Mr Tietmeyer focuses on economic convergence and EMU
Lecture by the President of the Deutsche Bundesbank, Prof Hans Tietmeyer, in the series "Builders of
the Millennium" in celebration of the 750th anniversary of the foundation of University College,
Oxford in Oxford on 3 June 1999.
I
First of all, I should like to express my sincere gratitude for honouring me with your invitation. I am
delighted and indeed honoured to be here. Oxford: the university, its colleges and facilities stand, on
the one hand, for achievement and competitiveness in the modern world and, on the other, for history,
tradition and heritage. They are part of Britain's history and part of its future. And that means - I
would quite expressly like to add - that they are also part of Europe's history and its future. Great
Britain and Europe are not separate, mutually independent entities - either economically or
culturally.
That leads me straightaway to the subject of Europe and its future. I am naturally aware that this
country is in the middle of a major process of clarification. How does it perceive its future position in
Europe? How can it influence future developments in Europe? And, not least, what are the conditions
of, and prospects for, future entry into monetary union? Like many others in Europe, I am following
this process with keen interest. And I have the impression that this debate in the United Kingdom has
made significant progress over the past two years. Of course, it is ultimately only the British
themselves who can decide how they wish to shape their relations with Europe and European
integration. Even so, I do not wish to conceal the fact that I have a great deal of sympathy with the
idea of the United Kingdom playing a crucial role in the future development of Europe and of it
bringing not only its great traditions but also its criticism and economic performance to bear in a
constructive role in Europe and, hopefully, one day also into monetary union.
But that is a prospect on which the United Kingdom - its government, its parliament and its people
- must take its own sovereign decision. I do not presume to be able to offer you advice on that
matter. Instead, what I would like to do today is to draw your attention, in particular, to those aspects
of monetary union which have played - and, in some cases, are still playing - a major role in our
debate in Germany. There will probably be very little of this that is really new to you. However, it
might be valuable for you to know the points on which particular emphasis was - and is still being
- placed in the German debate. Perhaps there will be some aspects which might provide a
stimulating talking point for your own discussion.
II
Let me start with a simple, but fundamental, analysis: What does monetary union mean? What kind of
environment does it create? It seems to me that it possesses three essential characteristics: Firstly:
membership of monetary union implies relinquishing monetary sovereignty. Monetary policy
becomes European. Naturally enough, that concerns the level of the official interest rates. But it goes
further than that. European monetary policy includes the framework in which monetary policy is
conducted, embracing not only its structure and the way in which the central banking system
perceives its own role, but also the strategy and instruments used, as well as much else besides.
Secondly: the monetary union is designed to last. Entry into it is a road on which there is no turning
back. In monetary union, a "trial marriage" is no longer possible. Reversing that decision would entail
incalculable economic and political costs. No one ought to place any faith in that being a realistic
option. And thirdly: the euro area is unlike every other currency area, which is defined - at least
usually - by the area of a single sovereign nation state. There is a single monetary policy for the euro
area. However, the other areas of policy, such as budget, tax and social policies, are still largely
decentralised. Fiscal policy, in particular, must abide by the rules set down in the Maastricht Treaty
and in the supplementary Stability and Growth Pact.
These three characteristics appear straightforward and self-evident. But they have important
implications: One key implication is that the euro area requires lasting economic convergence -
convergence in the sense that each single country must be able to keep up with the others on a
permanent basis, without recourse to national monetary policy or changes in the exchange rate. That
necessity of lasting convergence has to be seen against the backdrop of unrestricted capital
movements and supranational monetary policy. A traditional nation state with its own currency has
several options available for fostering convergence within its own currency area. There are largely
uniform economic and taxation policies to prevent excessive deviations in politically-induced
conditions for investment. There is a national budgetary policy which can give financial support to
regions which are lagging behind the general trend. And there is a largely similar and similarly funded
system of welfare. These are all things which the euro area does not have at a supranational level -
or, at least, not to anything like the same extent.
