Klaus Liebscher: European Economic and Monetary Union - how to continue a
success story?
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, at the International Financial
and Economic Forum, Vienna, 13 November 2003.
* * *
Ladies and Gentlemen,
By the end of last month, the successful era of President Willem Duisenberg at the helm of the
European Central Bank came to an end. At the beginning of this month, Mr. Jean-Claude Trichet
became second President of the European Central Bank. Certainly, already this change at the top of
the ECB provides a good opportunity for both looking back and looking into the future. Moreover, from
a broader perspective, we are at the threshold of the historic event of the accession of five Central
European and three Baltic countries as well as two Mediterranean islands to the European Union.
When eleven EU member states entered the third stage of the Economic and Monetary Union by
adopting the common currency, the euro, on the 1st of January 1999, this historic step was
accomplished in such a smooth way that it is often simply taken as a matter of fact. However, looking
back, it should be highlighted that there were not at all any problems, despite heightened uncertainties
in the international financial markets following the turbulences in Asia, Russia and Brazil. Certainly,
this was due to the fact that this step was indeed well-prepared. Moreover, the acting persons, and in
particular the first President of the ECB, Willem Duisenberg, whose appointment became effective
already as of June 1st 1998, had a strong commitment and merited high credibility.
In the meantime, the ECB became a successfully working institution, the Eurosystem prepared and
realized a great number of logistical, operational and organizational issues - highlighted by the smooth
Cash Changeover in 2002. And the euro establishes itself as a leading world-currency.
In 2002, the share of the euro in the settlement and invoicing of global exports of individual euro area
countries to countries outside the euro area has risen to between 40% and 58%. Moreover, the euro
has been well-received in the financial markets. In particular, a significant European corporate bond
market has emerged.
Further to its role in trade and financial markets, the euro has been used by many third countries as an
important official reserve currency and as an anchor in their exchange rate regimes.
The success of the Economic and Monetary Union in Europe can be measured not only by looking at
all that what happened, but also by taking into account what could be avoided. Within the euro area,
the monetary union has kept member countries from being exposed to harmful intra-European
exchange rate tensions of the type that many countries used to suffer when external shocks occurred.
It has become quite obvious that the countries constituting the euro area are protected from negative
shocks much more comprehensively now than was possible under past regimes. Indeed, major
external developments in recent years, like the bursting of the equity bubble, the repercussions of the
terrorist attack on September 11, 2001 and the more recent substantial depreciation of the US dollar
that has resulted from the sizeable imbalances in the US economy, otherwise might have led to
phases of instability within the European economy. Instead, they could be weathered within a stable
framework.
During the past five years, the Eurosystem successfully achieved its primary objective of maintaining
price stability over the medium term. Despite some years of rising world energy prices combined with
a strong appreciation of the US dollar, the Eurosystem managed to achieve low inflation and low
interest rates, which will ultimately stimulate further investment and contribute to sustainable growth in
the euro area. Thereby, the euro will contribute to more balanced global growth and to more stability in
the international financial system.
The current state of the European Economic and Monetary Union, its "stability architecture" and its
developed rule-based "stability culture" truly represent a culminating point in the process of European
integration. Indeed, over the last half century, Europe has followed an impressive path of voluntary
integration of nations, so far unparalleled in history. Economic integration, in particular, was
successively deepened. Moreover, in parallel to the process of deepening the integration, the
European Union was successively enlarged. At present, we are at the threshold of a further historic
enlargement of the European Union. The accession of ten new Member States, scheduled for May 1st
2004, is of great political importance and also has non-negligible economic implications.
Looking into the future, there are two main challenges for the European Economic and Monetary
Union. The first challenge consists in strengthening the hitherto developed architecture and culture of
stability, the second in successively integrating the incoming new Member States, and both challenges
are certainly inter-linked.
