Klaus Liebscher: The Euro - a stable anchor for Europe
Speech by Mr Klaus Liebscher, Governor of the Austrian National Bank, at the Central & Eastern
European Issuers & Investors Forum 2001, held in Vienna on 16 January 2001.
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Ladies and gentlemen!
It is a great pleasure for me to join you here at the Central & Eastern European Issuers & Investors
Forum organized by Euromoney Forums. I am particularly pleased to have the opportunity to address
the current experiences and future challenges of European monetary unification in front of so many
leading issuers and investors in the region. In this context, I will mainly focus on three points: on the
achievements of the new European currency to date, on the Austrian experience with European
monetary integration and on the question of how we can pass on our experience to countries which
have applied for EU membership.
Ladies and gentlemen!
Already in its run-up, the concept of EMU led to an impressive process of disinflation and to nominal
and real convergence within the EU as well as to a process of consolidation of public finances. Today,
the euro is well established, and we are beginning to reap the benefits of the single currency and a
single monetary policy: The inception of European Monetary Union in 1999 put an end to exchange
rate fluctuations and the resulting economic distortions among the countries of the euro area. The euro
has significantly reduced the transaction costs for trade within Europe. It contributes to even more
intensive coordination of economic policies within Europe and enables European financial markets to
become much more integrated, liquid and efficient. And I am convinced that the changeover to euro
cash at the beginning of 2002 will further enhance public support for the euro.
Moreover, the euro has established itself as the second most important reserve currency. The
euro/dollar foreign exchange market is the largest in the world and around 40% of international debt
securities issued over the past two years have been in euro.
Thus, already after two years of EMU, the euro is already a widespread international currency, second
only to the US dollar, and businesses and investors around the world need to take this into account. In
addition, more and more countries use the euro as an anchor currency. This applies primarily to those
EU Member States that are not participating in Monetary Union yet and to many Central and Eastern
European nations - in particular to EU applicants - as well as to those Mediterranean and African
countries that orient their monetary policies toward the euro. At present, approximately 50 states use
the euro as their nominal anchor currency.
The euro also serves as a catalyst for economic reform. Among other things, the adoption of a single
currency means that Member States participating in the euro area no longer have their own national
currencies which they can devalue to protect inefficient industries in times of need. Instead, other ways
must be found to maintain competitiveness, both within the euro area and internationally. I believe it is
no coincidence that policy-makers across Europe are now focusing more than ever on how to
overcome the economic rigidities which, in recent years, tended to hold Europe back in terms of
economic growth.
Ladies and gentlemen!
But above all, the prime objective of the independent Eurosystem is to guarantee price stability in the
euro area. And this is what the Eurosystem, now also including the Bank of Greece after Greece has
joined EMU, has done. Monetary policy decisions have been appropriate to the prevailing economic
situation. The decisions of the Governing Council of the European Central Bank (ECB) have
guaranteed internal price stability. With an average HICP increase of just 1.1% in 1999 and 2.3% from
January to November 2000, the euro area has one of the lowest levels of inflation worldwide.
During the last year, the emergence of external upward price pressures and the upswing of the euro
area economy have generated some risks to price stability. In a preemptive manner, the Governing
Council of the ECB has tightened monetary policy, thus helping to maintain the favorable conditions
for sustained, non-inflationary growth with a positive impact on employment. Over the medium term,
there are still elements of upward risks to price stability which warrant close monitoring.
Financial markets have developed confidence in the Eurosystem policies, as can be seen from the fact
that long-term interest rates in the euro area have remained persistently at, or below, US levels.
Therefore, the independent Eurosystem will stick, in a credible manner, both to its prime objective of
safeguarding price stability and to its successful single monetary policy according to the specific needs
of the euro area. This was clearly the case, when the Governing Council of the ECB did not take any
action after the Fed's surprising interest rate cut by 50 basis points on January 3th, obviously
expressing some concerns with a "soft landing" in the US.
