Jean-Claude Trichet: The euro - five years on
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Annual Dinner of
the Guild of International Bankers, London, 2 February 2004.
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Ladies and gentlemen,
For five years now, we have had a single currency and a monetary policy conducted by the
Eurosystem, consisting of the European Central Bank and the national central banks of the euro area.
The introduction of the single European currency has been a historical landmark. The process of
preparing for the adoption of the single currency had led to a degree of convergence in the 1990s that
many had not thought possible.
Sceptics were unconvinced as to whether it was possible to establish the euro as a stable currency
and to successfully formulate a monetary policy for a diverse currency area. In particular, some
observers considered the continuing existence of autonomous national fiscal policies as incompatible
with a supranational monetary policy. The "one-size-fits-all" approach implied by the single monetary
policy was, on account of the diverse nature of the currency area, criticised to give rise to permanently
asynchronous economic developments. Critical observers therefore took the view that a
stability-oriented monetary policy was doomed to failure.
Where do we stand five years later? The euro has been firmly and credibly established as a stable
currency. The euro area has witnessed a period of low rates of inflation and low levels of long term
interest rates. Most countries have had their lowest market interest rates for decades. The introduction
of the euro, first, in book-entry form, and, second, in the form of banknotes and coins went very
smoothly. The euro has become part of people's daily lives.
The successful introduction of the euro
The birth of the euro and the cash changeover
In January 1999 the to the euro was virtually free of technical problems, although many
transition
people had predicted that such a big project would inevitably be delayed or affected by bugs. We
established, almost overnight, a unified money market, which functioned smoothly from the very start.
Three years later, the exchange of the old national banknotes and coins of the 12 countries of the euro
area for the new euro notes and coins was a huge organisational, logistical and technical undertaking.
The euro cash changeover progressed well and rapidly, without any major hitches, to the benefit of
more than 300 million European citizens.
The mandate of the ECB
Equally important, the ECB's monetary policy has been successful in keeping inflation and inflation
expectations under control over the last five years, even in the face of substantial adverse shocks. To
a large extent, policy had to be conducted in a context of exceptional economic, financial and
geopolitical uncertainty. But we kept a steady hand and never overreacted, with a view to anchoring
long term inflation expectations.
It is important to recall which factors have enabled us to make the euro a stable currency. I would
name here, most importantly, the institutional framework of European Economic and Monetary Union.
The Maastricht Treaty assigned to the Eurosystem the unambiguous responsibility for the
maintenance of price stability. This clear focus of our mandate and the independence granted to the
ECB have been indispensable in ensuring a high degree of credibility for our policy from the outset.
There is a broad consensus today that the overriding goal of monetary policy should be the
maintenance of price stability. If credibly pursued, this will create confidence, thus diminishing inflation
risk premia incorporated in long-term interest rates and enhancing, ultimately, growth and
employment. Price stability also prevents the large distortions in relative prices which are encountered
with inflation or deflation, and which lead to a misallocation of resources. It also avoids an ad hoc
redistribution of wealth as a result of unexpected price developments, thereby also contributing to
social cohesion. Thus, an environment of stable prices fosters the functioning of the price mechanism,
favours allocation efficiency, anchors inflation expectations and reduces market uncertainty and risk
premia. Maintaining price stability is therefore a necessary condition for sustainable growth and job
creation and this is recognised very widely. It is in particular a strong belief that the Eurozone shares
with the United Kingdom.
The institutional framework for monetary policy in the euro area has helped the ECB to keep inflation
low and stable. The credibility of the ECB is reflected in low long-term inflation expectations. And this
credibility was already high at the start of European Economic and Monetary Union. I well remember
that at that time some observers argued that the quality of the euro as a new currency would converge
only towards a sort of an arithmetic average of the legacy currencies, rather than to the benchmark set
by the stronger ones. In fact, what happened is that long-term interest rates in all participating
countries converged towards those of the most credible currencies. This is one of the euro's main
achievements.
Independence and transparency
The independence of the ECB and the need for transparency go hand in hand. For us to successfully
maintain price stability, we constantly have to make all the reasons underlying our decisions
transparent to the public. The announcement of the monetary policy strategy in October 1998, well
before the introduction of the euro, was a key element in this. It clearly stated the ECB's understanding
of its objective and the framework used to guide policy decisions. In addition, the regular publication of
the Governing Council's assessment of the current economic situation and the risks to price stability
are an important part of our striving for transparency. Monetary policy decisions are regularly
explained in the press conference that we give after the first meeting of the ECB Governing Council
every month. Further details are given in the Monthly Bulletin of the ECB, in the speeches given by
members of the Governing Council and in the testimonies of the President to the European
Parliament. With its monthly press conference the ECB was the first central bank to provide such
extensive and open real-time diagnosis - and other central banks are now doing likewise.
