Mr Noyer focuses on the challenges in Europe
as seen from the point of view of the European Central Bank
Speech by Mr Christian Noyer, Vice-President of the European Central Bank, at the University of
Antwerp on 26 October 1999.
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Introduction
First of all, I should like to thank the organisers of the Kekulé Cyclus for inviting me to participate in
such an interdisciplinary conference bringing together experts from different professional
backgrounds. I will contribute to your discussions by focusing on the challenges we are facing in
Europe, as seen from the point of view of the European Central Bank (ECB).
Let me briefly recall that it was just a little over a year ago that the ECB was established and that for
almost ten months now the Eurosystem - which consists of the ECB and the eleven national central
banks of the Member States which have adopted the euro - has been responsible for monetary policy
in the euro area. The introduction of the euro has been a historic event for the countries concerned,
since it is the first time in monetary history that sovereign states have replaced their national
currencies with a common currency and transferred their monetary policy competencies to a newly
established supranational institution.
The new monetary policy regime in the European Union (EU) is not only an important further step in
European integration. It will also have far-reaching implications for the world economy and the
international monetary system. In this context, the ECB, together with other policymakers in Europe,
has a particular responsibility in setting the right conditions for sustainable non-inflationary growth in
the euro area so as to contribute to long-term economic welfare of the world economy.
Thus, in my presentation today, I should like to concentrate on three aspects related to the challenges
we are facing in Europe today and in the future and, in that context, on the contribution of the ECB
and the Eurosystem: first, I shall reflect on how we can seize the opportunity to ensure that the current
economic recovery in the euro area becomes a prolonged phase of sustainable non-inflationary growth
and employment creation. Second, turning to Europe as a whole, I shall refer to the challenges related
to the accession of new countries to the EU and, eventually, to the euro area. Finally, broadening the
perspective, I will discuss the role of Europe, the euro and the ECB in the world economy.
1. Challenges in the euro area: how can the ECB and the Eurosystem contribute to
sustainable non-inflationary growth and employment creation?
Starting with the euro area, recent economic developments point to a much brighter outlook than was
expected earlier this year. An improved international environment should support these positive
prospects. As shown by the IMF's recent World Economic Outlook, the growth prospects in individual
countries and for the global economy in 1999 and 2000 are now much better and more balanced than
expected.
While the risk of a pronounced slowdown of the US economy, with negative repercussions on the
world economy, cannot be ruled out, such a scenario appears unlikely at present. However, a major
challenge for the US authorities over the next few months is engineering a "soft landing" of the US
economy. The Japanese economy now shows clearer signs that the protracted weakness of the last few
years could come to an end. An economic consolidation and a resumption of capital flows to crisis-hit
emerging market economies, especially in Asia, also contribute to this favourable outlook.
Against this positive background, the challenge now is to ensure that the current recovery in the euro
area becomes a period of prolonged non-inflationary and employment-generating growth. I will
elaborate on the possible contribution of the ECB and the Eurosystem, but also on the limitations
thereof, pointing to the necessary contributions of other policymakers.
Looking back at the past ten months, I would like to recall that the introduction of the euro took place
in an environment of price stability that only few observers would have predicted some years ago.
This was the result of a process of economic convergence, in the course of which European inflation
rates were reduced significantly.
This development is very encouraging, since theoretical arguments and empirical evidence over
several decades suggest that high and variable rates of inflation are detrimental to growth and
employment in the long term. Against this background, the predominant view has emerged that the
best and most lasting contribution that monetary policy can make to long-term economic welfare is
that of safeguarding price stability. Therefore, central banks throughout the world have been moving
towards adopting long-term price stability as their primary goal.
In order to achieve this goal most successfully, independence from political interference and a clear
legal mandate for price stability are of the utmost importance. A lack of independence and an
ambiguous mandate can easily force central banks to focus on the short term, and thus to fail to adopt
the forward-looking, medium-term orientation that is crucial for a successful monetary strategy. These
aspects were taken into consideration by policymakers when drafting the Maastricht Treaty.
The mandate to maintain price stability cannot be seen in isolation. The Treaty assigns other tasks to
the Eurosystem. Article 105 requires that the Eurosystem "without prejudice to the objective of price
stability ... shall support the general economic policies in the Community, with a view to contributing
to the achievement of the objectives of the Community." These Community objectives include
"sustainable and non-inflationary growth" and "a high level of employment". But, given the
qualification "without prejudice", the Treaty also clearly states how the Eurosystem shall set its
priorities. A contribution to the achievement of the other objectives of the European Community can
only be made if the Eurosystem's primary objective is not compromised. However, there is ultimately
no incompatibility between maintaining price stability and pursuing these other objectives at
Community level. It is by maintaining price stability that the ECB will contribute to the achievement
of growth and employment creation.
