Mr Noyer covers several topics on the euro: six months after its introduction
Speech delivered by Christian Noyer, Vice-President of the European Central Bank, at the
Institute for International Monetary Affairs' (IIMA) seventh symposium on "The euro: its
promise and challenge to the world economy" in Tokyo on 6 July 1999.
First, let me thank the organisers of this conference for inviting me to participate in this panel.
Indeed, in my view, the title of this symposium, "The euro: its promise and challenge to the
world economy", has been well chosen. The introduction of the euro, which was successfully
launched just over six months ago, marks a significant milestone in the process of European
integration and will bring considerable benefits to the nearly 300 million citizens of the euro
area. The introduction of the euro will have a profound impact on the world economy, as well
as the euro area itself, in years to come. However, the euro area also faces a number of
challenges if the full potential of the single currency is to be realised.
The organisers have specifically asked me to cover several topics. Therefore, I should like to
start my remarks by considering the current economic situation and the outlook for the euro
area. I shall then explain the relationship between monetary and fiscal policy in the euro area
and deal briefly with the issue of differing economic situations in Member States. Finally, I
should also like to comment briefly on the question of structural reforms.
1. The current economic situation and outlook for the euro area
Real economy
According to a preliminary estimate released by EUROSTAT in mid-June, overall output
growth in the euro area stabilised in the first quarter of this year. Real GDP in the first quarter
was up 0.4% on the previous quarter, following a gradual slowdown from 0.7% to 0.3%
during the course of 1998.
Even though caution should be exercised when interpreting these figures, since they combine
data compiled partly in accordance with the old methodology and partly with the new (ESA
95), two broad conclusions may be drawn:
1. While previous data had suggested a rather sharp slowdown in the last quarter of 1998, the
revised data imply a pattern of slowing real GDP growth which was spread more evenly
over the course of 1998.
2. The weakening of output growth came to a halt during the first quarter of 1999. Data for
industrial production for April 1999 confirm this picture.
Although there is not yet a clear sign of a recovery in the industrial sector, it appears that the
level of industrial production stabilised over the first few months of 1999; a clear
improvement compared with the pronounced decline of around 1% in the last quarter of 1998.
There have also been positive indications of economic activity in the euro area in recent
business and consumer surveys. In particular, there was a further slight rise in business
confidence, supported by an improvement in production expectations and a more favourable
assessment of export order books, which may be seen as representing the more
forwardlooking components of the survey. At the same time, consumer confidence remains at an
extremely high level; this is consistent with the fact that private consumption has remained
robust, supported by real income growth and higher employment.
With regard to developments in the external environment of the euro area, there have been
some positive signs. US growth is expected to remain strong in the near term, forecasts of
growth for the United Kingdom (a significant trading partner for the euro area) have recently
tended to be revised upwards and, of course, the Kosovo conflict has ended. There are also
indications that prospects for several emerging economies have improved as financial turmoil
has subsided and access to international capital markets has become easier. Overall, recent
forecasts for the world economy suggest that the outlook has stabilised and the risk of a global
recession has receded.
In all, there have been some indications of a turnaround in the industrial sector and of an
improvement in the external environment. Overall, growth is expected to strengthen in the
course of this year and next. Most observers now expect that real GDP growth in the euro area
will be around 2% this year (compared with close to 3% in 1998) and 2.5% or more in 2000.
Prices
In response to these new data indicating a stabilisation of overall output growth in early 1999
and an economic recovery during the second part of 1999 into the year 2000, market
participants appear to have shifted their expectations towards a faster pace of economic
growth. Combined with recent monetary and credit developments, this suggests that
downward risks to future price stability have receded further. On the other hand, all indicators
we use in our monetary policy strategy do not signal upward inflationary pressures. This is
true for money, with a development of M3 that remains close to the reference value, and also
for the other indicators (combining financial market and real economy indicators including
wage developments) that we use in our broadly-based assessment of the outlook for price
developments.
The euro area yield curve has steepened somewhat more recently, as a result of a partial
spillover of the sharp rise in long-term bond yields in the United States and the release of
slightly higher-than-expected real GDP data for the euro area for the first quarter of 1999.
However, long-term nominal bond yields in the euro area remain low by historical standards.
Annual consumer price increases in the euro area rose slightly from 0.8% in January 1999 to
1.0% in May. This small increase is mainly due to the impact of higher oil prices. Excluding
seasonal food and energy, which are two of the more volatile components of the Harmonised
Index of Consumer Prices (HICP), the rate of increase in consumer prices has continued to fall
slightly in recent months, to stand at 0.9% in May. Recent forecasts of international
organisations for inflation in the euro area over the next one to two years generally point to a
range of around 1.0-1.2% this year and 1.4% in 2000.
