Christian Noyer: First experiences with the euro
Speech by Christian Noyer, Vice-President of the European Central Bank, delivered at the
International Center for Monetary and Banking Studies, held in Geneva, on 20 March 2001.
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Ladies and Gentlemen,
I am pleased and honoured to be able to speak to such a distinguished and varied audience today. I
am sure you will appreciate in what an exciting and important time we are living. In slightly more than
nine months, the euro banknotes and coins will be in the hands and pockets of all citizens of the
participating Member States. The euro will thus become tangible in the personal dealings of 300
million Europeans and cease to exist only on computer screens or in the press headlines. Travelling
from the sunny islands of the Mediterranean to the icy lakes of Scandinavia will no longer require any
stop at a bureau de change. This is no little achievement, to my mind.
While the introduction of euro banknotes and coins will certainly bring about a quantum leap in
people's acceptance of the euro and change their psychological attitude towards it, we should not
forget that a great deal has already been done and that Monetary Union is already fully-fledged reality.
I am by no means an impartial observer, but I think that the first two years of Monetary Union have
been a success. I hope to have convinced you of that by the end of my talk. The euro - the crowning
achievement of the Single Market programme - has de facto created a common market of 300 million
consumers, one of the two most important economies in the world. This reinforces the possibilities for
producers to exploit the economies of scale that - at least since the work of Adam Smith - are
regarded as one of the main engines driving economic growth and technological progress.
Competition is being fostered and will be fostered even more in the future by the increased price
transparency that the introduction of euro banknotes and coins will bring about.
During the first two years of Economic and Monetary Union (EMU) in Europe, we have dealt with the
difficult task of consolidating a new central bank, the European Central Bank (ECB). This has been by
no means easy, also because the ECB plays a role of global importance and is continuously in the
limelight of public attention. In my view, the ECB has proved to be very well equipped to tackle the
challenges it is confronted with in a successful manner. An important contribution to this is to be
attributed to the drafters of the Treaty, who have devised an institutional setting which is optimal for
the maintenance of price stability and the achievement of high levels of economic growth and welfare
in the euro area. I will come to that in a moment.
The transition to Stage Three of EMU in 1999 was a complete success from a technical point of view.
A fully integrated euro area money market - an essential prerequisite for a monetary union - was
reality from the very first day of the introduction of the euro. The overnight interest rate, a key indicator
of the monetary policy stance, has been practically the same across the countries in the euro area
since the start of Stage Three of EMU in January 1999. This was certainly not obvious ex ante. It
required a substantial amount of preparatory work, not only by the central banks in the euro area, but
also by other economic agents, most notably the banking sector and the governments.
The main yardstick for any evaluation of the success of the euro is, of course, the maintenance of
price stability in the euro area. This is the ECB's primary objective under the Treaty. The monetary
policy strategy of the ECB was designed in such a way as to ensure the fulfilment of this objective. As
a first element of the strategy, the Governing Council of the ECB defined price stability as "a
year-onyear increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%".
This definition serves to anchor inflation expectations and provides a framework against which the
ECB can be held accountable. Short-term fluctuations in the inflation rate are not under the control of
the central banks. Therefore, it was also announced that price stability is to be maintained over the
medium term, imparting a medium-term orientation to the strategy as a whole. In order to attain the
sodefined objective, the ECB is pursuing what is known as a two-pillar approach. The first pillar is a
prominent role for money. The second is a broadly based assessment of the outlook for price
developments and risks to price stability. Giving money a prominent role in monetary policy analysis is
something quite natural for a central bank geared towards price stability. Inflation is ultimately a
monetary phenomenon. The prominent role for money is signalled by the announcement of a
reference value for the annual rate of growth of the broad monetary aggregate M3. In December 2000,
the Governing Council of the ECB reconfirmed the reference value of 4 1/2% annual growth. While the
reference value plays an important role in monetary analysis, the assessment of the first pillar goes
beyond the evaluation of deviations of M3 growth from the reference value. It encompasses a variety
of approaches which assign a central role to money, as well as a detailed analysis of the components
and counterparts of M3.
Monetary data on their own do not constitute a complete summary of all the information on the
economy required to set an appropriate monetary policy for the maintenance of price stability.
Therefore, in parallel with the careful analysis of monetary variables, a broadly based assessment of
the outlook for price developments and of the various risks to price stability in the euro area plays a
major role in the ECB's strategy. This assessment is made on the basis of a wide range of variables
influencing future price developments. This range includes, inter alia, the exchange rate, wages, unit
labour costs, bond prices, the yield curve, fiscal policy indicators, various measures of real economic
activity, price and cost indices. In addition to an in-depth analysis of the individual indicators,
macroeconomic projections for real GDP growth and inflation are regularly made. While such
projections facilitate the structuring and summarising of some of the individual factors, they can only
provide a partial summary of the state of the economy. Hence they are only one element of the second
pillar. Overall, the two-pillar approach has proven to be successful in the first just over two years of
Stage Three, which were characterised by an above-average degree of uncertainty. The ECB's
strategy is certainly rather complex, but - at the same time - it has the crucial advantage of
guaranteeing that no piece of relevant information is left out in the policy analysis.