There are some - mainly on the continent - who regret this because it means that economic
convergence cannot be created or, at least, actively promoted by a centralised policy. Others - and I
suspect that the overwhelming majority of the British people belong to this camp - believe this to be
a good thing. Europe should not be a dominant centralised entity, nor should it have an egalitarian
public-sector system of adjustment. It should be decentralised, organised on the principles of
subsidiarity and geared to competition. Your Prime Minister put this in a nutshell: "Integrate where
necessary. Decentralise where possible." I would add that I have a great deal of sympathy for that
position.
However, one also has to see the other side of the coin. One problem remains: how can a politically
decentralised monetary union safeguard the necessary lasting convergence of all its member states?
Ultimately, there is only one way of doing this. Safeguarding lasting convergence in a politically
decentralised monetary union must rest on two pillars: firstly, on each country's own sustained
competitiveness and on each country's own efforts; and, secondly, on a fundamental willingness to
accept certain binding rules and abide by them on a permanent basis. That is the only way in which a
monetary union with a decentralised political structure can succeed - not only economically, but also
politically: in other words, without excessive conflict among the participating countries.
III
The competitiveness of each single country is obviously initially one economic condition for a kind of
optimum currency area. Basically, an optimum currency area means that, in the longer term, there is
no need for adjustment of the nominal exchange rate because other adjustment mechanisms are
effective, say, as a result of internal flexibility or a high degree of labour mobility.
That is clear in theory. In practice, there is a fundamental problem: how can the ability to "keep up"
be assessed? And how is it possible to safeguard that ability and the willingness to utilise it on a
lasting basis? Now, in some way or another, the track record and the basic situation in the countries
concerned have to be taken into account. The Maastricht Treaty does that and stipulates convergence
criteria for that purpose. These may not have been the final pearl of wisdom in the strict economic
sense, but that should not make us overlook what fundamental pillars the convergence criteria
represent in terms of the logic of a politically decentralised currency union.
I am aware of the fact that we Germans, by insisting on a strict interpretation of those criteria, have
not always been given a good press internationally in the past. It may also be the case that the debate
in Germany did not always take the best possible course, especially when somewhat too much
emphasis was being placed on the decimal place in the budgetary policy for the test year, for example.
But the key element - taking the convergence criteria seriously - was - and still is - correct. The
criteria were, and remain, a test of ability and political will, at least at the time of entry. Basic
conditions for passing a test are undoubtedly the abilities to keep the internal value of the currency
stable and to maintain the exchange rate without tensions - an exchange rate, moreover, which is
determined a priori as a central rate, not one which is defined at a later stage. For that reason, the
Treaty calls - and, in our opinion, unquestionably calls - for a two-year membership in ERM
without tensions.
In this interpretation of convergence - which has determined the German debate - there are two
ideas which play a key role: the idea of the permanence of sufficient convergence and the idea that the
present and the past are a test of the future ability to stay the pace on a lasting basis.
Perhaps you feel the debate in Germany has a different emphasis from the one here. In the United
Kingdom, convergence is sometimes understood more in the sense of convergence in the business
cycle. By no means do I wish to disparage that. Naturally enough, I am aware of the current economic
background in the United Kingdom. And we do already have this problem in the euro area at the
moment. The cyclical position of Ireland, for instance, is obviously different from that in some
countries on the continent. There can be no question at all: if a country believes that it is in its own
longer-term interests to enter, it will look for a time which it feels to be opportune. That is no more
than an act of human reason.
I would only like to point out that what we have here is a case of the debate being weighted somewhat
differently. And, naturally, one has to perceive the backdrop to this: in other words, the fact that the
tie which is created is a permanent one. It is not least for this reason that it is right for the British
government, in particular, to place repeated stress on the subject of internal flexibility.
I believe that there is unanimity in the debate both in the United Kingdom and in Germany that
economic convergence does not imply uniformity.
Firstly: it does not imply uniform structures. It is true that competition - precisely in a monetary
union - exerts pressure to find efficient solutions, but they do not have to be the same everywhere.