Of course, this contribution is a necessary, but not the sole pre-condition. A central bank can set
monetary conditions in a way that helps the economy to grow at its potential. Even if this condition is
met, monetary policy is not enough to reduce significantly the high level of unemployment in Europe.
This high level of unemployment reflects mainly structural rigidities within the European labour and
product markets. This is confirmed by the fact that the European unemployment rate has remained
high and broadly stable over business cycles in the past decade. Only comprehensive structural reform
can therefore remove the underlying impediments to higher employment. In particular, further reforms
of the tax and welfare systems are required in many EU countries in order to increase the incentives to
create new jobs and to accept them. Wage moderation can also have a significant beneficial impact.
National governments bear the main responsibility for structural reform designed to enhance market
flexibility. I recognise that these reforms may imply difficult political decisions, especially since
necessary changes are felt directly, whereas the benefits only become apparent over time. The success,
however, of past structural reforms is already visible in those countries where appropriate measures
have been implemented and wage growth has been moderate.
Another argument supporting better functioning labour and product markets is that the monetary
policy of the Eurosystem is and can only be geared to the euro area as a whole. It can thus not take
into account purely national or regional developments. The cyclical positions of participating
countries have not yet completely converged, although - with the single currency in place - some
national differences may disappear over time. This requires national policies and labour and good
markets to be increasingly flexible in order to be able to respond effectively to economic shocks that
can affect any monetary union. A single currency does not call for uniform wage developments or for
uniform economic and social policies in general. On the contrary, where national or regional economic
and productivity developments are different, this should be reflected in different policy responses and
wage developments.
Budgetary policies, too, are crucial for setting the necessary conditions conducive to growth and
employment creation. Sound public finances, with lower public debt and tax burdens, contribute to a
reduction of long-term interest rates, reduce uncertainty and increase private capital formation. Thus,
they not only facilitate the task of monetary policy to maintain price stability, but also strengthen the
conditions for sustainable growth conducive to employment creation. Conversely, unsound fiscal
policies tend to increase inflation expectations and force monetary policy to keep short-term interest
rates higher than would otherwise be necessary. Therefore, the Stability and Growth Pact, which
encourages the pursuit of disciplined and sustainable fiscal policies by Member States' governments,
is a crucial element for sustainable non-inflationary growth in the euro area. The consolidation of
public finances, which has made considerable progress in the past few years, has to be continued and,
in some cases, intensified.
Setting the monetary conditions required to maintain price stability in the euro area is certainly the
best contribution that the Eurosystem and monetary policy can make. To achieve this aim, the
Eurosystem has adopted a monetary policy strategy which is tailored to the unique conditions of
introducing a new currency. Our two-pillar strategy takes into account that economic behaviour may
change as a result of the introduction of the euro itself. The first pillar lends a prominent role to
money, as signalled by the announcement of a reference value for the growth rate of the broad
monetary aggregate M3, which is regarded as being compatible with price stability; within the second
pillar, the outlook for price developments is assessed on a broad basis, using a variety of financial and
economic indicators.
This strategy thus takes into account that the start of EMU constitutes a structural break. A better
knowledge of the structure and functioning of the euro area economy, and of the transmission
mechanism of monetary policy within it, will be gained over time. Similarly, the availability and
quality of economic statistics will improve. As experience is gained, our strategy will be reviewed and
may evolve, possibly in the direction of greater emphasis on one of the two pillars. However, this has
to be a prudent process, since one of the main functions of a strategy is to provide a tool to facilitate
the communication of monetary policy preparations and decisions. Continuity is therefore a major
feature of any monetary policy strategy.
The effectiveness of a monetary policy strategy and related decisions depend to a large degree on the
credibility of the institution. Transparent and accountable policymaking can help to build up a
reputation and, hence, credibility. Openness, transparency and predictability therefore rank high on the
agenda of the ECB and the Eurosystem. Monthly press conferences given by the ECB's President and
myself are an important part of our communication policy. They take place immediately after the first
Governing Council meeting each month, thus providing an opportunity to explain our decisions and
the basis on which we have taken them, and to answer questions from journalists. As far as I know, no
other central bank communicates with the public in such a prompt manner.
Communication is and should not be a one-way street. The ECB must also take note of and be
sensitive to its environment in order to be effective in its own polices. But, still, monetary policy has
to be conducted independently of short-term political considerations. In this context, the ECB cannot
commit itself to move its interest rates in a certain way in response to specific actions or plans of other
policymakers. Monetary policy has to take the overall economic situation into account in its
assessment of the risks to price stability. For a monetary union to be viable, the fact that monetary
conditions may not be tailored to the specific needs of each individual component of the euro area has
to be accepted.
