Mr Schieber looks at the significance of the euro for Germany and the Bundesbank
Speech by Mr Helmut Schieber, a Member of the Board of the Deutsche Bundesbank, at the
Euro-Forum hosted by the Club de Banqueros, Mexico, on 10 March 1999.
- I -
The entry of eleven countries into Stage Three of European monetary union on January 1,
1999 has introduced a new era of monetary policy in Europe. Germany is one of the initial
participants and has, since the beginning of the year, subordinated itself - abdicating a
sovereign right in the process - to the single monetary policy of a supranational central bank.
In the following, I will look at the opportunities as well as the problems and risks of monetary
union from the German point of view, and especially from the point of view of the
Bundesbank.
- II -
The decision to participate in European monetary union was especially difficult for Germany.
On the one hand, the European unification process has had Germany's broad political support
since the end of World War II. The integration successes achieved in Europe since the 1950s
were mainly in the economic sector. From the development of the European Coal and Steel
Community in 1951 to the founding of the European Economic Community and the creation
of the single market to the establishment of the European Monetary System and the signing of
the Maastricht Treaty, Germany has always been a motor of European union.
On the other hand, Germany found it very difficult to part with the Deutsche Mark. The
Deutsche Mark was a symbol of the "economic miracle" of the post-war era and of Germany's
self-image as a nation. Germany's increasing importance in Europe and the world is reflected
in particular by the ascent of the Deutsche Mark to the second most important international
reserve, transaction and investment currency after the US dollar. This explains the particularly
critical dialogue among politicians, in public as well as in business and finance in Germany,
concerning the path to EMU laid down by the EC Treaty. The debate centred around concerns
that monetary stability would be jeopardised. Stability ranks extremely high in Germany's
order of priorities, with hyperinflation having wiped out the currency twice this century,
followed by currency reforms and their horrible political, social and economic consequences.
Against this background, the debate on economic and fiscal convergence and the group of
participating countries was especially heated in Germany.
- III -
Now, a good two months after the changeover to the euro, initial experience with the new
currency in the international financial markets can be evaluated. The changeover to Stage
Three of EMU, which posed an extraordinary technical and operational challenge to all
financial market participants, was an unqualified success. Despite the technically complex
task at hand, there were no serious malfunctions. Much to the relief of the financial market
participants, the convergence of interest and exchange rates took place even before the euro
was launched. The speculative attacks against the euro which many people were afraid would
happen did not come to pass. The money market rates converged towards the low level of the
core countries, which was set by means of the coordinated interest rate reduction by the
central banks of the Eurosystem in December 1998. All in all, the smooth transition from the
national currencies to the euro can be regarded as a sign of the high quality of the preparations
made by the central banks and the private financial market participants - and as public
recognition of the hitherto successful convergence process of the partner countries.
- IV -
Confidence in the role and the work of the ECB is rising within the German population. The
decision to locate the European Central Bank in Frankfurt and the composition of the
Governing Council with Wim Duisenberg as President stand for a tradition of
stabilityoriented monetary policy. After all, the institutional regulatory system of the Eurosystem was
modelled on that of the Bundesbank. The establishment of an independent European System
of Central Banks unmistakably dedicated to the goal of price stability was of the utmost
importance for German residents and politicians. Like the Bundesbank Act, the Maastricht
Treaty only envisages supporting the general economic policy of member states provided this
does not prejudice the objective of price stability.
The Governing Council of the ECB has thoroughly discussed its monetary policy approach
and subsequently presented and explained the results in detail to the public. The ECB has
made it plain that - in line with its mandate - it shall pursue neither an exchange-rate-oriented
monetary policy nor an anticyclical monetary policy. Exchange rates and the business cycle
will certainly be carefully observed, analysed and taken into consideration in the
decisionmaking process, but they do not determine the general orientation of the ECB's monetary
policy. Rather, monetary stability as the primary goal of the ECB shall be ensured by
regulating the growth of the money stock, with the aid of interest rate policy, in a way that, on
the one hand, enables the full exploitation of the available scope for growth and, on the other,
prevents inflationary developments.
Here, it becomes evident that as far as the intention of the ECB is concerned, the strategy
chosen is similar to that of the Bundesbank. In the light of the uncertainty prevailing in the
new currency area, at least at the beginning, however, the Governing Council of the ECB has
not set an explicit monetary target, but rather confined itself to determining and releasing a
somewhat less binding reference value. Anyway, and as a reassurance to the politicians
worried about the business cycle, this type of monetary policy has an automatic and clearly
anticyclical component.
Looking at the Eurosystem's monetary policy instruments and procedures, there are also
strong parallels to the instruments of the Bundesbank.
All in all, it is apparent that both the institutional and organisational structure of the
Eurosystem and the choice of the monetary policy strategy and instruments have contributed
to achieving continuity in monetary policy. The stock of confidence gained by the ECB has
helped to limit the prevailing fears and doubts concerning EMU, especially in Germany, so
that today more and more residents are regarding the European Central Bank as a worthy
successor to the Bundesbank.
- V -
What, then, are Germany's expectations of the transition to a single currency in Europe?
Much has been written and debated about the opportunities and risks of this step: the
introduction of the euro is certainly more than simply exchanging one medium of payment for
another. The euro will no doubt also have real economic consequences, and it constitutes a
new element in the international monetary system.
