Lucas Papademos: The new EU member states - convergence and stability
Opening address by Mr Lucas Papademos, Vice President of the European Central Bank, at the Third
ECB Central Banking Conference "The new EU Member States: convergence and stability", Frankfurt,
21 October 2004.
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Ladies and Gentlemen,
"This is the third time. I hope good luck lies in odd numbers." So wrote William Shakespeare, and I am
quoting him as a fitting reference for our conference: This is the third ECB Central Banking
Conference to which I welcome you all. After the ECB conferences in the years 2000 and 2002,
entitled, respectively, "Why price stability?" and "The Transformation of the European Financial
System", we chose as the topic of this year's conference "The new EU Member States: convergence
and stability". I speak on behalf of all my colleagues on the Executive Board and all ECB staff involved
in the preparation of this conference when I say that we are delighted to host such a distinguished
group of academics and policy-makers here in Frankfurt.
Obviously, in 2004 - the year of the historic enlargement of the European Union with ten countries of
Central, Eastern and Southern Europe - our theme is a very topical one. For that very reason it is also
a difficult one: a plethora of academic conferences and gatherings of policy-makers have examined
the issues related to EU enlargement. That said, I believe that the subjects and the quality of the
papers to be presented, the impressive expertise and experience of our speakers, discussants,
chairpersons and panellists will provide a particularly "fertile ground" to nurture fruitful debates,
enhance our understanding and generate new ideas regarding the topics we will address.
So what can we look forward to today and tomorrow? The headings of the three sessions provide the
framework to structure our discussions.
1. After enlargement - where do we stand?
We will start off by devoting this afternoon to the economic and structural transformation of the new
EU Member States. And I am very grateful indeed that Christian Noyer has kindly agreed - at very
short notice - to replace Eugenio Domingo Solans (who unfortunately could not join us) as chairman of
this session. On the basis of the paper by Gérard Roland, we seek to ascertain where the new EU
Member States stand today, with regard to nominal and real convergence, and in particular their
institutions and market structures. I find it very useful that such a comprehensive stock-taking exercise
is undertaken at this moment in time, since the accession of these countries to the Union is a distinct
step marking the beginning of a new phase in their economic and monetary integration within the EU.
Looking back over the past years, it is obvious that the new EU Member States have made
remarkable progress in terms of macroeconomic stabilisation. Eight of them transformed their planned
economies into market economies and integrated them through trade and financial relations with the
euro area. The prospect of EU accession and future euro adoption has already served as a powerful
focal point and driving force for economic, monetary and exchange rate policies and has guided
policy-makers as well as market participants. In that process of transformation from planned to market
economies, "institutions" played a key role - and here I understand "institutions" in a broader sense as
also encompassing appropriately-designed policy frameworks. Countries that have established high
levels of political and civil liberties and the effective rule of law have made significant progress in the
crucial area of institution building. The existence of well-designed policy frameworks has also been
conducive to achieving a high degree of sustainable nominal convergence, which is the essential
prerequisite for the eventual adoption of the euro by the new EU Member States. If we look at the data
for inflation, long-term interest rates, and fiscal positions, it seems that already a number of the new
EU countries would fulfil - at least some of - the Maastricht criteria.
But, of course, all the Maastricht criteria for nominal convergence must be fulfilled and in a sustainable
manner. Moreover, it is also important to aim at real convergence - structural and institutional - as real
GDP per capita levels in the new EU countries are still well below those in the euro area. Even though
progress has been achieved in the areas of privatisation and product market deregulation (with the
exception of utility prices) and today the relative size of different sectors (agriculture, industry and
services) and the distribution of employment have converged towards EU levels, we cannot deny that
there are still large differences.
A number of issues could be raised in this context, for instance, with regard to labour markets and the
development of the financial sector. I believe, however, that the core message remains the same: a lot
has been achieved, but many issues still remain to be tackled. Assessing the current situation and
establishing in which fields further action will be required - be that with respect to further trade and
financial integration, to intra-industrial specialisation or to fiscal consolidation - is of paramount
importance, especially to policy-makers.
2. Economic and monetary integration
The second session tomorrow morning is devoted to international linkages and the macroeconomic
performance of the new Member States, by looking at the interrelation between the processes of
integration into the EU-25 and into the global economy. This may seem as a rather specific angle from
which to analyse the enlargement process. But it is one that I find particularly important, not least since
it counteracts the assertion on the part of some international observers that the EU is "obsessed with
its own internal dynamics".