Explaining this properly to eleven countries with different economic, political and cultural
backgrounds is also one of the challenges we are facing. It will probably be better understood over
time, subject to further progress being made towards a positive attitude regarding European
integration. Such a positive attitude - that is seeing Europe as a positive opportunity - will also help to
cope with the challenges posed by the accession of new countries to the EU. This leads me to the
second part of my presentation.
2. Looking ahead - the accession of new countries to the EU and, eventually, the euro area
European integration as well as monetary union is an ongoing process and will continue to be so in the
future. Four EU countries have, for different reasons, not yet adopted the euro. Without elaborating on
that, let me simply state that they may well join in the coming years.
A greater challenge is the potential accession of still more countries to the European Union and,
ultimately, the euro area. Negotiations are currently being conducted with six countries. Negotiations
with another six candidates may start soon. The eligibility criteria for their accession to the EU were
formulated by the European Heads of States and Government at their summit in Copenhagen in 1993.
These criteria set out what should be required of a future Member State of the European Union and
thus ensure equal treatment of all applicant states. Let me briefly recall the three criteria that have to
be fulfilled:
• first, the political criterion requires stability of institutions guaranteeing democracy, the rule
of law, human rights and respect for and protection of minorities;
• second, the economic criterion requires the existence of a functioning market economy as
well as the capacity to cope with competitive pressure and market forces within the EU; and
• third, the so-called "acquis communautaire" criterion requires the ability to take on the
obligations of membership, including adherence to the aims of political, economic and
monetary union.
While accession is a political decision, it is clear that extending the EU to include new members will
have consequences for the ECB and the Eurosystem. Following their accession to the EU, the new
Member States will also - in a second step - become members of the exchange rate system ERM II
and - in a third step, if and when the Maastricht convergence criteria are met - adopt the euro.
In view of the implications for its own tasks and objectives and of the advisory role it can play, it is
only natural that the Eurosystem will become more involved in this process.
The Eurosystem should be involved in all issues falling within its exclusive or shared areas of
competence: monetary policy, exchange rate policy, foreign reserve management, payment systems,
financial stability and the impact of enlargement on the Eurosystem itself.
The Eurosystem is currently in the process of defining its position. Let me briefly outline some
preliminary observations. The Eurosystem needs to have a positive attitude towards the prospects for
an enlargement of the EU. This also applies to subsequent participation in ERM II and the eventual
adoption of the euro. The Eurosystem should be prepared to advise these countries in pursuing
appropriate structural reforms and stability-oriented policies in line with accession and convergence
criteria. The Eurosystem should stand ready to provide technical assistance to accession countries, in
particular to their central banks.
Equal treatment should be a key feature of the accession process. Objective and uniform criteria
should apply both to the countries' accession and to their participation in ERM II and adoption of the
euro. These criteria, related to each step of the process, should be implemented in a strict and effective
manner, in order to provide the countries concerned with the external constraints necessary to bring
their economies into line with the respective standards and the final goal of EMU, while also avoiding
any discrimination.
Against the background of different starting points and possibly different lead-times for progress
towards real and nominal convergence, a plurality of approaches should be feasible without
compromising equality of treatment. This may apply, in particular, to the timing of the individual steps
towards accession.
In accordance with the Treaty establishing the European Community, the Eurosystem will always
focus on the maintenance of price stability in the euro area. Hence, our involvement in the accession
process, including our technical assistance, and any arrangement or other forms of cooperation with
accession countries, must be without prejudice to the Eurosystem's independence and its primary
objective.
Over time, the Eurosystem - like other EU institutions - will face the necessity of institutional
adjustments required by enlargement. These adjustments should preserve the efficient functioning of
the Eurosystem and its ability to maintain price stability in an enlarged euro area. In the case of
previous enlargements, the entry of new Member States often brought about so-called "arithmetical
adjustments" to the composition of EU institutions. However, an enlargement by as many as 12 new
countries may require more substantial adjustments. This is one of the reasons why a new
Intergovernmental Conference on enlargement-related issues will be convened by the end of this year.
In this regard, as provided for in the Treaty on European Union, the Eurosystem would stand ready to
take part in any initiative taken by the competent EU institutions on issues falling within its
competence. Such institutional adjustments should be without prejudice to the fundamental features of
the Statute of the ESCB, namely the Eurosystem's mandate and its independence.
