Mr Tietmeyer looks at the euro and the challenges ahead
Address by the President of the Deutsche Bundesbank, Prof Hans Tietmeyer, at the Frankfurt
International Banking Evening, in Frankfurt on 20 May 1999.
This year's Frankfurt International Banking Evening is a special occasion for me. It's the last
one I shall attend as President of the Bundesbank.
And what is the consequence of that to me? Well, this time I must hold the lecture myself.
Up to now, I have always had the pleasure of delivering the shorter supplementary address. It
seems that the Bundesbank President was regarded - at least by the organisers of this meeting
- as particularly suitable for that purpose, being the local "Frankfurt" central banker.
Seen in those terms, Wim, it is noteworthy that this evening that is your privilege. Since you
appear to be performing the role of the "Frankfurt" central banker tonight.
I hope, by the way, that you will occupy the position of a central banker in Frankfurt for a long
time to come. I shall be watching from the sidelines of my retirement, and shall be delighted if
you remain "in the best of health" for a long time yet.
If we combine "de facto monetary union" and "official monetary union", we can look back
today not only on almost six months of the euro, but actually on an entire year - even if the
formal launch in January marked a particular watershed.
At all events, already in 1998 some crucial decisions were taken affecting the credibility of the
new currency:
• on balance, a number of convincing personnel decisions,
• a credible monetary policy strategy,
• effective and easily comprehensible policy instruments,
and some major technical preparations, not to be underrated in terms of the credibility of the
euro.
And, as a matter of fact, the interest rate decision taken last December was virtually the first
interest rate measure adopted by the Governing Council of the ECB.
Not least on account of this thorough preparatory work, the Eurosystem was happily able to
assume full responsibility for monetary policy at a time of low inflation rates and favourable
medium-term prospects for stability, thus linking up pretty smoothly with the monetary policy
pursued by the national central banks.
Indeed, the medium-term price outlook appeared so favourable to the Governing Council that
we were actually able to lower central bank rates by a further 50 basis points in April.
The technical side of the transition to the euro went off better on the whole than some
financial market players had expected. At any rate, the media expressed surprise that no major
mishaps were to be reported. A steep rise in equity and foreign-exchange-market prices
seemed to bear that out.
Some people actually believed that the longer-term potential of the euro could be exploited in
full in the first few days. A few apparently thought that
• global investors would quickly switch a large proportion of their assets into euros, and that
• central banks would rapidly diversify their reserves in favour of the euro.
In the meantime, a rather more cautious assessment - at least, as compared with the initial
euphoria - has won through in the markets, especially as regards the pace of any such
assumption by the euro of the role of a major investment and reserve currency.
Exaggerated short-term expectations have thus inevitably been followed by a certain
disillusionment, and even disappointment, which has ultimately been reflected in the external
value. Political developments in the Balkans have likewise played (and are still playing) a
role, at least in the short run.
However, there is no reason at all to write off the enormous potential of the euro - which some
people have seemingly been tending to do of late. The potential is there. Yet the markets
should not be too short-term in their orientation.
The international attractiveness of the euro will hinge crucially on the extent to which it
manages to gain investors' long-term confidence, and to which it succeeds in accumulating
credibility of its own.
Of course, that will owe a great deal to the economic and political setting. That has likewise
been the case in the past six months:
• in the economic setting, it has transpired that - contrary to some fears expressed during the
past year - the US economy continues to be marked by an exceptionally buoyant growth
process.
In a number of euro countries, by contrast, the impression of a certain short-lived slackening
in growth has been confirmed. In the meantime, however, there are signs of activity starting to
pick up again soon.
And as far as the political setting is concerned, a number of euro countries are still rather far
away from the medium-term objective of the Stability and Growth Pact, namely a balanced
budget, as is mentioned in the recent Monthly Bulletin of the European Central Bank.
That forms a distinct contrast to the United States, which is in the enviable position of being
able to think about what it can do with its budget surpluses. In the process, it is reaping the
fruits of an investment-friendly tax system and of vigorously pursued longer-term reforms.
