Jean-Claude Trichet: Euro in wider circles
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Conference
"Goodbye Lisbon" organised by the European Banking Congress, Frankfurt, 19 November 2004.
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Ladies and gentlemen,
It is a pleasure for me to share with you some thoughts on the euro in wider circles. Reflecting on what
the term "wider circles" means for the euro, I think of the EU Member States that still use their national
currencies and that aim to adopt the single currency in the future, and in particular the ten new
Member States that joined the EU earlier this year and their path towards the euro. Let me briefly say
a few words on this aspect.
The euro goes east
It is now 15 years ago that the Berlin Wall fell, giving rise to one of the most astonishing political and
economic transformations in European history. Who could have imagined 15 years ago that in May
2004, eight countries in central and eastern Europe, together with two countries in the Mediterranean,
would be members of the European Union? The perspective of joining the European Union and
eventually adopting a European single currency was out of sight for even the most imaginative minds.
In only 15 years, these countries managed to restore and entrench democratic institutions and market
economies, replacing the communist ones that were imposed there before.
The accession of ten new countries to the EU was an important milestone in a process that will lead to
the eventual adoption of the euro by these new Member States. The euro will go east and south and
the road to the adoption of the euro is embedded in a well-defined institutional framework. A crucial
phase before euro adoption is ERM II membership for at least two years. Although there are no formal
criteria to be met for entry into ERM II, successful participation in the mechanism requires that major
policy adjustments - for example relating to fiscal policy and price liberalisation - are undertaken before
joining the mechanism. Participation in ERM II is an important means to anchor exchange rate and
inflation expectations and to promote consistently sound policies. It helps to orient macroeconomic
policies to stability, while at the same time allowing for a degree of flexibility, if needed, through the
wide standard fluctuation band and the possibility of adjusting the central parity.
As you know, three new EU countries have in the meantime entered the ERM II: with effect from
28 June 2004, Estonia, Lithuania and Slovenia joined Denmark as participants in the mechanism. The
three new entrants joined with a standard fluctuation band of ±15% around their central rates against
the euro, while Estonia and Lithuania kept their currency boards as a unilateral commitment. In order
to ensure a smooth participation in ERM II, countries have firmly committed to take the necessary
measures to preserve macroeconomic and exchange rate stability. Participation in ERM II has been
smooth. The four currencies in the ERM II have traded continuously at or close to their central rates,
while short-term interest rate differentials vis-à-vis the euro area have been small.
Beyond ERM II membership lies the adoption of the euro, the crowning achievement of the monetary
integration process. In order to adopt the euro, non-participating EU Member States have to achieve a
high degree of sustainable economic and legal convergence. Every country will be assessed on its
own merits and its own particular situation, on the basis of a strict analysis of the performance relating
to the Maastricht convergence criteria. Let me stress that there is no pre-set timetable for the
enlargement of the euro area.
Economic challenges for the new Member States
How far are the new Member States on this road towards the euro? The countries that joined the EU
this year have shown impressive economic growth rates and have made great strides in reducing
inflation. They belong to the most dynamic economies in the EU, having gone through profound
structural changes. For example, they have taken thorough measures to reform their product and
labour markets, and some new Member States, in some respects, may be even more advanced than
other, existing EU countries. They have become more integrated with the euro area, with the major
part of their trade now occurring with the euro area and tight financial links: as a matter of fact, the
share of the new 10 Member States in the total external trade of the euro area stands around 11%,
compared with around 14% for the US and 3% for Japan. In addition, the transition process has
brought their economic structures closer to those of the euro area. At the same time, while remaining a
diverse group in many respects, the new Member States still display distinct economic characteristics
that differ from the euro area. Their income-per-capita and productivity levels are still low relative to
the euro area, which may have an impact on their inflation rates.
Let me mention two particularly important economic challenges that the new Member States are
confronted with on the road to the euro: price stability and fiscal policy. Price stability is an essential
requirement for a successful monetary integration process. Inflation rates in many new Member States
have picked up recently to an average of almost 5%, following increases in food and energy prices
and indirect tax changes. The challenge for the new Member States is to contain inflation and inflation
expectations in an environment of rapid catching-up. Besides solid macroeconomic policy frameworks
and prudent wage policies, progress in structural reforms is conducive to price stability by improving
the supply side of the economy and enhancing the growth potential.
This brings me to the second challenge that I want to mention: the need to achieve sound fiscal
positions. Fiscal deficits are on average high or even very high in a number of new Member States
and mostly despite very high economic growth. Their governments are confronted with competing
expenditure demands, including public investment in infrastructure and the need to strengthen the
effectiveness of public administration and the judicial systems. This, however, should not be seen as
an excuse to delay fiscal consolidation, but as an additional reason to design and implement a
credible consolidation path based on durable and growth-enhancing structural reforms. It is important
to bear in mind that fiscal consolidation in the new Member States becomes increasingly important in
the course of the monetary integration process and it is essential for a smooth participation in ERM II
and the eventual adoption of the euro.
Conclusion
Let me conclude. The historic enlargement of the EU is now six months ago and I think we can say
that is has been a genuine success. Following a remarkable transformation in the past 15 years, the
further integration of the new Member States into the European family has progressed smoothly and
without any disruptions. The new Member States have shown an impressive economic performance,
though various important challenges still remain to be fully tackled, including those relating to the
recent pick-up in inflation and to fiscal imbalances.