Klaus Liebscher: The euro - an anchor of stability in the international financial
architecture
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, at the International Financial
and Economic Forum, Vienna, 14 November 2002.
* * *
It is a pleasure for me to be with you today and to address this highly distinguished audience on the
euro and its role as an anchor of stability in the international financial architecture.
Since March 1st of this year, euro banknotes and coins have been the sole legal tender in as many as
12 out of the 15 Member States of the European Union, i.e. for as many as 300 million people. The
completion of monetary integration in those 12 countries, as mapped out in the Maastricht Treaty, truly
represents a culminating point in the process of European integration. With the use of euro cash, the
single European currency has finally become a tangible reality for the citizens of the euro area - part
and parcel of their everyday lives. It is gratifying to note that this historic cash changeover was
completed most successfully with the broad - and often enthusiastic - support of the European
citizens, including the people of Austria, of course.
With the introduction of the euro, the economic weight of this single market has risen to a level
matching that of the USA. Thus, the single currency has gained an important international dimension.
The number of principal actors in the international financial system has now been reduced to three -
the USA, Europe and Japan. At present, Europe is still trying to find its own, distinguished voice in
international financial matters. But it is a fact even now that the introduction of the euro has had a
stabilizing influence in the international financial system, as was successfully demonstrated in the
wake of September 11, 2001.
A number of indicators point to the growing international role of the euro: The euro segment of the
global money market has risen to about 25%. In the bond market, too, the euro plays a crucial role in
fostering a deeper and more liquid market. The introduction of the euro paved the way for issuers to
access a broader base of investors. Investors too have gained access to a wider spectrum of
investment opportunities. The euro's share in net issuance currently amounts to 39%. Regarding its
use as an official reserve currency, the euro has already attained the same weight as the predecessor
currencies.
Within the euro area, Monetary Union has kept member countries from being exposed to harmful
intraEuropean exchange rate tensions of the type that many countries used to suffer when external shocks
occurred. It has become quite obvious that Austria's inclusion in the stability-oriented Economic and
Monetary Union has protected our country from negative shocks much more adequately than was
possible under past regimes. Moreover, the almost four years of EMU bear impressive testimony to
the fact that the stability-oriented interplay between monetary and fiscal policy provides a solid
foundation which was well suited to weathering the economic policy challenges of this period.
The stabilizing effects of the euro, however, go beyond providing an anchor in the exchange rate
regimes of not only EU accession countries but, all in all, about 50 countries within the gravity zone of
the euro area. By providing price stability the euro contributes towards more stability in the
international financial system.
The goal of maintaining price stability over the medium term lies at the core of the independent
Eurosystem's monetary strategy. After almost four years of EMU we can observe that the Eurosystem
has to date performed very well in preserving price stability. The euro area has achieved low inflation
and low interest rates, which should stimulate further investment and contribute to sustainable growth
in the euro area.
In order to ensure stability, the institutional framework of EMU extends beyond monetary policy. A key
ingredient is the Stability and Growth Pact, which intends to promote sound fiscal policies at the level
of individual member countries. By fostering fiscal discipline, it contributes substantially to the
noninflationary growth potential of the euro area. Prudent fiscal policies reduce the debt-to-GDP ratio and,
consequently, the interest burden on governments; they increase investors' confidence in the euro
area, keep interest rates lower than they would otherwise be, and lead to a crowding-in of private
investment.
Therefore it is essential that all member countries remain credibly committed to the framework of
Treaty and the Stability and Growth Pact. In this regard, it is important to recall that fiscal targets
should embody sufficiently ambitious structural consolidation efforts and should also be based on
realistic growth assumptions.
Thus, the current economic slowdown should not distract governments from pushing ahead with
reforms related to the size and structure of public expenditures and revenues, taking into account the
need to create room for tax cuts and to absorb the cost of an ageing population.
Apart from fiscal policy, further structural reform is another improtant ingredient for the success of
EMU, especially in the longer term. Structural reform is needed both for its indirect effects on monetary
policy via the budget, and for its direct effects on the international competitiveness of the euro area.
Competitiveness includes, among others, increasing the flexibility of the labor and product markets
and creating a more efficient tax system that encourages job creation.
As a stable anchor for Europe the euro contributes to the stability of the international financial system.
As the financial system is crucial in the allocation of resources by channeling funds from households to
enterprises, an economic environment in which these functions can be fulfilled smoothly and efficiently
is essential for the welfare of an economy. Financial markets can only work smoothly and efficiently if
they can rely on a complementary legal and regulatory infrastructure. Thus, the economic integration
of financial markets has to be accompanied by the necessary adoptions of regulatory frameworks and
regimes.
In today's globalized world there is no doubt about the importance of a strong and well-regulated
financial sector. The crises that have swept a number of emerging markets in recent years indicate the
dangers that a weak financial sector poses to economic stability. Therefore, the international
community has set a range of initiatives to strengthen the international financial architecture. After all,
global financial stability needs to be promoted through both national action and enhanced international
cooperation.
