Prof. Tietmeyer discusses the relationship between economic convergence
and EMU Speech by the President of the Deutsche Bundesbank, Prof. Hans Tietmeyer,
delivered to the Boersen Executive Club in Copenhagen on 14/3/97.
I
The Boersen Executive Club has asked me to speak about "Economic
Convergence and EMU". I shall be pleased to do so, especially as I can well imagine that you
here in Denmark are able to adopt a somewhat more relaxed and calmer approach to the subject
of "Convergence and EMU".
There are two obvious reasons for that. Firstly, Denmark itself has made distinct
progress in economic convergence during the past few years. That progress was documented in
the European Monetary Institute's recently published Convergence Report.
-The Danish krone has been stable internally for a good number of years.
-It is unlikely that Denmark will have any problem with the exchange rate
criterion either. Happily, participation in the ERM - as in Germany - has
never been at issue here.
-And there has been notable progress in consolidating public finance.
The assessment of Denmark in the European Monetary Institute's Convergence
Report was therefore decidedly more positive than that of Germany.
The second reason why you in Denmark can be rather more relaxed on the subject
of "Convergence and EMU" is, of course, self-evident. Denmark has announced that, for the
time being, it is not going to participate in the third stage of monetary union.
Naturally, we in Germany respect Denmark's sovereign decision, even if we at
the Bundesbank are not unreservedly happy about that decision. That is because it is precisely in
the initial phase that we shall need stable partners in EMU. But the door is open. The terms of
entry are known on all sides. What has not happened yet can, of course, take place at some point
in the future. It goes without saying, however, that this is a matter for the Danes themselves to
decide. Whatever decision Denmark ultimately takes on participating in the third stage, I hope
that exchange rate stability is maintained as before.
It is likely that the Danish krone will belong at least to the exchange rate
mechanism of "EMS II" from the outset. That would, at any rate, imply the existence of close
bilateral links between the Danish krone and the euro. For the rest, it is precisely the economic
and stability record of countries not wishing to belong from the outset which represents a
challenge to and a commitment for the euro area. In this way, Denmark can play a part, at least
indirectly, in the anti-inflationary orientation of the euro, even if it does not join EMU at once.
Naturally enough, the setting-up of an "EMS II" will, at the same time, enhance
the responsibility of the European Central Bank. A stable euro is an essential precondition for
the operation of an intra-European exchange rate system. I am convinced that the European
Central Bank will be fully aware of precisely that international responsibility for the euro as the
anchor currency.
will also be other links between the Danish central bank and the European
Central Bank:There
-The Governor of Danmarks Nationalbank will be a member of the
enlarged Governing Council of the ECB.
-And the central banks of the countries with a derogation are also invited to
participate in TARGET, the planned large-value payment system for the
euro.
In saying that, I would ask you to understand why there has to be a minimum of
divergence in the terms of participation in TARGET. Those terms have to take account of the
differing commitments of the central banks inside and outside the euro area.
II
In order to explain the relationship between economic convergence and EMU,
there is, in the first place, a fairly simple textbook answer. By definition, a monetary union
abolishes, once and for all, the instrument of exchange rate adjustment between the participating
economies. The countries taking part must be able to do without that instrument for ever - even
if structural changes occur. That calls for the ability on the part of each participant to keep up
with the others in terms of economic and anti-inflationary performance, or - if it does fall behind
- the ability to remedy a worsening of its competitive position by its own domestic efforts.
These general requirements of a single currency area apply to the euro to a quite
special degree. There are three reasons for this: Firstly, in the supranational euro area - in
contrast to the usual national environment of a currency - there will be hardly any fiscal policy
mechanisms that would be able to counterbalance regional disequilibria. There will not be a
dominant central budget. At the Community level, there will be no network comparable to an
internal, national system of income redistribution. The public financial systems and social
security will remain in the national domain.
Secondly, any regional disequilibria in the euro area would scarcely be mitigated
by high labour mobility. Linguistic and cultural barriers will continue to exist. Furthermore,
high labour mobility within Europe might even provoke opposition. In Germany, we have
witnessed something of that kind in the construction industry, owing to the fact that it depresses
wages.