Regarding actual price developments, we have to admit that, after very moderate inflation in 1999,
HICP inflation has been standing above 2% since June 2000. However, this is due mainly to direct
effects stemming from the external oil price shock. Such a shock cannot be prevented by monetary
policy. It is very positive under these circumstances that the public's trust in the ability and willingness
of the ECB to maintain price stability has never faded. This is signalled, for instance, by the low and
stable inflation expectations implicit in long-term interest rates. A high level of anti-inflationary
credibility has been obtained in no easy times, which were characterised by an increase in headline
inflation in the euro area in 2000 due to the oil price shock and the protracted depreciation of the euro.
This is important, especially in view of how oil price shocks in the not too distant past have sparked
long periods of higher inflation in Europe. In the long run, of course, there is no substitute for a track
record of price stability to bolster monetary policy credibility. This is what the ECB has been and will be
consistently aiming for. From this perspective, it is clearly too early to come to an assessment after
only two years of experience.
The outlook for the euro area economy remains positive at the current stage. Real GDP growth was
relatively strong in 2000. However, output growth was lower in the second half of last year than in the
first. At the same time, the overall level of confidence in the euro area has remained high. Economic
indicators relating to developments around the turn of the year support the view that economic growth
will remain fairly robust. The high overall rate of capacity utilisation, continuing employment creation
and lower unemployment should contribute to supporting investment and consumption. Looking
ahead, for this year and 2002, we continue to expect that positive fundamental factors such as
favourable real disposable income developments and long-term financing costs will underpin growth in
domestic demand. At this juncture, there are no signs that the slowdown in the US economy is having
significant and lasting spillover effects on the euro area. Nevertheless, the deterioration of the external
environment of the euro area constitutes an element of uncertainty, against the background of which
growth prospects in the euro area should be carefully monitored. As regards the medium-term outlook
for price stability, risks appear to be more balanced than in late 2000, mainly due to the moderation of
monetary growth.
The credibility of the ECB has also been fostered by the sound institutional setting envisaged in the
Treaty, as I have just hinted at some minutes ago. In particular, the clear assignment to the ECB of the
task of safeguarding price stability and its independence are important in this respect. This is
facilitated by the fiscal discipline brought about by the Stability and Growth Pact and by the "no
bailout" clause in the Treaty. The Stability and Growth Pact requires government budgets to be close
to balance or in surplus in normal circumstance. The soundness of fiscal and monetary policies
represent the cornerstone of an institutional setting which should foster non-inflationary growth in
Europe in the future. It is important to recall that the design of this setting took stock of decades of
historical experience and of academic research; in short, it took advantage of a long, cumulative
process of learning.
The euro has become one of the two most important currencies in the global economy in a short
period of time, as is signalled, for example, by the massive issuance of euro-denominated bonds
worldwide. This position has been facilitated by the economic weight of the euro area in the global
context. Some commentators have pointed out that the international role of the euro accrues to the
ECB's mission and gives it a compelling "global" responsibility. Let me stress that, while the use of the
euro as an international currency is likely to increase, the Eurosystem (i.e. the ECB and the twelve
national central banks of the euro area) has adopted a neutral stance in this respect. We will neither
hinder nor actively promote the international role of the euro, but leave its development to market
forces. However, by gearing its policy towards the maintenance of price stability in the euro area, the
Eurosystem provides a sound basis for the euro's external value in the medium-term and thereby
indirectly fosters the euro's international role.
Within the euro area, the euro is certainly acting as a catalyst to promote the integration of product and
capital markets. There is evidence, for instance, that the introduction of the euro has led to a strong
increase in corporate euro-denominated bond issues, a segment of the market where Europe was and
is still significantly lagging behind the United States. There is also evidence of an acceleration of the
process of restructuring the banking sector in some euro area countries, although really pan-European
mergers and acquisitions have hardly taken place. Finally, some evidence also points to a reduced
"home bias" in investors' portfolios since the start of Stage Three of EMU. This would be a signal that
the creation of a truly area-wide financial market is on its way.
Despite all these successes, there is of course no reason to be complacent. Quite the contrary, a lot
remains to be done and the right attitude is to roll up our sleeves and go on working. The ECB and the
national central banks of the Eurosystem face many challenges ahead in their efforts to ensure that
the euro will be a lasting success. Let me now deal with some of these challenges.
At the current stage, the most obvious and immediate challenge on our agenda is obviously the cash
changeover, an enterprise of historic relevance that will change the life of 300 million Europeans in a
lasting manner. You will certainly know that after E-day (1 January 2002) the euro and the legacy
currencies will circulate in parallel for at most two months. The euro will become the only legal tender
in the twelve participating Member States. The ECB and the national central banks are actively
engaged on two fronts, the production of the banknotes and the information campaign (the "Euro 2002
Information Campaign"). The introduction of the euro banknotes and coins is an unprecedented
logistical challenge for all the parties involved, since around 15 billion banknotes and 50 billion coins
have to be produced. In order to support a smooth distribution of banknotes and coins, the ECB has
set up procedures for the frontloading and sub-frontloading of euro banknotes and coins inside the
euro area as from 1 September 2001. We are all well aware of the fact that there will also be a
considerable demand for euro banknotes by non-euro area residents. Therefore, the Governing
Council also decided on some general principles for the distribution of frontloaded euro banknotes
outside the euro area.