Over the past two decades, the world economy has become increasingly integrated. The new EU
member countries are particularly striking examples of this process. Those of them which were part of
the former Soviet economic sphere used to form a largely isolated trade bloc, with few interactions
with the world economy. Today, these countries export and import more than two-thirds of their goods
and services to and from the rest of the world. They also attract significant amounts of foreign
investment. Openness and international integration can lead to a dramatic improvement in economic
performance through the introduction of new technologies and access to larger markets. The paper by
Douglas Laxton and his co-authors provides interesting insights and helps to estimate some of the
dynamics that are at work. At the same time, international integration places significant demands on a
country's economic, political and social institutions. In this context, three principal subjects would
deserve, in my view, particular attention: trade, capital flows and labour mobility. I would expect that
the conceptual approaches in understanding the phenomena that we are observing, as well as the
concrete policy challenges related to these subjects will take centre-stage in the discussions
tomorrow.
3. Macroeconomic adjustment, convergence and the role of policy
The third session tomorrow morning as well as the policy panel in the afternoon will address the
questions which are probably closest to home for central bankers: What is the role of national policies,
both at the micro and macro levels, in the process of economic adjustment? What are the key policy
challenges for the new Member States on the road to euro adoption? And, looking ahead, what is
required to ensure a successful participation in monetary union of any future new entrants into the
euro area?
The paper by Jürgen von Hagen provides a comprehensive treatment of the issues at stake and will
serve as a good basis for discussion. Allow me to whet your appetite for these issues with a few
preliminary thoughts.
Clearly, short-term and medium-term economic prospects depend on factors such as the stance of
fiscal or monetary policy, the movements in commodity prices and/or global economic activity.
However, the degree of long-term economic success is ultimately determined by the progress in
structural and institutional reforms. These include, for instance, the creation of a business environment
conducive to investment and entrepreneurial initiative; incentives for the formation of human capital;
investment in education and research; competition policy; and appropriate policies concerning labour
markets and social security systems. These are significant issues that deserve attention, and not only
in the EU Member States that seek to adopt the euro in the future, but also in the current euro area
countries.
On the road to the euro, convergence and stability are key objectives - hence the title of our
conference. I view real and nominal convergence as interdependent processes, which can be mutually
reinforcing. Indeed, by fostering real convergence through structural reforms, thereby improving the
supply-side of the economy through enhanced flexibility in goods and labour markets, nominal
convergence will also be enhanced. Likewise, by advancing nominal convergence, anchoring inflation
expectations and reducing the inflation bias, prospects for economic growth and thus real
convergence will improve. The role of macroeconomic policies in general, and the stability-oriented
policy framework of the Union in particular, is to make sure that the dynamics of the economic,
financial and monetary integration process do not jeopardise an orderly convergence process. It is in
this light that participation in the ERM II and the fulfilment of the Maastricht convergence criteria
should be seen.
EU membership is not sufficient to ensure continued economic success and real economic
convergence of the new EU countries with the older Member States. There is a risk that reform fatigue
will set in after EU accession, because the incentive for reform may no longer be as strong as before.
At the same time, I would expect further pressures for reform to come from increased competition
within the Single Market which is now confronting domestic producers; from the limitations on state aid
and public subsidies that are laid down in the acquis communautaire and are applied by the European
Commission; and from the constraints on macroeconomic policy which derive from the objective of all
new Member States to adopt the euro.
To what extent these expectations are justified and, more importantly, what can - or should - be done
in order to address the challenges accompanying these processes of economic adjustment and
structural reform will be discussed tomorrow. Given that the policy panel will consist of high-calibre
policy-makers from both old and new Member States and from EU institutions, one does not have to
be a follower of the rational expectations hypothesis to anticipate a lively debate, be that on labour and
product market reform; on financial sector policies; on monetary and fiscal policies; or on exchange
rate policy and the merits of ERM II membership.
Ladies and Gentlemen,
As I said at the beginning, this is the third time - the third time the ECB is organising a Central Banking
conference. And I hope there is not only good luck in odd numbers. I also hope that our third
conference will again offer a valuable forum to have intellectually stimulating debates, exchange
insights, generate new ideas, and enhance the good contacts between central bankers and academia.
Judging by the experiences of the first two conferences, I have every reason to be confident.
Thank you very much for your attention.