Willem F Duisenberg: The introduction of the euro, the regions and the
accession process
Speech by Dr Willem F Duisenberg, President of the European Central Bank, at the plenary session of
European Union Committee of the Regions, Brussels, 14 November 2001.
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Ladies and gentlemen,
It is a pleasure for me to be here today and to address the plenary session of the Committee of the
Regions. Like many events in the still young life of the euro and my institution, the European Central
Bank, this is in fact a premiere. In recognition of the composition of this Committee and its specific
expertise, I should like to focus my remarks on two key issues, which - I believe - could be of
particular relevance to regional and local authorities. First, I should like to explore an issue that has
received a great deal of academic and media attention, and which could be considered particularly
relevant from the perspective of regional and local authorities: the persistence of regional economic
differences in relation to a single monetary policy in which - so to speak - one size fits all. Second,
allow me to address some of the challenges connected with the forthcoming enlargement of the
European Union and the eventual entry of the new Member States into the euro area.
But before doing so, let me emphasise that the introduction of the euro banknotes and coins is - at the
moment - the most important challenge for the ECB and the national central banks (NCBs) of the euro
area. The euro banknotes are currently being produced by 15 different printing works throughout
Europe, including those of a number of NCBs. By the end of October 2001 over 13 billion banknotes
had been produced - that is, significantly more than the 10 billion expected to enter circulation at the
beginning of next year. The printing works are currently producing logistical stocks for the purposes of
the changeover.
In order to ensure the smooth introduction of the euro banknotes and coins and the efficient
withdrawal of national banknotes and coins, the logistics of the 2002 cash changeover have been
determined well in advance. Within this general framework the changeover scenario is a national
responsibility, in accordance with the principles of subsidiarity and decentralisation.
The Eurosystem is well aware of the importance of achieving a smooth cash changeover in order to
maintain both public and financial market confidence in the single currency. One of the main concerns
expressed about the cash changeover is the need for retailers to hold large amounts of cash during
the first few days of 2002. In order to address this concern, a substantial number of measures are
being implemented at the national level.
While a successful cash changeover is an immediate concern - and thus naturally at the centre of
current public and media attention, - we should also bear in mind some of the longer-term challenges
involved in making Economic and Monetary Union and the euro a lasting success. In this context, the
relationship between the single monetary policy and the presence of regional economic differences in
the euro area is probably of particular relevance and, in my view, also a topic of common interest to
our institutions.
The Treaty establishing the European Community unambiguously lays down that the overriding
objective of the single monetary policy is to maintain price stability in the euro area. This reflects the
notion that the best contribution that monetary policy can make to sustainable long-run economic
growth and rising standards of living is to maintain price stability.
A single monetary policy which is successful in fulfilling this objective will not necessarily imply that
euro area regions or countries will always display similar price developments. Divergence in price
developments across various regions or countries is a normal phenomenon in monetary unions. Such
differentials in price developments represent relative price changes, which do not affect - and are not
affected by - monetary policy.
Given the existence of a single monetary policy in the euro area, the ECB's monetary policy can only
have an impact on the price level for the euro area as a whole. This is true irrespective of the number
of countries or regions that are part of the euro area. This implies that the ECB's monetary policy must
focus on price stability in the euro area as a whole.
However, it is important to understand the sources of differentials in the rates of price changes among
countries and regions in the euro area, since they may affect citizens' welfare and require national or
regional corrective measures.
One source of divergence in the rates of price changes across euro area countries or regions, which is
often quoted in public debates, relates to the "catching-up processes". We can witness such a
catching-up process when a country or a region starts from a lower level of productivity - and thus
income per capita - compared with other economies participating in EMU. During the transitional
period, there may be faster productivity growth in sectors exposed to international competition in the
catching-up economies than in the more mature economies. This, in turn, might be associated with
faster price increases in the catching-up economies. This is a normal phenomenon within a monetary
union and is not in itself a cause for concern. In this respect, I should like to stress that a substantial
process of convergence in per capita income has already taken place in the euro area over the last
few decades.
Another source of divergence in the rates of price changes across euro area countries or regions may
arise when countries or regions are affected by economic or policy shocks which are different in their
nature or timing, or when, due to different economic structures, local economies respond differently to
a common shock. One example of this would be a change in the oil price. Although this is a common
shock to the whole euro area, countries and regions in the euro area can be affected to a different
extent, depending on their particular demand for (or supply of) energy.
As differences in economic structures across countries are likely to remain in the future too, the fact
that different regions in the euro area will face different economic shocks will be unavoidable. It is
therefore crucial that national and local authorities have all the measures in place to facilitate a smooth
and efficient adjustment to economic developments that affect countries and regions differently.