The "Euro 2002 Information campaign" is aimed at familiarising the general public with the new
currency and at making sure that the euro banknotes and coins are well received by euro area
residents. The message of our campaign concentrates on four main issues, namely the detailed visual
appearance of the banknotes and coins, the main security features (which will be unveiled in
September 2001), the denominations of the euro banknotes and coins, and the changeover
modalities. Let me assure you that we are taking the introduction of the euro banknotes and coins very
seriously. We are well aware that, in one year's time, the public at large will tend to identify the euro
and the ECB through the uniform image of the euro banknotes. Therefore, next year is of paramount
importance for the public image of the ECB as an organisation.
It should be stressed that the responsibility for the cash changeover does not fall exclusively on the
euro area central banks. Other parties (banks, firms, governments) are also involved in the
changeover. Actually, the Member States have the ultimate responsibility for the changeover, with the
European Commission and the Eurogroup monitoring the whole process. This decentralised approach
is reasonable because it assigns clear responsibilities, favouring an efficient division of labour and
fostering the accountability of all the parties involved.
Looking beyond the immediate future, there are still other challenges. For the ECB, maintaining price
stability is a permanent challenge. Building up a positive track record in this respect will be essential
for its medium-term credibility. Of course, other policy-makers also face a number of challenges. In
particular, it was decided at the Lisbon meeting of the European Council that all possible actions
should be taken in order to make the European economy the most advanced knowledge-based
economy of the world by 2010. The ECB shares the view that this should be the most important
ultimate objective of policy-makers in Europe. Enlarging Europe's growth potential is the main
yardstick for evaluating the pros and cons of different policies. At the same time, the ECB is convinced
- and I think for very good reasons - that the best contribution that monetary policy can make to
sustaining non-inflationary long-term growth is to maintain price stability in the euro area.
Europe's main problems are not of a cyclical nature; its main problem is, in fact, the high level of
structural unemployment. In the first two years of Monetary Union, the euro area countries have found
themselves in the best economic situation they have had since at least a decade, with robust output
and employment growth, low inflation and no major economic imbalances. What is needed now is the
enhancement of the growth potential of the economy over the medium term. The main task remaining
on the governments' agendas is therefore to promote the structural reforms that are essential to
increase the flexibility and competitiveness of the European economies, and to make them more
permeable to the introduction of new technologies and business practices.
The area of labour markets is particularly important if the unemployment rate is to be lowered in a
lasting manner. A well functioning labour market should always ensure that general wage increases
are compatible with the objective of price stability (what I would define as "macro"-efficiency) and bring
about flexibility and an optimal allocation of resources (what I would label "micro"-efficiency). I will
concede that all these matters are not, strictly speaking, related to the euro; they would, very plausibly,
have been on the agenda of European governments anyway. The euro, however, makes them more
compelling, forcing European governments to speak to one another even more frequently and
together to find creative solutions as soon as possible.
Efforts to bring about further integration in the product and capital markets by harmonising regulation
across Europe are also very important. They contribute to making Europe really "one market" and to
providing further economies of scale.
Fiscal developments are monitored very closely by the ECB. We have noted that a number of
governments need to reinforce their efforts to proceed along the path of fiscal consolidation in order to
achieve the objectives of the Stability and Growth Pact. By increasing the level of ambition of their
stability programmes, especially in respect of expenditure restraint, they would free resources for
productive investment and reassure the public with regard to future tax developments, thereby
fostering economic growth.
I have already expressed the view that the ECB's best contribution to economic welfare in Europe is to
maintain price stability in the euro area. The ECB will continue to address governments and other
policy-makers, convinced as we are that monetary policy does not act in a vacuum and that the task of
maintaining price stability is much easier in a flexible and competitive economy. In this regard, we
have taken note that, while some countries have implemented structural reforms, much remains to be
done if the objectives set at the Lisbon meeting are to be attained.
One area where further progress is needed is the integration of the equity and securities markets.
There is still a certain degree of fragmentation in Europe's financial markets. The Eurosystem is
directly involved in the area of securities and settlement systems, because of the repercussions these
may have on the conduct of the common monetary policy. The Eurosystem is also active in ensuring
that retail payments systems are harmonised across Europe. At the moment, cross-border retail
payments cost more and take longer than payments effected within countries; this is incompatible with
a well-functioning monetary union. All these aspects represent important challenges for the
Eurosystem and the financial sector at large.
In conclusion, I hope that my presentation of the challenges the ECB and other European
policymakers are facing has not distracted you from the assessment in the first part of my talk. It is perhaps
useful to restate my main findings. The introduction of the euro has been a notable success, and I am
sure that the euro will contribute to raising economic growth in Europe in a lasting manner.