Even in monetary union, there will still be room for different economic traditions and styles.
However, the competitiveness of all the participating economies must be ensured on an enduring
basis.
Secondly: convergence does not imply uniform policies in all areas. On the contrary: a decentralised
monetary union calls on national policy to exercise its own responsibility for maintaining competitive
economic structures. In key areas, too, powers can indeed remain with the nation states. Nevertheless,
individual approaches, say in the area of taxes, must not lead to distortions on the markets.
Thirdly: convergence least of all implies uniform living conditions or equal prosperity in all the
participating countries and regions. It may very well be that the way in which the single market and
the single currency work will assist less well-developed regions that face up resolutely to competition
in catching up quickly and sustainably. But that must happen on the basis of competition. There can
be no a priori guarantee of that.
IV
Lasting economic convergence based primarily on market forces is one fundamental precondition for
a politically decentralised monetary union. The second fundamental precondition is that the
participating countries agree binding rules for certain areas and are prepared to abide by them on an
enduring basis. There are rules of this kind - in addition to the general rules for the single market -
principally for budgetary policy, where it has a particular direct relevance to the financial markets.
Some of the rules for budgetary policy are: Firstly, the central banks must not finance the budgets.
Secondly, there is a no-bail-out clause. The Community is not liable for the commitments of
individual member states. Thirdly, the governments have committed themselves to avoiding excessive
deficits and, where they exist, to reducing them immediately. Fourthly, in normal circumstances the
deficit should be close to balance.
These rules are not undisputed. Some ask whether the no-bail-out clause is not sufficient. Is the
reference to the inherent responsibility of national budgetary policy not enough on its own? In my
view, these objections put matters too simply. Firstly, we do not know under what financial market
conditions a financial crisis in one EMU country might break out. (To be honest, I hope that is
something we shall never learn.) However, we can tell from the recent national financial crises in
other regions that systemic risk can easily arise. Or, at least, the argument is advanced that there is the
possibility of systemic risk - and who would want to let it come to that? Of course, the markets are
aware of that, too. For that reason, there is always likely to be a certain problem of credibility with
regard to the no-bail-out clause.
Secondly, it is true that a single currency does not imply the same long-term interest rates for all
issuers. Certainly not. The quality of the borrowers and liquidity aspects also play a role. But,
naturally, the foreign exchange risk is shared equally by all the participating countries. For that reason
alone, there exists an interdependence among the participating countries. And there naturally also
exists an interdependence in macroeconomic terms. If the budgets of individual participating
countries - especially the large ones - have excessive recourse to the capital markets, this will
obviously be a burden on the other countries. An excessive government deficit eats up private savings.
That is a factor which uses up internal capital resources and/or has an impact on the euro's external
relations - quite apart from an overburdening of monetary policy as a result of an excessively
expansionary fiscal policy.
For these reasons, there is undoubted justification not only for a no-bail-out clause but also for
defining limits for the national budget deficit and for the general government debt ratio. I wish that
the national budgetary policymakers in the participating countries would perceive these rules not
merely as a constraint but also as an opportunity of pursuing a rational policy on a sustained basis.
One thing is clear, of course: setting the rules is not enough. The rules also have to be accepted by the
countries involved. And they have to be enforced if the need arises. That is not an easy matter, as we
learnt only last week in Brussels.
V
The second area in which rules are set is within the framework of monetary policy. One of the key
elements of monetary union as provided for in the Maastricht Treaty is, without doubt, the
independence of the European Central Bank and of the participating national central banks: in other
words, the independence of the Eurosystem. The economic rationale for a central bank which is
independent of the instructions and influence of political bodies is rooted in the finding that it is
generally easier for such a central bank to keep the value of the currency stable on a lasting basis.