In the international arena, the IMF has played a central role in the effort to establish internationally
accepted standards and codes as "rules of the game" for the global economy. The IMF and the World
Bank have worked together with central bankers and regulators to develop the "Financial Sector
Assessment Program" as a systematic way to identify weaknesses and sources of vulnerability in
national financial sectors. It is designed to help countries to enhance their resilience to crises and
cross-border contagion, and to foster growth, by promoting financial system soundness and financial
sector diversity. Austria has declared its interest to participate in this program and will thus have its
financial sector systematically monitored with respect to its resilience to shocks.
Let me next turn to the debate about the European regulatory framework. By abolishing national
boundaries and harmonizing different legislations, European integration has fostered the development
of a single financial market in Europe.
The introduction of the euro, the single monetary policy, the existence of a single payment area all
have undoubtedly accelerated and reinforced the process of financial market integration and structural
change as well as the growing process of European financial and banking integration.
However, in the recent past the speed of integration has slowed down. As a case in point, all those
structural factors that the Eurosystem some time ago identified as hampering further financial market
integration are still in place. This is regrettable since the degree of financial market integration in
Europe is still clearly below the level efficiency considerations would suggest. The national economic
policies of the EU Member States are a big obstacle to further integration; in other words, a great
number of regulatory, tax and legal barriers continue to impede stronger financial market integration.
But the current regulatory and supervisory framework still strongly relies on national responsibilities.
The Brouwer Report found that there is a need to enhance arrangements for cross-border and
crosssectional co-operation, to improve the alignment of supervisory practices and to reinforce the
collaboration between supervisory and central banking functions.
The EU's regulatory roadmap to integration is the Financial Services Action Plan. It contains more
than 40 legislative and non-legislative measures. The deadline agreed by the European Council for
implementing the entire Plan is 2005, with an earlier deadline of 2003 for the securities and risk capital
markets.
Considerable progress has been made in recent attempts to implement the Lamfalussy
recommendations in the field of security market regulation. Consistent and efficient implementation of
regulatory rules has been promoted by new institutional arrangements delegating rule-making powers
to a committee or regulators whereas implementation at the national level is undertaken through a
committee of supervisors.
These two examples illustrate that initiatives are under way and debate is ongoing. However, not all of
the recommendations of the Brouwer Report have been implemented and many other issues still need
further investigation and debate. But developments show that we are heading in the right direction.
The increasing integration of the European financial markets is only one further example that
economic policy has become a subject of common interest in the European Union. It also requires
putting financial stability in an EU-wide perspective alongside the still important national point of view.
Accordingly, enhanced cooperation in the field of financial supervision, both nationally and between
EMU Member States, can minimize the risks involved in deepening of financial market integration so
that its indisputable advantages can take effect.
At the national level we have been observing various proposals to reorganize and restructure financial
markets supervision. In Austria, the legal foundations as well as the practice of supervision have been
evolving rapidly to respond to developments in the financial sector, to implement the EU financial
sector directives, and to introduce ongoing improvements in international best practice.
The most visible change in supervision and regulation has been the establishment of a single financial
supervisory agency. Since April 1st, 2002, the Financial Market Authority performs banking, securities,
insurance and pension fund supervision. The Financial Market Authority is autonomous. It operates
independently and is not bound by any instructions. The restructuring was aimed at establishing a
high-quality, effective and at the same time cost-efficient supervisory regime.
Given the Oesterreichische Nationalbank's far-reaching operational integration in banking and
financial market supervision, the Austrian central bank can fulfill its manifold macroprudential tasks
also within the Eurosystem and can thus contribute to safeguarding financial stability. The close
involvement of central banks in the supervisory process has various advantages. It gives the central
bank a much clearer picture of the economic reality that is behind the numbers visible in the books of
banks.
This information facilitates its role in safeguarding financial stability and creates a special advantage in
spotting early warning indicators of financial crises and potential situations of economy-wide financial
distress. Moreover, as a part of the Eurosystem central banks are integrated in an already functioning
network of national and supranational institutions. Such a network is of decisive importance in the light
of the structural change in European financial markets that already has taken place or is likely to come
in the near future.
After successfully implementing EMU, the next major task Europe faces in the upcoming years is
certainly the enlargement of the European Union. This integration project is just as impressive and
farsighted as EMU, and it offers both enormous opportunities and challenges that should not be
underestimated. I am firmly convinced that a diligently prepared enlargement of the EU will go down in
European history as a very major step toward integration and peacekeeping.
European integration will only be truly successful if it reaches out to the whole of Europe. It is the
concept of stability orientation that urges us to complete European unification. If we manage the
enlargement process successfully, this will also be conducive to our endeavour to guarantee stability
for the whole euro area. Such a mutual improvement is desirable in a very broad sense: political
stability, financial market stability, macroeconomic and - in the particular interest of the Eurosystem -
price stability.