In a number of euro countries, on the other hand, investment-friendly tax systems and resolute
reforms of the labour market and social security systems remain obligations that policy
makers urgently need to fulfil.
Now that the Governing Council of the ECB has done its bit to create an environment in
which price stability is largely assured on the monetary side, and in which the considerable
growth potential of the euro area can be exploited more effectively, such reforms are
particularly necessary.
A preliminary outcome therefore reads as follows: alongside a number of expectations met,
particularly in the area of stability prospects, there is also a certain degree of disappointment
over some decisions still outstanding on the part of policy makers and over the stance of the
parties to pay settlements in some countries.
Only after the requisite reforms have been implemented is the die cast as to whether and when
the monetary union actually culminates in a successful and durable Community of Stability
with an inherent dynamism of its own which can live up both to the expectations of growth
and employment prospects placed in it and to the idea of an internationally attractive
investment and reserve currency that can stand up to competition from the dollar.
Making a lasting success of monetary union is and will remain the ongoing task of, ultimately,
all policy areas - not just of the single monetary policy, but likewise of fiscal and economic
policy, which have largely remained national responsibilities.
Member states must recognisably discharge their obligations and make that perfectly clear for
all to see. Only in that way can lasting credibility be achieved.
And credibility is the name of the game.
For that will convince the markets, too, of the long-term determination and long-term capacity
of the Community to ensure stability.
Nobody can simply lean back, or perhaps seek to instrumentalise the euro for one purpose or
another.
The yardstick of monetary policy is, and will remain, lasting internal stability. In the long run,
it is on such stability that the external attractiveness of the currency will depend. Happily, that
is generally agreed in the Governing Council of the ECB. And that objective is clearly
expressed in the monetary policy strategy we are pursuing.
True enough, monetary policy has not exactly become any easier since the turn of the year.
How the transmission mechanisms of monetary policy operate over the euro area as a whole is
not yet known beyond dispute. This is why we do not know very precisely just what the
monetary indicators are telling us. Above all, it is not yet manifest just how far the financial
markets and consumers have changed their habits as a result of the introduction of the euro.
Altogether, therefore, monetary policy in the euro area is in a position in which it can rely less
than it used to in the Federal Republic of Germany on the old relationships, laws and
experience familiar from national monetary policy.
That, of course, confronts it with new, serious challenges. Incidentally, the Governing Council
foresaw that development and formulated its monetary policy strategy accordingly.
In the light of past experience - not least that of the Bundesbank - it assigned a special place in
its analysis to the money stock.
At the same time, however, it is also trying to estimate inflation prospects and inflation risks
direct, on the basis of an analysis of a broad range of the factors determining prices.
Needless to say, these factors include (besides foreseeable movements in costs) real economic
trends. They likewise include the exchange rate. We cannot, and must not, ignore either the
one or the other.
But we are not thereby pursuing the objective of activist demand management. Nor are we
pursuing an exchange rate target.
Instead, we are analysing these factors very carefully, along with the money stock, and
evaluating them in the light of their implications for the objective - that is the logical
consequence of the strategy we have chosen.
Of course, I know that this seems too "discretionary" to some people; it smacks too much of
"muddling through" to them, and seems to require too much confidence in persons and too
little in rules.
And I know that some people would best like a strategy that could easily be expressed in
terms of mathematical formulae, so that monetary policy could be forecast by computer or
actually computerised.
Perhaps those mathematically oriented watchers will be glad to hear that there are some
people in the Governing Council who are pretty good at maths - for instance you, Wim. At all
events - as I have recently read in the magazine "Focus" - the Dutch Ministry of Education has
recently been advertising for young teachers, using a nice picture of you, Wim, in your youth.
The caption below the photo reads:
"Wie heeft Wim Duisenberg leren rekenen? - Mooi werk, juf."
And for all those who are not so conversant with Dutch as Wim and I, here is the English
translation:
"Who taught Wim Duisenberg maths? - Well done, teacher."