The Eurosystem is closely monitoring developments in accession countries, which are directly related
to its own areas of competence. Of course, this is done in cooperation with the countries concerned. A
network of contacts has been established with the relevant central banks, and several bilateral and
multilateral meetings have been convened in recent months. This process will be intensified over the
coming months and years, with a view to deepening cooperation in areas of mutual interest. In this
regard, I should like to mention the high-level meeting with the central banks of the accession
countries to be held in Helsinki next month.
Let me now turn to the role of the euro, the ECB and the Eurosystem in the world economy.
3. The role of the euro, the ECB and the Eurosystem in the world economy
The introduction of the euro certainly represents one of the most profound changes in the international
monetary system since the collapse of the Bretton Woods system in the early 1970s. The euro is the
currency of an economic area with a population of nearly 300 million people and one-sixth of world
GDP, which is significantly higher than that of Japan, although smaller than that of the United States.
The euro area is the largest trade partner in the world economy with a share of 20.1% in world exports,
followed by the United States with a share of 16.3% and Japan with a share of 7.6%. Given these
facts, it is stating the obvious to say that the euro and the Eurosystem are likely to play an important
role in the world economy.
By reducing the number of key players in the international arena and by strengthening the awareness
of each player to take up its respective responsibility, the euro will contribute - over time - to
facilitating international cooperation. But the transfer of competence for monetary policy from the
national to the Community level also implied that new arrangements had to be found in order to allow
the Eurosystem to participate and represent the euro area in matters of its competence.
Devising the appropriate arrangements was complicated because of two specific features: the first
relates to the fact that membership in different fora (for example, the G7 or the G10) varies across euro
area Member States. The second derives from the fact that full membership in intergovernmental
institutions such as the International Monetary Fund (IMF) or the Organisation for Economic
Cooperation and Development (OECD) is restricted to countries only. Therefore, in all of these
instances, specific arrangements had to be devised in order to provide for the representation of the
Eurosystem and the ECB. We have now reached formal and informal agreements with the IMF, the
OECD and the Bank for International Settlements (BIS) as well as in the G7 and G10 context. Let me
briefly comment on two of these arrangements:
• In December last year, the ECB was granted permanent observer status in the IMF. This was
a particularly important step. The IMF, as the cornerstone of the international monetary
system, plays a key role in the process of multilateral surveillance of economic policies. The
ECB Observer attends all meetings of the IMF Executive Board that are of relevance to the
Eurosystem, such as discussions on multilateral surveillance or the Fund's surveillance of
euro area monetary and exchange rate policies. As far as the Interim Committee of the IMF
is concerned, which has recently been given the new name of the "International Monetary
and Financial Committee", the President of the ECB participates in its meetings as an
observer.
• Regarding meetings of the G7 Finance Ministers and Central Bank Governors, it was agreed
that the President of the ECB will be the sole representative of the Eurosystem in discussions
on multilateral surveillance and exchange rate issues. This part of the G7 meetings will also
be attended by the Presidency of the Euro-11 Group.
These arrangements will enable the Eurosystem and the ECB to participate fully in international
cooperation. This is all the more important since the international agenda contains important items for
the future. The generally improved outlook for the world economy should not lead to complacency
and to a diminishing of the reform efforts initiated in the aftermath of the financial crises of the past
two years. Strengthening the architecture of the international financial system remains an important
topic on the international agenda. The financial crises in Asia, Russia and Brazil, with risks of
contagion to other emerging market economies and spill-over effects into capital markets of matured
economies (e.g. LTCM in the United States), highlighted the need substantially to improve the ability
to prevent and resolve crises. Against this background, a wide range of proposals was put forward and
reviewed. One important aspect concerns the strengthening of the soundness of the banking systems
and of regulatory and supervisory frameworks in emerging market economies. Another reform
initiative relates to the transparency of the private and public sectors. The main objective here is to
improve available information through the elaboration of international standards and codes of good
practices. Further progress in that area will contribute significantly to crisis prevention, since
improved information will enable a better risk assessment by market participants.
The challenge now is to keep the political momentum for reform and to pursue the implementation of
the envisaged measures in order to strengthen the resilience of the international financial system. The
Eurosystem is actively participating in these ongoing discussions. Our focus in these discussions is
clearly on crisis prevention. If, however, another financial crisis was to occur in the future, it should be
handled in a way that will not create incentives for both creditor countries and investors which are
incompatible with the future stability of the international financial system.
Again, the best contribution the Eurosystem can provide to international stability is to maintain price
stability in the euro area. International policy cooperation which goes beyond the exchange of
information and views on issues of mutual interest could easily become counterproductive,
compromising both the Eurosystem's mandate and international financial stability itself.
