Having a single currency will automatically contribute to this process, not only because of
the common banknotes and coins, but also because it will mean dealing with identical issues in all
European countries. There are many other areas in addition to politics and economics where this can
be done, such as the sciences, the arts, the press, television and so on. We should try to develop debate
on European issues at a European level. I attach great importance to explaining our monetary policies
at the hearings in the European Parliament. Monetary policy is conducted from a European perspective
and should therefore primarily be explained at a European level. More attention should be paid to
European issues. The objectives of European integration should be explained more often and more
clearly.
The fear that Europe is something abstract, remote and threatening to local culture should be taken
seriously. However, I do not believe that there necessarily has to be a contradiction between
preserving local culture and at the same time further developing a common European culture. On the
contrary, they can complement and enrich one another. It is necessary and inevitable that an increasing
number of issues be decided at a European level. Quite apart from issues relating to the euro, other
issues such as those relating to the environment, crime, defence and migration can no longer be
considered to be purely national issues. In deciding on what should and should not be discussed on a
European level, the principle of subsidiarity should continue to play a guiding role. What can be
decided at a lower level should be decided at a lower level.
I do not close my eyes to the existence of substantial obstacles to further integration in this broad
sense. Perhaps the fact that the European Union has 11 official languages is the most important one. In
a sense it also poses a dilemma in our communications policy. On the one hand, it is very important to
reach all European citizens in their own language; on the other, should we not encourage a situation in
which as many Europeans as possible also speak one common language? Could our education systems
not make this happen? This cannot, of course, be accomplished overnight, but should we not at least
try to make the issue less sensitive than it still is?
History is in some respects another barrier. There is no alternative but to recognise this and work to
overcome it. I believe this lies at the heart of the European integration process. European integration
has been, is and will continue to be, a step-by-step process. It will certainly suffer setbacks at times,
but on balance it is contributing to peace, stability and prosperity.
What often strikes me is the negative, gloomy attitude of many Europeans towards European
integration. This project deserves a different attitude. We should see Europe as an opportunity, a
positive challenge, rather than as a threat or a cost. European integration is a unique and fascinating
process and I wish that this were more strongly reflected in the attitude of many towards it. We also
need the energy which is born of such an attitude to deal with the challenge posed by the accession of
new countries to the European Union and the euro area. Let me now turn to that issue and deal with it
from the perspective of the ECB.
3.3 Coping with the accession of new countries to the EU and the euro area
Four countries of the European Union have not yet adopted the euro. They may well join in the
medium term. A greater challenge is the potential accession of still more countries to the European
Union and ultimately the euro area. Negotiations are currently being conducted with six countries.
Negotiations with another six candidates may start soon. The so-called Copenhagen criteria must be
fulfilled for EU membership. They read as follows:
• stability of institutions guaranteeing democracy, the rule of law, human rights and respect for
and protection of minorities (political criteria);
• the existence of a functioning market economy as well as the capacity to cope with
competitive pressure and market forces within the European Union (economic criteria); and
• the ability to take on the obligations of membership including adherence to the aims of
political, economic and monetary union (acquis communautaire criteria).
Accession is a political decision, but it is clear that the entry of new members into the EU will have
consequences for the ECB and the Eurosystem. The three steps of accession to the EU, becoming a
member of the exchange rate system ERM II and adopting the euro should be seen as a continuum.
This autumn, EMU issues will be on the agenda for negotiations. It is only natural that the Eurosystem
will become more involved in this process in the future both in its advisory role and because of the
implications for its own tasks and objectives. The Eurosystem should be involved in the accession
process and in other forms of cooperation with the applicant countries on all issues falling within its
exclusive or shared areas of competence: monetary policy, exchange rate policy, payment systems,
financial stability and the impact of enlargement on the Eurosystem itself. Currently we are in the
process of defining our position. Let me briefly outline some preliminary observations.
The Eurosystem needs to have an open and positive attitude towards the prospect of the accession of
new EU Member States, as well as their subsequent participation in ERM II and adoption of the euro.
The Eurosystem should be prepared to advise these countries in pursuing appropriate structural
reforms and stability-oriented policies in line with accession and convergence criteria. The Eurosystem
should stand ready to provide technical assistance to accession countries. The accession process
implies a significant body of preparatory work on the part of the central banks of the applicant
countries. This work may be facilitated by external technical assistance.
Equ