The historic enlargement of Europe
EU enlargement
The introduction of the euro as a stable common European currency was not the last challenge to be
faced by the ECB and the European Union in general. The forthcoming enlargement of the EU will be
the largest ever expansion of the European Union. The number of Member States will go up from 15 to
25 and the EU population will increase to more than 450 million people.
Many acceding countries have made remarkable progress in recent years, especially in terms of
macroeconomic stabilisation and structural reforms. Moreover, those eight acceding countries that
were formerly centrally planned economies have been able to establish functioning market economies,
thus driving forward the process of transition.
There remain, however, important challenges. The task at hand is to advance real convergence while
safeguarding and, where necessary, enhancing macroeconomic and financial stability. In particular,
locking in inflation at low levels, preserving the soundness of the financial sector and making
determined efforts towards fiscal consolidation are all of the utmost importance.
At present the gap in per capita income between the current and most new Member States is large.
For acceding countries as a whole, per capita income today is less than half of the average of the euro
area. In general, the process of catching-up in respect of real incomes has been slower than many
expected at the start of transition, while the progress achieved has differed from country to country.
Given the low starting point for most countries, increasing prosperity and living standards will remain
their main policy objective for quite some time.
Of course, accession to the EU has a positive effect on the countries' growth prospects. Full
integration in the internal market and inclusion into EU regional policies will foster the catching-up
process.
Moving towards the euro
The Eurosystem has been engaged since 1999 in a constructive dialogue with the central banks of the
acceding countries. The governors of these central banks already attend the meetings of the General
Council of the ECB as observers and will as from 1 May 2004 be full members of that Council.
Enlargement of the EU will also lead to an expansion of the euro area at some time in the future.
The main aim of the Eurosystem in this process is to ensure that the monetary integration of the new
Member States proceeds in a smooth manner and in line with the Treaty provisions. The principle of
equal treatment will continue to apply throughout the entire process of monetary integration. Adopting
the euro is an irrevocable decision and it is of the utmost importance that countries fulfil the
convergence criteria in a sustainable manner, as required by the Maastricht Treaty. There will be no
additional criteria but neither will there be a relaxation of the criteria.
The Governing Council of the ECB published a policy position paper on exchange rate issues relating
to the acceding countries on 18 December 2003. This document consolidates into a single
comprehensive policy text the previous positions of the Eurosystem on the matter. It lays out the key
principles for financial markets and for the public at large in a European Union of 25 Member States.
As the acceding countries differ greatly in terms of economic structure, exchange rate and monetary
regimes, and in the degree of nominal and real convergence already achieved, they will need to be
assessed on a case-by-case basis throughout the process leading to their adoption of the euro. In
this respect, no single path towards ERM II and the adoption of the euro can be identified or
recommended. Many strategies may be feasible, provided they are based on sound economic
reasoning, conform to the existing institutional framework and contribute to the high level of
sustainable convergence which is essential when joining the euro.
The need for structural reforms
While Economic and Monetary Union has been highly successful in furthering macroeconomic stability
in Europe, policymakers still have to undertake important efforts to fully realise the advantages of a
stable common currency. Structural economic impediments in participating countries reduce
employment opportunities and real income, and they undermine the sustainability of the social security
system. It is therefore widely recognised that structural reforms in capital, labour and product
markets are needed to improve the prospects of the euro area. In this respect, the ECB very much
welcomes and supports the impetus given by the Lisbon European Council to the economic reform
process. Structural reforms that are designed to increase the flexibility of markets permit a higher level
of sustainable long-run growth and employment. They furthermore enhance the capacity of the
participating countries to cushion macroeconomic shocks. The more rigid labour, product and financial
markets are, the higher will be employment and income losses experienced in response to changing
domestic and global economic conditions. This is due to the fact that prices and wages cannot adjust
suitably and in a timely manner. Conversely, the speedier adjustments of wages and prices can take
place in response to adverse changes in macroeconomic conditions, the lower will be the costs in
terms of employment and output losses.
As the central bank responsible for the euro area, we place great value on seeing a major necessary
condition for growth, job creation and prosperity for current and future generations being fulfilled:
ensuring price stability, confidence in the euro and its purchasing power is our own decisive
contribution to sustainable growth. And this contribution is less difficult to deliver in an environment
where governments and social partners - based on sound policies - contribute to confidence and
potential output growth.