And thirdly, the increased need for internal flexibility resulting from the
irrevocably fixed exchange rates must be seen against the backdrop of current economic
conditions in Europe. Most countries in Europe are faced with an enormous need for adjustment
anyway
-as a result of the fiercer competition in the single market and in a global
economy
-and as a result of a number of domestic problems which are probably
home-grown: on the labour market, in public finance, in provision for old
age.
The setting prefigured for the next decade is therefore a highly dynamic one. That
will, of course, not make it easier for any country to perform the task of holding its own
economically in a monetary union.
Bearing that in mind, it will be extremely important for the euro area to restrict
entry to those countries which are ready in terms of their economic and anti-inflation policies.
That is to prevent a lack of anti-inflationary convergence from being transformed into real
economic divergence. Any split in real economic trends would, naturally, exert pressure in the
direction of a transfer and social union, or even of a European "super-state", which you in
Denmark - if I understand it correctly - do not want, and which we in Germany - I can assure
you - do not want either.
Adequate and lasting convergence is in the individual countries' own interests,
however. That is because a country which is unable durably to pursue the same course as the
others in the euro area will itself get into difficulties - all the more so if the other countries are
not prepared to enter into a permanent burden-sharing arrangement, with all its attendant
political implications.
III
Besides that textbook answer to the question of the relationship between
convergence and EMU, there is another aspect. What a monetary union needs is not just
convergence in terms of the hard economic data. It also needs a convergence in terms of
thinking. That implies convergence in objectives and in how we interpret and explain the
interaction of economic forces. Monetary union will not just abolish the exchange rate
instrument domestically. It will of necessity also call for a single domestic and external
monetary policy, and thus a common stance in a key policy area.
For the euro area, however, achieving and maintaining a common stance of this
kind will undoubtedly be more difficult than for a traditional national currency area. Whereas
the currency will be supranational, it will generally remain the individual governments that will
be taking the decisions on economic and social policy. That is all the more reason why the euro
needs dominant patterns of preference which are common to all participants. That likewise
implies the affirmation of major fundamental positions.
Firstly, maintaining the value of money is the best contribution that monetary
policy can make to economic growth and employment. Price stability is the foundation on which
society and policy-makers can and must carry out the necessary adjustments. Secondly, in the
event of conflict, internal price stability must have priority over external exchange rate stability.
Thirdly, experience has shown that a central bank which is independent of the vagaries of
dayto-day politics, and committed solely to the goal of price stability, helps to safeguard that
indispensable price stability. By the way, that might be even more important in a supranational
union than in a purely national context.
These three basic convictions are essential to a durably stable currency. That is
why they have rightly been enshrined in the Maastricht Treaty.
-Article 107 lays down the European Central Bank's independence of
instructions.
-The Statute of the European Central Bank requires it "to maintain price
stability" as its primary objective.
-And Article 109 (1) and (2) require the EU Council to pursue external
exchange-rate policy without prejudice to the objective of maintaining
price stability.
Any calls for the political control of the European Central Bank or for different
objectives were thus firmly rejected five years ago, when the Treaty was signed.
But it is, of course, not only the legal position created by the Maastricht Treaty
which argues in favour of the primacy of price stability and its safeguarding by means of
independent monetary policy. Past experience and economic reason argue in its favour, too. It is
important that this is perceived - and lastingly perceived - to be the case in all the participating
countries. Otherwise, political conflicts might impose a heavy burden on monetary union at a
later date.
The task of preserving a durably stable currency is, however, one which has to be
faced in other policy areas, too. It cannot be a matter for the monetary policy of the European
Central Bank alone - particularly since the ECB still has to establish its reputation and credibility
in the first place. However great a contribution an independent central bank can make to a stable
currency, monetary policy is never conducted in a political vacuum or under laboratory
conditions. And, in the long run, a currency's fate can never be divorced from the political and
economic trends in the area in which it is used. That is why there is yet another item on the list
of common features needed for a durably stable monetary union.
The Euro requires, fourthly, a sense of and a willingness for shared responsibility
for the currency in all the participating countries and in the various policy areas. That applies to
wage rate policy, for example. Above all, however, it applies to fiscal policy. It is the resolute
and lasting pursuit of sound policies that will be of crucial importance in that respect - and not
any one-off measures.