Regarding the "stability architecture", the legal fundaments of the Economic and Monetary Union have
to be transposed appropriately into the Treaty establishing a Constitution for Europe, in order to
ensure that the essence of the stability orientation of the Economic and Monetary Union will be
preserved and the institutional position of the Eurosystem within the whole European Union will be
better defined.
At least as important as the architecture is the way how the authorities live in the well-established
house of the Economic and Monetary Union. This is what I would like to term the "stability culture". It is
certainly a significant task for monetary policy makers to thoroughly honour their obligations to conduct
a stability-oriented balanced monetary policy for the whole euro area. Moreover, it is a formidable
challenge for fiscal policy to maintain a culture of stability, in particular in times of slow growth.
Nonetheless, it is essential that all EU Member States remain credibly committed to and, thus, comply
with the existing framework of democratically established self-imposed rules. The challenge consists in
responding positively to the fiscal consolidation pressure which results from obeying the rules. In
addition, acute pressures may be avoided by anticipating longer-term reform measures in a timely
manner. Obviously, this is directly linked to the next major ingredient of a "stability culture", namely
structural reform. Finally, the required "culture of stability" comprises also a responsible attitude on the
side of both employers and employees, in particular in member countries where central wage
bargaining prevails.
Ladies and Gentlemen, I am convinced indeed that the solid foundation of the stability architecture
and the attitude of a stability culture will certainly make the decisive contribution to continue the
success of the EMU.
Now, turning to the second main challenge for the Economic and Monetary Union, I would like to state
very clearly that I highly welcome the acceding countries' joining the European Union. After the fall of
the "iron curtain" 14 years ago, the Central and Eastern European countries have undergone an
impressive and successful, if often painful, process of transformation and we see their joining our
Union as a well-deserved and historic step.
Upon entering the European Union, the new Member States also become members of the Economic
and Monetary Union. While they do not take part in EMU to the full extent, as they cannot immediately
join the euro area, they are already required to observe a number of obligations embodied in the
stability architecture of EMU: They generally have to bring into line their economic and monetary
policies with the overall goals of EMU. Their central banks will be represented in the General Council
of the ESCB and take part in monetary policy coordination within the EU. The new Member States will
participate in the coordination of economic policies and in the multilateral fiscal surveillance. Moreover,
they shall treat its exchange-rate policy as a matter of common interest, as the functioning of the
single market must not be weakened by real exchange-rate misalignments or excessive nominal
exchange rate fluctuations.
From my point of view, it is vital for the new member countries to perform catching-up real growth that
permits their income-per-capita levels to gradually approach the average income level in the present
EU member countries.
Therefore, economic policies of the new member countries and any further steps in monetary
integration should be oriented towards achieving real and sustainable nominal convergence, as both
convergence processes are complementary to each other and should be pursued in parallel.
The speed of further monetary integration must not compromise its quality and there will be no uniform
appropriate speed, due to differences in the economic situation among new member countries.
Decisions have to be taken in accordance with the legal fundaments on a case-by-case basis, and,
simultaneously, equal treatment between new and current EU member states must be ensured
throughout the whole process.
The acceding countries are in midst of an integration and catching-up process, and their equilibrium
exchange rates will be subject to gradual changes and shocks over time. Therefore, any premature
euro area participation has to be avoided. This corresponds to the economic reasoning behind the
Treaty provision that the Commission and the ECB have to examine the achievement of a high degree
of sustainable convergence in their convergence reports to the Council before a decision will be taken
on any new Member State's adoption of the euro.
Ladies and Gentlemen, I am sure that the participation of the new member countries in the stability
architecture of the Economic and Monetary Union from their accession onwards will decisively
contribute to enhancing the success of EMU into the enlarged European Union. Therefore, I am
looking forward to this new era, which lies in front of us, characterized by a larger number of Member
States and, in terms of ideas, by an even larger potential of human beings. For the Eurosystem, this
new era will be personalized by the new president of the ECB, Mr Jean-Claude Trichet, whom I wish
all the best, indeed.
Thank you very much for your attention.