Hence, all available evidence points to the conclusion that both in the short and medium term,
price developments should be compatible with the Eurosystem's definition of price stability,
i.e. with increases in the area-wide HICP remaining below 2%.
Against this background, the Governing Council has decided during its recent meetings to
keep interest rates on the monetary policy instruments unchanged.
Foreign exchange rate developments
Let me refer briefly to recent exchange rate developments. Since its launch in January 1999
the euro has fluctuated significantly against the currencies of our major trading partners but
currently stands at a level that is broadly corresponding to the level of its constituent
currencies that was observed in summer 1997.
This fluctuation has reflected a cyclical divergence between the euro area and the United
States that is expected to diminish over the course of this year and thereafter. Given that the
euro is a currency firmly based on internal price stability, it therefore has a clear potential for a
stronger external value. Since the start of Stage Three of Economic and Monetary Union
(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, which is a basis
for a solid and stable currency over the medium term.
2. The Eurosystem's monetary policy and fiscal policies of Member States
I should like to emphasise that the Eurosystem's monetary policy strategy is geared towards
the maintenance of price stability for the euro area as a whole. Before the establishment of
Monetary Union, monetary policies in the countries that have now formed the euro area could,
at least in principle, have reacted to country-specific developments. However, with the
introduction of the single currency monetary policy decisions must be based on area-wide,
rather than national, considerations. Clearly, to the extent that national developments have an
impact on area-wide developments, the single monetary policy takes these factors into
account, but the focus of monetary policy is on area-wide indicators.
The Treaty on European Union provides a fundamentally sound allocation of objectives and
instruments between the single monetary policy and national fiscal policies in Europe. The
Eurosystem is responsible for maintaining price stability. The Treaty also states that it shall
support the general economic policies in the Community without prejudice to the objective of
price stability. There is a widely shared view that maintaining price stability is the best
contribution monetary policy can make to a high level of output and employment in the
medium term.
As regards fiscal policy, the Stability and Growth Pact, which was agreed by EU Member
States in order to avoid excessive deficits, provides countries in the euro area with a common
code of fiscal conduct that requires discipline in the management of government finances.
Member States are committed to respecting the medium-term budgetary objective of positions
close to balance or in surplus. Safeguarding sound government finances is a means of
strengthening the conditions for price stability and of achieving strong sustainable growth,
which is conducive to employment creation. An open exchange of information among
policymakers is helpful for a proper assessment of the impact that fiscal policies have on
developments in the euro area as a whole. This assessment will form one input - among others
- into monetary policy decisions aimed at maintaining price stability over the medium term.
One of the fora via which such an exchange of views is carried out is the regular Euro-11
meetings with the Ministers of Finance of the euro area in which the President of the ECB and
I participate. Other exchanges will in the future take place in the macroeconomic dialogue
established in the context of the European Employment Pact, which will bring together
representatives of the Council of Ministers, the Commission, the ECB and the social partners
in the form of a "macroeconomic dialogue". However, I should emphasise that these other
exchanges remain limited to an exchange of information and do not interfere with the
responsibility of individual policy areas.
3. The need for structural reforms to promote high and sustainable economic growth
I should like to emphasise how important it is that monetary policy is supported by structural
measures to improve the functioning of labour, product and capital markets. This would also
enable the economies of the euro area to operate at a higher degree of resource utilisation and
thus make better use of the available productive capacity. In particular, it is widely recognised
that the euro area faces a problem of high and persistent unemployment, which is largely
structural in nature. There is therefore, a pressing need for measures targeted at making labour
and product markets work more flexibly. Furthermore, flexible labour and product markets
are also important to enable national economies to adapt to shocks, particularly those that do
not affect the countries of the euro area equally. Monetary policy has to maintain price
stability in the euro area as a whole, so national labour and product markets need to be
flexible enough to adjust to such shocks.
Although some countries have adopted a wide range of measures, the progress made so far in
pursuing structural reforms has been uneven and not yet satisfactory overall. However, there
are some encouraging signs. Over the past few years, the European Community has stepped
up its efforts in this field, aiming to co-ordinate and improve Member States' policies in the
field of employment and labour market reform and to initiate reforms that improve the
functioning of goods, services and capital markets. The experience of countries that have
undertaken significant reform programmes shows that it takes time to implement structural
reforms and even longer for the benefits of these reforms to materialise in full, but that these
reforms bring about swift progress in employment creation and the reduction of
unemployment.
Finally, let me stress that while there are challenges ahead, the independence of the
Eurosystem, together with the clear mandate to maintain price stability in the euro area,
provides a solid foundation for the long-term stability of the euro. The first six months of
1999 have seen the successful launch of the new currency. In the coming years the euro will
make an important contribution to further economic and financial integration, helping to
improve the growth potential of European economies.