That higher degree of monetary stability benefits the economy and society in various ways. It
increases planning certainty in the economy, which fosters a culture of long-termism. It makes it
easier for enterprises to fund investment decisions in the longer term. That generally results in a
stronger long-term orientation in economic decision-making. Incidentally, that was one of the key
considerations when the new government gave greater autonomy to the Bank of England two years
ago. A stable currency is, at the same time, an element of social policy. It is often precisely those who
are not so well off in economic terms who find it difficult - or impossible - to protect themselves
against inflation. Finally, money which has a stable value is also a factor of political philosophy.
Confidence in the currency is, to some extent, confidence in the state and its institutions. That is, at
least, the case in Germany; partly owing to our experience of galloping inflation in the first half of
this century, but also partly on account of the ideas of economists such as Alfred Müller-Armack and
Ludwig Erhard, who introduced into German economic policy the leitmotif of the social market
economy, with a stable currency as one key element. This economic rationale has now resulted in a
trend towards greater central bank independence outside of Europe as well. That is perhaps also one
factor - among others - which helps to explain the high degree of price stability that prevails
worldwide at present.
One fundamental objection to central bank independence raises the question of democratic legitimacy.
Is a central bank which is independent of political instructions and influence in keeping with a
democracy? I believe that there are two preconditions which have to be fulfilled for an independent
central bank to be unquestionably compatible with a democratic system.
Firstly: the assigning of independence and the mandate has to have been arrived at democratically: at
the least, by virtue of an implicit consensus and on an explicit foundation provided either by law, a
constitution or by a treaty - like that of Maastricht - to which the parliaments have given their
consent.
Secondly: the mandate of the independent central bank must be unambiguous. Political value
judgements among various competing aims may be made only by those who have acquired direct
democratic legitimacy as a result of elections. It is precisely for that purpose that elections give a
mandate. The decision-making body of an independent central bank, which is not elected directly,
may not make any autonomous value judgements among various competing aims. An overriding
objective has to be specified in advance. That is precisely what the Maastricht Treaty does. It
specifies the primary objective of price stability. Hence, the independent central bank remains
anchored in the democratic structure of the state.
In my view, the limitedness of the central bank's mandate is thus a corollary of its political,
democratic and constitutional legitimacy. For that reason alone, I believe that broadening the mandate
would lead to problems for the European System of Central Banks. That applies, for example, to the
idea of extending the scope of the central bank's mandate beyond price stability to include growth and
full employment as additional objectives. That is quite apart from the fact that I do not perceive any
trade-off between those aims - at least in the longer term. Assigning other tasks can also cause
difficulties for an independent central bank, however. Assigning sole responsibility for banking
supervision or a lender-of-last-resort function, for instance, may give rise to difficulties. Such a
plurality of mandates might give rise to a situation in which the independent ECB has to choose
among different objectives, say between the objective of stable prices, on the one hand, and the
consolidation of individual financial institutions, on the other. Fundamentally, that would be a
political value judgement. Therefore, caution - at least - should be exercised in terms of delegating
additional tasks to the ECB.
In addition to those two basic preconditions - the democratic assignment of tasks and an
unambiguous mandate - tying the independent central bank into a democratic system naturally
requires something more: it calls for transparency and accountability. Independent monetary policy
cannot and must not be remote from the general public.
In saying that, it is essential to distinguish precisely what is meant by transparency. Does transparency
mean full disclosure of the deliberations, arguments and motives behind a decision: in other words,
transparency of the situation in which a decision is taken? Or does transparency principally aim at
disclosure of the process by which is a decision is made?
In terms of the transparency of the overall situation in which a decision is taken, the ECB endeavours
to do this by a comprehensive disclosure of its judgements and the assessments which determine its
decisions. Of course, I do not rule out the possibility of improvement in one respect or another. It is
not yet even six months that the ECB has borne responsibility for monetary policy. We are therefore
all still involved in a learning process. Incidentally, I personally would have nothing against also
identifying arguments pointing to a decision other than the one that was ultimately taken but which
happened to be rejected after taking other arguments into account.
