Address by the
Dr. Duisenberg assesses the future importance of the euro
President of the Netherlands Bank and of the Bank for International Settlements,
Dr. W.F. Duisenberg, on the occasion of a dinner hosted by the Board of Directors of the
'Association for the Monetary Union of Europe' (AMUE), at Kasteel De Wittenburg,
Wassenaar, 4/3/97.
1 It is a great pleasure for me to be able to address you here tonight in
Wassenaar. Your Association has always been among the strongest supporters for speeding up
European integration, particularly Economic and Monetary Union (EMU). This emphatic
support gives the speaker the luxurious feeling of playing before a home audience.
2 Tonight, I would like to ponder two issues related to the future importance of
the euro. First, what are the chances of the euro becoming an important reserve and invoicing
currency? Second, how should the European Central Bank deal with the external value of the
euro?
Future role of the euro as a reserve and invoicing currency
3 I know that the first issue - the future role of the euro as a reserve and
invoicing currency - has been receiving a lot of attention from your Association over the years.
As a matter of fact, you very strongly believe in a powerful role for the euro. I quote from your
latest report: "By placing Europe in a much stronger position vis-à-vis the United States of
America and other countries, the introduction of the euro improves investor climate and
ultimately favours employment. Also, the use of the euro will rapidly develop world-wide, in
proportion to the external trade of the European Union which already ranks first in the world".
I very much welcome this positive approach to the euro. The internationalization
of the euro is only partly in the hands of European policy-makers. Policy-makers can provide for
the right incentives by pursuing sound policies, thereby making their currency attractive. But, at
the same time, the success of the euro is also in the hands of the markets. In this respect, I would
encourage the European business community to take every opportunity to promote the private
use of the euro and increase its role as a vehicle currency and store of value.
4 Let me elaborate a little by discussing three major factors that will determine
the future importance of the euro: the stability of the euro, the amount of trade conducted in it,
and the depth of euro financial markets. Safeguarding the stability of the euro is the biggest
responsibility of the European Central Bank. The safest currency for all investors is the currency
of the country with the lowest inflation rate over time. Here, the prospects for the euro are good.
Over the years, inflation in European core countries has been constantly lower than in the United
States, and there is no reason to believe that this would change with the start of EMU. It is also
very important that the euro will be strengthened by the institutional independence of the
European Central Bank and its objectives of price stability. Furthermore, safeguards have been
put in place, such as the Stability Pact, to prevent EMU countries from pursuing unhealthy fiscal
policies. All in all, I firmly believe that the euro will be a strong currency.
5 As regards the other major determinants of the future importance of the
euro - trade and financial markets - the role policy-makers can play is more limited. This is not
to say that the euro's starting position is unfavourable. On the contrary, over the last twenty
years international private portfolios have been gradually diversified in the direction of
European currencies. Also, European currencies have been increasingly used as vehicle and, to a
lesser extent, as invoicing currencies. There is every reason to believe that these trends could be
strengthened by the introduction of the euro. After all, the euro will eventually cover an
economy whose gross domestic product is larger than that of the United States. If intra-EU trade
is excluded, the EU and the US both account for around 20 percent of world trade. Furthermore,
with 350 million inhabitants the EU is the largest consumer market in the OECD area,
consumers whose needs will partly have to be met by trading with the rest of the world.
Companies which trade principally with European counterparties may be inclined to invoice and
pay in euros. If the euro is going to be widely used in international trade transactions, exporters
and importers within the European Union will no longer be exposed to exchange rate risks nor
have to hedge against such risks. The European business community thus has ample
opportunities to reap the benefits provided by the introduction of the euro.
6 It is more difficult to predict the future role of the euro in international
financial markets. Fortunately, at the European level agreement has been reached on legal
provisions that guarantee the continuity of ECU contracts. This provides a good starting point
for euro capital markets. Ultimately, however, the choice of currency in which to borrow and
lend depends on the depth and liquidity of the underlying market. Presumably, some segments of
the euro market will become deeper. For instance, government bond markets are likely to
become deeper and more liquid, and will offer international investors more instruments than
current national markets. It is also important that experience in the last few years has shown that
financial markets can put increasing pressure on political authorities to conduct prudent
macroeconomic policies. In such an environment, governments can no longer afford to outrun
the constable, and credit spreads between different debtors may in practice be rather small.
The external value of the euro
7 Let me now briefly discuss the issue of the external value of the euro.
Recently, there has been a great deal of attention on this issue. Should the ECB, for instance, set
an exchange rate target vis-à-vis the dollar?
In my view, this is not the appropriate way to go. The primary task of the ECB is
to guarantee internal price stability. As I have mentioned earlier, the euro area will have an
economic and commercial weight comparable to that of the United States. This means a huge,
but relatively closed economy. With a low import ratio, the effect of exchange rate movements
on internal price developments will be limited compared to what currently holds for individual
EU countries. Therefore, it is simply wiser for the ECB to focus on euro-wide indicators, such as
money growth for the whole euro area. Put differently, the internal value of the euro is the
objective of monetary policy and the external value the outcome.
8 This is not to say, of course, that Europe could adopt an attitude of benign
neglect with regard to the external value of the euro. As is the case now, exchange rate
developments will continue to be informally monitored by the major global players. Indeed, the
introduction of the euro may even enhance the opportunity for strengthened policy coordination.
With Europe speaking with one voice, the players on the global field are being put on a more
equal footing. This could add to globally balanced and stable policies, which is in the interest of
the three poles concerned.
Furthermore, there is the relationship between the euro and the currencies of those
countries which will not participate in EMU from the beginning. A new Exchange Rate
Mechanism has been designed which aims to ensure that the EU Member States stay together
and that the working of the Internal Market is not frustrated by exchange rate fluctuations
between the euro zone and other EU currencies. It will also help those countries which will not
join EMU right from the start to orient their policies towards convergence, in order to enable
them to qualify for participation as soon as possible.
To conclude...
..., there are reasons to believe that over time the euro could develop into an
important reserve and invoicing currency. Good opportunities for the euro arise from the fact
that the EU economy is even larger than that of the United States. Furthermore, it is the
responsibility of European policy-makers to safeguard the attractiveness of the European
currency by pursuing sound policies. In this respect, the stability of the euro is in the good hands
of the ECB. At the same time, I would like to emphasize that the success of the euro is also in
the hands of the markets. It should be borne in mind that it took the dollar half a century and two
world wars to replace sterling as the international currency, despite the fact that the United
States had been the major economic power since the beginning of this century. All in all, these
are challenging times for Europe. Let me, therefore, propose a toast to the future success of the
euro.