European monetary union eliminates exchange rate fluctuations among the currencies of the
participating countries, thus doing away with a substantial element of volatility and
uncertainty. Costly hedging operations against exchange rate fluctuations and high exchange
costs have become obsolete; cross-border trade can expand without being held back by
currency market uncertainties, therefore stimulating the real economy. Large enterprises and
financial institutions, in particular, are hoping that the elimination of foreign exchange rate
risks and the direct price comparison of input and output factors will present new market
opportunities. This home base free of monetary uncertainties presents great advantages,
especially for the German economy, because more than half of all German exports go to our
European neighbours.
It is therefore somewhat difficult to understand why a new debate has erupted just now in the
euro area on the fixing of foreign exchange rates between the large currency blocs. Stable
exchange rates are the result of a stability-oriented monetary and fiscal policy and cannot be
achieved by interventions. If the central banks were assigned an exchange rate target in
addition to the objective of price stability, considerable conflicts could arise between these
two objectives, a point that has been proved especially by events in Asia and Latin America
over the past few years.
Of course, this does not imply that exchange rate developments must not be carefully
monitored and taken into consideration while shaping monetary policy. The exchange rates
are an important element of inflation forecasting because they help determine the climate of
stability through the import prices, and the state of business activity through foreign trade.
Therefore exchange rates must be taken into account when considering monetary policy
(alongside the dominant role of monetary growth), yet must not serve as an end unto itself.
- VI -
Whether the introduction of the euro will, over the medium term, result in a rearrangement of
the international currency interrelations depends considerably on whether the euro will be able
to achieve a stronger position in the international monetary system than the sum of the eleven
member currencies. From the present perspective, it is not possible to give a definite answer to
this question. In terms of population, economic performance, and their respective share of
world trade, the euro area and the US are very similar. Only the use of the euro as a
transaction, investment and reserve currency will indicate future developments. This area
presents a large scope for growth for the euro because the previous European currencies were
relatively underrepresented, in comparison to the US dollar, in all of the above uses.
The creation of a common European financial market, in particular, promises a huge potential
for the euro's growth. Broader and deeper market structures, high levels of liquidity and
transparency and expected increases in efficiency are attracting international investors and
issuers. To be sure, the rupturing of monetary segmentations will not automatically create a
fully harmonised capital market in Europe. There will continue to be differences regarding the
established structures. However, the innovation process begun in the past few years at
financial institutions and in the financial markets shows that all parties concerned have
recognised the challenge and are rising to it.
- VII -
The introduction of the euro alone is no guarantee, however, of the positive developments I
have described. Rather, this raises the question of what problems and risks monetary union
harbours, seen from the German perspective. Extraordinary developments in economic
activity or structural circumstances such as different cost trends for wages, taxes and social
security contributions, different manufacturing structures, diverging trends in corporate
financing and differences in the national transmission channels of monetary policy can alter
the effect of monetary policy measures on the real economy. In future, under a common
exchange rate and monetary policy with identical official interest rates and an identical
liquidity supply, these differences among the participating countries can only be countered by
means of flexible national fiscal, structural and wage policy measures.
It is, of course, tempting for the politicians and social partners, caught up in their many daily
conflicts and confrontations, to call for a more expansionary monetary policy, as this will
seemingly enable an easier solution of conflicts. Yet monetary stability is - especially from
the German perspective - precisely the purpose and worth of an independent central bank
insulated from the multitude of political conflicts, as has been so convincingly laid down in
the Maastricht Treaty. Solving problems at the expense of monetary stability is invariably an
exercise in self-deception, with many counterproductive results. Inflationary monetary policy
exacerbates growth and employment problems instead of solving them, at least over the
medium term.
The unbearably high unemployment rate in large parts of Europe presents the key economic
policy problem from the German perspective, too. A full employment equilibrium in the
participating countries is characterised by varying national labour costs corresponding to
national labour productivity. Thus, a rapid equalisation of the nominal wages in the
participating countries is not realistic, as the unemployment rate threatens to continue rising in
countries which raise the wage level above the level of labour productivity. Increases in
negotiated wages and settlements should therefore conform to the national employment
situation and the growth rate of labour productivity. These considerations lead to the
conclusion that it does not make sense to harmonise the pay-rate policies within Europe. This
would complicate the necessary variation of wages in the euro area and impair the necessary
flexibility of wage structures.
Thus, for the euro to be a success, it is imperative that these inevitable consequences of the
single currency be understood and accepted by all participating countries and that the
necessary measures be carried out. A single European monetary policy which cannot make
exceptions for special national developments and interests must be accepted and taken into
consideration in the shaping of national economic and fiscal policy. The implementation of a
supranational European monetary policy will be all the easier the more the independence of
the European Central Bank is respected by the European bodies and especially by the residents
of the euro area. To a very large extent, the basic conditions for a stability-oriented monetary
policy and an independent central bank in Europe have been fulfilled. It is now up to those
taking action to determine how this framework is filled out and implemented. There is
certainly cause for optimism. The governors of the participating central banks and the
Members of the Board are in accord that they must, from the beginning, operate as
representatives of the euro area and its single currency and not as advocates of their nations.
- VIII -
All in all, the euro has had a relatively smooth and promising start. Despite a trend to
weakening on the foreign exchange market - due mainly to an increase in the spread of
interest rates between Europe and the US - it has increasingly gained acceptance on the
financial markets, but also among the residents.
However, the range of questions and risks presented above shows that European monetary
union, which does not go hand in hand with an adequate political union, is an unparalleled
experiment. For it to succeed, it will require a high degree of political discipline on the part of
all participants. Only the future can show whether giving up the Deutsche Mark for the euro
was, in the long run, the right decision.