Transparency concerning the internal process of consultation and decision-making is another matter,
however. I regard that as problematic since it may ultimately imperil the efficiency of monetary policy
decision-making. Why? Firstly, it puts the frankness and confidentiality of the discussion at risk. It
can, at least, lead to confidential discussions being shifted to other circles. And that undermines the
unity of the decision-making body. Secondly, it may endanger the credibility and standing of
individual members, who are open to argument and, on account of new insights, may alter their
position during the discussions. I therefore feel that this second approach to greater public
transparency is not without problems. And I also have doubts as to whether it really introduces more
clarity and calculability in monetary policy for the markets.
I admit that my reservations also have to do with the idea that the decision-making body should have a
feeling of collective responsibility. And that also includes the attempt to seek an internal consensus
and demonstrate it externally. Now, it may be that some people find the desire to seek consensus
stuffy and old-fashioned. In the final analysis, I believe it is not. Allow me to make a few remarks in
this connection: I come from a central bank which - together with its predecessor institution, the
Bank deutscher Länder
- has been independent for over 50 years. During that period, it was
necessary to fend off several attacks from the political field. In saying that, it has to be borne in mind
that a simple parliamentary majority would have sufficed for a legislative amendment to remove the
Bundesbank's independence.
In situations of conflict, an independent central bank needs the support of as broad a segment of
public opinion as possible. That will also be the case for the ECB, even though its independence is
anchored in the Maastricht Treaty. But to be given that support, a central bank needs more than just a
good record over the longer term. What is also important is that it can demonstrate a minimum degree
of unanimity. That applies anyway in the event of a conflict. In that situation, if the central bank gives
disparate signals to the outside world, the general public does not know at all what it is actually
supposed to be supporting. Admittedly, it is comparatively easy to create unanimity in the event of a
conflict. But the central bank's standing with the general public, which is intended to be a protection
in the event of a conflict - that is something which it has to have earned and built up beforehand.
And it has that standing only if the general public is aware of what the central bank stands for. If the
general public asks what the bank's standpoint is, it wants a clear-cut answer and not a response
enumerating the various possibilities of position 1, position 2, position 3, and so on. A central bank
must be identifiable by its basic stance. That can scarcely be achieved without a minimum of
collective awareness.
I fully understand the objection that this must not lead to individual responsibility becoming lost in
the decision-making bodies. There is something in that. I wish, however, that critics who have never
had to withstand a serious attack on the independence of the central bank would have somewhat more
respect for the concepts of consensus and unanimity.
VI
Finally, allow me to indulge in a reflection of a fundamental nature. We are certainly all in agreement
that the euro has to be a success. And that is a permanent challenge. Whether the euro becomes a
success story is something on which it is impossible to make a final judgement after less than six
months. The euro certainly has a great potential. Recent exchange rate movements have not altered
that fact.
Clearly, the decline in the euro's external value over the last few days has not been good news. We
shall study developments carefully. Yesterday the Governing Council had a serious discussion on
that. We came to the following conclusion which was presented to the press after the meeting by
President Duisenberg: "The euro is a currency firmly based on internal price stability and therefore
has a clear potential for a stronger external value. Since the start of Stage Three of EMU the euro has
become the second most important international currency in the world, and the policy of the
Eurosystem will safeguard its internal purchasing power, thereby also supporting the international
role of the euro."
But in making a reasonable assessment of the opportunities and risks inherent in the project of
monetary union, we shall maintain a longer-term perspective. In the eyes of future generations, the
ultimate test of the success of monetary union will one day consist of three questions: Has monetary
union been able to safeguard lasting monetary stability? Have the participating economies coped with
the conditions of monetary union? And: has the euro brought the people and peoples of Europe closer
together?
The answers to those questions have a lot to do with convergence, although not only with economic
convergence in the narrow sense of parallel trends in the hard data on productivity, labour costs, or
whatever. It also has much to do with convergence in values, in beliefs and in aims. That is something
which cannot be measured mathematically, but it is nevertheless important. I feel that it is precisely
this convergence in thinking which has increased over the past few years between the United
Kingdom and Germany, with both sides having learnt from each other. That is not intended to be a
sixth test for your entry into monetary union, but no harm can come from it either.