An effective stability pact is extremely important, too, for the same reason - a
stability pact being, incidentally, precisely in the interests of the smaller countries. After all, any
undisciplined behaviour on the part of a large partner country of substantial economic weight
could have a severe adverse impact on interest rates and on confidence in long-term stability,
thus hampering the economic growth of its partners. The pact on stability and growth agreed in
Dublin is an important reminder and assertion of the need for that shared responsibility. Its
details are to be set down in legal texts during the next few weeks. What will be absolutely
crucial at this juncture is for the requirements laid down in Dublin to be spelled out in precise
terms. Failing this, there might easily be unnecessary conflict later on. And, of course, at a later
date it will be necessary to apply those provisions consistently if excessive budget deficits are
incurred.
IV
EMU being able to build on sufficient convergence in economic performance as
well as on sufficient convergence in the thinking of all the participating countries, would
undoubtedly open up major opportunities for Europe. The economic advantages are obvious:
-Exchange costs will cease to exist in trade within the euro area.
-Exchange rates against the US dollar and the yen could become more
stable.
-The financial markets could expand and intensify, to the benefit of
creditors and debtors.
But, above all - and this is the key factor - overall competition will increase. A
stable common currency will give the single market a new dimension. Admittedly, that does not
by any means imply that the euro will solve the structural problems besetting a large number of
European countries at present or in future. On the contrary, the pressure to adjust deriving from
the single market and from globalisation will, if anything, tend to grow stronger rather than
weaker.
Incidentally, the increasing competitive pressure by no means implies that all
countries have to pursue the same economic and social policies. Under the conditions obtaining
now and in the future, policy-makers will, in fact, have different options available to them to
satisfy their own preferences. But there is one precept that holds true for everyone, whether they
like it or not. Whatever policy a country may pursue, the economy must be viable, and compete,
in an international setting on a durable basis.
One gains the impression that, at the moment, the smaller countries in continental
Europe are having slightly less difficulty in adapting to changed competitive conditions. Perhaps
that is because it has always been more necessary for smaller countries to be flexible and prove
themselves in foreign markets. Obviously, it is a case of "small is beautiful". At any rate, both
the Netherlands and Denmark appear to be already a little way ahead of the larger countries on
the continent. Hence Germany is looking here towards Denmark with growing interest. The
German press reports on the "job miracle in the north" - especially as the fall in unemployment
and resilient growth is being accompanied by a marked course of consolidation in public
finance.
Last autumn, for example, the present Governor of the Dutch central bank and
future President of the European Monetary Institute, Wim Duisenberg, was in a position to say:
"I do not believe that there is a contradiction between fiscal
consolidation and creation of employment and economic growth.
Evidence from ... Denmark supports my view. In Denmark, the
general government's net borrowing will be reduced to almost a
balanced budget in 1997, while the unemployment rate is
expected to decline to almost 9 % of the working population,
compared with the all-time high of more than 12 % in 1994."
Admittedly, public finance is precisely the area in which Denmark has to be
ambitious. The provisional "no" to entry into the third stage of monetary union may be playing a
certain role in the international financial markets. At least, that was how the OECD saw it in its
1996 Economic Survey:
"... the increase in Danish risk premiums seems high compared
with other ERM members. Since the main feature that separates
Denmark from those countries is the discussion not to participate
in stage III of ERM."
Denmark can now point to a positive interrelationship between higher
employment and sound public finance. In that respect, Denmark is a model for us in Germany.
Our country is at present in the process of rethinking, and facing up to these
difficult challenges. That is not a simple matter, especially as the structural inflexibilities
existing in Germany have arisen over a long period. Our own adjustments are all the more
important, seeing that we shall have to cope with the economic implications of German
reunification for some considerable time to come.
It is my hope and wish that we shall soon be able to make the progress that is
needed, and achieve positive results. That will undoubtedly be the case if we follow the path
taken by our neighbours in the north and north-west. At all events, the Netherlands and Denmark
are setting important signposts, not only for us in Germany, but also for the road to EMU and
beyond.