One important equilibrating mechanism in response to such shocks is fiscal policy, through the
operation of automatic stabilisers and the adoption of specific measures in the case of adverse shocks
at the regional and national level. However, this requires sound budgetary positions over the medium
term in accordance with the Stability and Growth Pact. In this context, allow me to emphasise the
responsibility of regional and local authorities to make an important contribution to the consolidation of
public finances by exercising control over public expenditure.
Another important adjustment mechanism is mobility in the factors of production. The process of
European integration has already led to a significant convergence of financial and capital markets and
capital is now highly mobile at the international level. However, labour continues to be barely mobile
within many euro area countries and almost immobile between countries.
To this end, it is crucial - and I should like to encourage you - to make as much progress as possible
in the introduction and acceleration of structural reforms aimed at increasing mobility, promoting
flexibility in price and wage settings, enhancing competition and reducing distortions in product and
labour markets. Without these reforms, the loss of competitiveness deriving from rigidities will become
a source of national, or regional, unemployment and inefficient under-utilisation of resources. Stronger
competition and the removal of structural rigidities will increase the flexibility of the economy and lower
the adjustment costs associated with asymmetric shocks affecting one particular country or region.
Although considerable progress has been made, much remains to be done.
Ladies and Gentlemen, allow me to also stress the importance of your role in contributing to informing
European citizens about the dangers caused by divergences in price developments across countries
or regions, which might arise as a result of excessive wage increases or the unsustainable expansion
of profit margins at the local level. The more such developments become entrenched in the economy,
the more they will lead to a loss in competitiveness and, eventually, to a loss in output and
employment in the respective economies.
Clearly, our efforts to make the euro a success will require all of us to master - at home - the
challenges which I have outlined. However, the European Union, and also the euro area, face an
important external challenge - and this brings me to the second topic of my presentation: the EU
accession process and the subsequent enlargement of the euro area. The fact that your Committee
has established a liaison group with applicant countries bears witness to the substantial implications
which enlargement will have not only for a central bank but also for representatives of regional and
local authorities.
As you are well aware, to date 12 countries from central, eastern and southern Europe are involved in
negotiations to become members of the EU and, ultimately, also of the euro area. The integration of
such a large number of new countries into the European Union - which would imply almost a doubling
of the current number of Member States - will be an enormous task for both sides and be without a
precedent in history.
As I have just said, accession to the EU also entails significant implications for the economies of the
accession countries themselves. For them, the main priority is indeed to foster the convergence
process with the EU, both in real and in nominal terms. Thus, accession countries are aiming to
achieve the European Union's standard of living, while at the same time seeking macroeconomic and
financial stability. This process will entail profound and comprehensive adjustments in their real
economies as well as in the careful design of sound economic policies.
Undoubtedly, significant progress has already been made in this respect. A substantial reallocation of
resources, a strong reorientation of trade links towards the EU, a complete institutional overhaul and a
sizeable development of the private sector are the most obvious signs of systemic change. However,
these achievements should not give rise to complacency but rather be taken as motivation for further
structural reforms. These reforms are needed in accession countries in order to further transform their
economies into fully-fledged market economies, so as to enable them to cope with competitive
pressures and provide the conditions for sustainable and non-inflationary growth. Given the positive
impact of structural reforms on those countries' disinflation processes, there appears to be no
contradiction between real and nominal convergence. Thus, both objectives should be pursued in
parallel and the emphasis should not be focused on one target at the expense of the other.
In the context of real and nominal convergence, I should like to emphasise the important role played
by sound fiscal policies. Although we judge the overall fiscal policy stance as being broadly
satisfactory in most accession countries, budgetary consolidation efforts in some countries appear to
have experienced a recent setback. In these few cases, a strengthening of efforts to return to the path
of sound fiscal policies is crucial. A determined pursuit of fiscal consolidation is all the more necessary
as the accession process and the completion of the transition phase are likely to place further
demands on the budgetary situation, for example in relation to higher infrastructure investments or
future reforms of the accession countries' health and social security systems.
Ladies and Gentlemen, I should like to conclude my presentation by answering one of the main
questions which usually arises when a representative of the ECB talks about enlargement: will the
accession process have consequences for the conduct of the single monetary policy? The answer is
no. As I have already argued with regard to the issue of monetary policy and regional differences, the
ECB's monetary policy can focus only on maintaining price stability in the euro area as a whole,
irrespective of the number of regions or countries forming part of the euro area. Furthermore, the
definition of price stability, as adopted by the ECB, should be seen as a lasting quantification of its
primary objective. The purpose of a definition is that it should remain valid as a consistent and credible
point of reference over time and in different circumstances.
Ladies and gentlemen, it has been a pleasure to be able to use this brief presentation to convey the
perspective of a central bank on topics that are also of great interest to the Committee of the Regions.
Thank you very much for your attention.