With the creation of the euro, there has been a renewed interest in the concept of target zones for
exchange rates among the main currency areas, namely the Unites States, the euro area and Japan.
But, in a world characterised by highly integrated and sophisticated international financial markets,
there is serious doubt as to whether target zones for exchange rates are feasible or even desirable. Such
exchange rate targets would imply that domestic policy objectives would have to be subordinated to
external requirements. This would - in certain circumstances - conflict with the primary objective of
price stability and result in a greater volatility of business cycles, as the burden of adjustment would be
transferred to domestic policies and developments.
But the fact that the Eurosystem does not have an exchange rate target does not imply that we are
indifferent to exchange rate developments or that we will neglect them. The exchange rate of the euro
is monitored within the second pillar of our monetary strategy as a potentially important indicator for
monetary policy. If its development poses a threat to price stability in the euro area, the causes of this
development will be assessed and appropriate measures taken.
euro as an international
With regard to the use of the currency, the Eurosystem has adopted a neutral
stance: we will neither hinder nor actively promote the international role of the euro, but leave its
development to market forces. We observe that the euro is already second only to the US dollar as the
most widely used currency in the world, ahead of the Japanese yen. In general, the international use of
a currency is determined by several factors. Private agents may use a currency for international trade
and investment, as well as for pricing and denomination purposes. In the official sector, it is used as an
anchor for exchange rate pegs, for holding foreign exchange reserves and for the conduct of foreign
exchange intervention.
The successful changeover to Stage Three of Economic and Monetary Union (EMU) played an
important role in promoting the role of the euro. During the so-called changeover weekend, the bulk of
bonds, shares and other financial instruments were re-denominated in euro. The same applies to
outstanding government debt. Thus, since the start of EMU, investors have been able without any
difficulty to borrow and lend funds in euro, and to trade their euro securities on the secondary market.
Looking ahead, it is likely that over time international investors will start to hold a greater proportion
of their portfolios in euro-denominated assets than they held in the former national currencies. In other
words, the role of the euro as an international currency is likely to be greater than that of the sum of its
components. One reason why this may be the case is that the economy and the financial markets
backing the euro are large relative to the world economy. In this regard, one of the key elements
influencing the international use of the euro is the creation of a large, liquid and integrated capital
market in the euro area.
As for trade, the existence of a large capital market will also encourage and facilitate the use of the
euro in international transactions. In particular, many euro area exporters and importers, who did not
previously use their own domestic currency for invoicing, may now take the opportunity to do so with
the euro. The same tendency could gain ground in those countries that have close economic ties with
the euro area or which have chosen to peg their currencies to the euro.
This brings me to some considerations on the use of the euro in the official sector. Apart from the EU
countries participating in ERM II, a number of countries - mainly in Central and Eastern Europe and
in Africa - have unilaterally decided to peg their currencies either to the euro or to one of its legacy
currencies. Other countries are pursuing managed-float policies, with the euro as the main reference
currency, whereas another group of countries is pegging their currencies to baskets of currencies, such
as the Special Drawing Rights containing the euro. Against this background, the use of the euro is
likely to increase both as an intervention currency and as a reserve currency. As a matter of fact, just
like private international investors, central banks may find it convenient to diversify their portfolios to
incorporate a currency offering broader investment opportunities than its legacy currencies.
Apart from the existence of a large, liquid and integrated capital market, another major prerequisite for
the substantial use of a currency by foreign investors is confidence in the long-run stability of its
purchasing power. In this regard, internal price stability should provide a sound basis for the
development of the euro's external value in the medium term. By maintaining price stability, the
Eurosystem is contributing to the emergence of a solid and stable currency over the medium term,
thereby fostering the euro's international role.
Conclusions
Coming to the end of my speech, let me quote Mark Twain by saying that predictions should be
avoided, particularly those about the future. However, there is little doubt that Europe's agenda for the
immediate and longer-term future will be full of challenging tasks. I have outlined the three areas in
which Europe will have actively to shape its future: the euro area, the enlargement of the EU and its
role at the international level. The fact that these areas are interlinked and that progress will have to be
achieved simultaneously adds to the challenges we are facing. From a more general point of view,
Europe should aim at becoming a stronger partner in international cooperation and, as far as possible,
at speaking with one voice. Such an ideal cannot be realised overnight, but every effort possible
should be made to move in this direction. A stronger, more integrated and coherent Europe is in the
interests of the world at large. In order to be able to play this role on the international scene, Europe
should keep an eye on the rest of the world and, in spite of the many challenges it will face internally
in the years and even decades ahead, it should avoid adopting an exclusively inward-looking stance.