There is no denying the fact that the implementation of structural reforms requires courage and
leadership. Especially, as they may temporarily have negative repercussions for some groups, namely
those that profited from protective regulations or subsidies. For example, while regulatory reforms will
ultimately result in broader choices and lower prices for consumers, they may imply some adverse
short-run effects for formerly protected firms. This may, amongst other factors, be due to the inefficient
use of resources in incumbent firms before the sector was opened up to competition. However, after
some time, employment in the liberalised sector can be expected to increase, as new services are
being introduced. Most importantly, all other sectors which before had to finance the subsidies will
immediately enjoy the benefits from the reform. These gains are often overlooked in the public debate.
In fact, there is a formidable challenge to gain the support of parliaments and the public for
implementing structural reforms. It is therefore imperative to make it clear to the public that, if
governments and social partners deliver those reforms, the net benefits will be significant.
The impetus from determined structural reforms in capital, labour and product markets would
set in train a virtuous circle of increasing confidence: the more credible the reforms are, the more
confidence they will create, and the more confidence is created, the sooner positive results will be
visible.
Among the necessary measures, structural reforms in capital markets should aim to allow a more
effective allocation of savings toward the most rewarding investment opportunities. Since the
introduction of the euro, the pace of reform has been impressive. Through a cohesive and effective
interplay of free competition, co-ordinated action by all market participants and policy enforcement by
public authorities, micro-economic reform in capital markets has been proceeding. However, the need
for continuation and completion remains. First, the Financial Services Action Plan (FSAP) initiated by
the European Commission in 1999 should be implemented and enforced, giving rise to a genuine
common financial legislation and regulation. And second, a further consolidation and integration of
market infrastructure and harmonisation of the standards and conventions routinely used by market
participants, is required, extending also to accounting standards.
Also regarding the integration and level of competition in goods markets much progress has been
achieved. But substantial barriers to trade and free competition continue to exist, particularly limiting
the integration of services markets. The Internal Market Directives have not yet been fully
implemented, and a number of infringement cases, too, indicate that delays and inefficiencies remain.
A strengthening of competition, through further deregulation, should be accompanied by a sustained
reduction of state aid - particularly to the extent that it constitutes economically questionable ad-hoc
and sector-specific measures. This will help to smooth the restructuring process in goods markets, by
promoting the entry of new players. It will enhance innovation and an efficient allocation of resources.
It will have a downward effect on prices. And cuts in industry- or sector-specific subsidies will reduce
the tax burden. All this will contribute to boost welfare across the euro area.
Progress with the implementation of structural reforms in labour markets has been uneven in the
euro area. Output growth has become somewhat more job intensive at the end of the 1990s, and we
also have some tentative evidence that the structural level of unemployment has tended to decline.
However, it is urgent to reduce non-wage labour costs and labour mismatch and to improve the
flexibility of labour contracts and wage-setting to enhance employment growth in a lasting manner.
This will help to increase the employment opportunities for those who face particular difficulties in the
labour market, such as women, the youngest, the oldest age and the lowest educated groups. These
measures have to go hand in hand with a reform of the pension and health care system. They are
indispensable to contain expenditures on pensions and health care and thus to reduce non-wage
labour costs.
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In conclusion, Ladies and Gentlemen, let me make three remarks.
First, as regards the Euro, I would only mention here that the Eurozone today represents already four
fifth of the number of countries members of the present European Union, four fifth of the population
and four fifth of the GDP of the fifteen. Let me add that UK entry is very warmly welcomed by all of us.
That of course depends on the decision of the authorities and people of the United Kingdom.
Second, as regards enlargement, I would like to stress again the major historic achievement that it
represents. It is not only an impressive illustration of the success of the concept of European Union. It
is also a formidable chance and opportunity for Europe, not the least in the economic field. Let us
seize this chance and this opportunity in a highly responsible and professional manner in the Western
part of Europe as well as in the Central and Eastern part of it. We have all reasons to be optimistic as
regards the impact of this historic endeavour on overall European growth.
Third, the ECB is conscious of its particular responsibilities in a time of meditation and hesitation as
regards the institutional framework of present and future Europe. We do all what we can to preserve
and enhance confidence as a fully unified executive institution in our domain of responsibility. Let me
also tell you that I remain personally very confident that Europe will overcome its present difficulties. I
draw this personal intimate conviction in particular from the reading of Jean Monnet's memoirs written
in 1976 : "When one sees the persistence of European sentiment within this permanently changing
environment, one cannot doubt that there is at stake a very powerful trend of historic nature (...) 'Il faut
compter avec le
temps', One has to take account of time".
"Those who decide not to start any enterprise because they are not assured that things will move in
strict conformity with their plans are condemning themselves to absolute immobility. Nobody can say
today what will be the shape of tomorrow's Europe, because future changes that will be born from
present changes are unpredictable". This was written in 1976 by the founder of the European
Community concept. It is truer than ever today.
Ladies and gentlemen, thank you for your attention.