But, to be serious: a rule-bound approach entails too great a knowledge of the relationships
involved for us to be able simply to hand over monetary policy to a computer.
If need be, the computer would have to be reprogrammed if the structural relationships and
laws changed over time. And considering that every player in the markets anticipates the
potential fallibility of mechanistically applied rules, such rules are beset by credibility
problems of their own from the outset.
Rules are naturally important and useful for orientation purposes, but they must not
degenerate into automatic responses. They cannot be a substitute for the responsibility of
decision-makers in a concrete situation - although they can provide an orientation for such
responsibility.
Incidentally, the Bundesbank has never applied its monetary targeting policy in mechanistic
fashion, especially not during the nineties. And the experience it gained of that approach was
excellent.
The point of properly understood strategies - not wrongly understood automatic responses - is
to provide longer-term orientation. They should certainly have a binding character - in the
sense that the central bank is required to justify the extent to which actual decisions are
compatible with the strategy.
That gives rise to transparency. The ship needs both a course and a helmsman. Both together
result in credibility.
Has not the strategy of the Governing Council already contributed substantially to the
accumulation of credibility by the euro?
I, at all events, do not rate the criticism voiced here and there about the last interest-rate
decision as being negative. After all, it gave rise to a need for the central bank to justify how
far the decision was compatible with monetary growth. That indicates to me that the strategy
has already attained a major objective. A debate on that point cannot but foster the
accumulation of credibility by the euro.
A different matter is the, in my view, mistaken criticism that the decision constituted a
paradigm change. That is unequivocally wrong. Certainly, there were many arguments to be
weighed up. But the crucial yardstick was the long-term safeguarding of internal stability.
That was and remains the main thing that monetary policy can contribute to the movement of
growth and stability.
One of the fathers of the Reichsbank, the member of the Reichstag from Mainz, Ludwig
Bamberger, rightly said (back in the last century) something about the proper relationship
between people and rules that is no less valid today:
"There is one thing that neither an Act of Parliament nor a Statute - be they never so perfect
can accomplish: namely, the right application of the right regulations. Final perfection must be
ensured by individual human ability. A bad rule of the road can do much damage and a good
one can prevent many mishaps, but even with the best rule of the road a good coachman is
indispensable."
In the same sense, responsibility for the euro is ultimately likewise borne by those who, while
not monetary decision-makers, shape the political and economic setting of the euro by their
actions. For what Joseph Schumpeter once rightly said about the "Nature of money" still
applies today:
"(...) that a people's monetary system reflects everything that that people wants, does, suffers,
is (...) The state of its monetary system is a symptom of all its states."
It is not immaterial for a currency's lasting ability to be stable
• whether its public finances are in good shape, whether unemployment is consistently
being reduced,
• whether the social systems in the euro countries are based on firm foundations, or
• whether the conditions for a sustained, dynamic growth process in Euroland are met
everywhere.
According to Schumpeter, all these factors are also reflected in the state of a country's
monetary system, implying in this country today: in the state of the euro.
Thus, all those responsible in the various policy areas must constantly ask themselves whether
everything is really in order in their own sphere of responsibility, or whether improvements
are not needed, indeed, badly needed - in the interests of the currency, and also in their own
interests.
To that end, there is no need for "ex ante coordination". On the contrary, that only blurs the
responsibility, and not infrequently endangers a medium-term-oriented anti-inflation policy.
What is necessary, rather, is the discharge of one's own responsibility.
And since we have to deal with eleven countries in the monetary union, the euro reflects the
ability of all those countries to settle the outstanding question.
Nobody should adopt a "free rider" position, in the hope that his own failure will be
counterbalanced by the others. That would endanger the lasting stability of the euro and
jeopardise its international attractiveness. That would be bound to sap its credibility. It would
also result in political tensions.
This is why the euro is an "ongoing challenge and task" for all those who currently bear
responsibility in business and politics.
And the euro will likewise be an "ongoing challenge and task" for those who will assume that
responsibility in the future.