Summing up, a lot of progress has already been made. In addition to low inflation, economic growth in
the euro area has reached its highest level in a decade and unemployment shows a clear downward
trend. Budgets have been fairly consolidated and structural reforms are under way. If this development
continues, I am confident that the future of the euro is indeed very promising. Moreover, it may be said
that the single currency is the basis for a stable and prosperous economic climate in the euro area,
which also has a positive effect both on our neighbours and EU applicant states and for the global
economy. The euro was conceived as a tool to promote further European integration and to
strengthen the European economy. And it has done so. Thus, the euro is a stable anchor for Europe
and the international financial system.
Ladies and gentlemen!
Let me now turn very briefly to Austria's experience with full integration in the European Union.
Over the past decades, Austria has become one of the leading small open economies in Europe,
ranking above average in terms of growth performance. The slowdown in economic growth recorded
in the mid-1990s (i.e. between 1993 and 1996) can be traced to the general economic development in
the European Union as well as to the adjustment costs resulting from Austria's accession to the
European Economic Area and to the EU. In addition, a powerful process of structural consolidation
was in full swing and manifested itself in an extraordinarily high number of insolvencies. But from 1998
onwards, annual growth climbed to its medium- to long-term path of 2.5% to 3%. Moreover, Austria
was able to augment its share in EU exports to 3.1% by 1999 (1995: 2.9%).
At 3.1%, Austria's unemployment rate was the third lowest in the European Union in November 2000.
Youth and long-term unemployment were also kept at comparatively low levels. The employment rate
of 15- to 64-year-olds, measured in terms of full employment, is one of the highest in Europe. And the
outlook for the labor market remains bright. The favorable economic development, active employment
policies as well as the gradual removal of structural rigidities all foster employment. The dialogue
between the social partners has certainly facilitated the favorable development of unit labor costs. In
the 1990s, Austria's industrial productivity augmented by 5%, the third highest rate among OECD
countries, whereas the growth rate of industrial unit labor costs was 5% lower than that of its main
trading partners. Moreover, Austria has been more successful than other countries in avoiding the loss
of human capital triggered by high joblessness and in utilizing the productive potential of its workforce,
which is highly educated by international standards. The extremely low strike rate also reflects the high
degree of social stability in Austria, which entrepreneurs consider to be a major competitive
advantage.
Summing up, the entry into the EU and the participation in Monetary Union have visibly shaped the
Austrian economy. The changeover to EU law and the intense cooperation and communication with
EU institutions, together with the process of gradually getting used to the rules of the new and stiffer
competition of a single market, have triggered extensive reforms. Accession to the EU generated
considerable net welfare effects, that is the cost of offsetting measures was more than compensated
by welfare gains. Solid economic growth, an upbeat labor market, stable prices, moderate unit labor
costs and high price competitiveness, the consolidation of public finances, growing attractiveness for
foreign investors, the traditional monetary stability and social peace have significantly increased
Austria's international competitiveness as a business location since its accession to the EU and
Monetary Union.
Ladies and gentlemen!
To what extent can our experience - both within the Eurosystem and in Austria itself - be relevant to
countries in transition and, above all, to the EU applicant countries in Central and Eastern Europe ?
Basically, European integration was conceived as a project aimed at ensuring peace, stability and
prosperity in Europe. This aim is not restricted to Western Europe only. The forthcoming enlargement
of the European Union should be seen as the realization of the Union's longer-term objective of
providing a framework for political stability and economic progress throughout Europe, including
Central and Eastern Europe, to overcome the division of our continent. I might put it that way: It has
been ten years since the velvet or, in some cases, not so velvet revolutions led to the fall of the Iron
Curtain. And the subsequent transition to a market-based economy has not been easy. According to a
transition report of the European Bank of Reconstruction and Development (EBRD), only three
countries - Poland, Slovenia and Slovakia - have regained pre-revolution levels of wealth. In other
countries, the levels of wealth have fallen below that mark by vast margins.
Obviously, there is a consistent need for economic reform in all societies. While transition-specific
reforms will sooner or later come to an end, other reforms will never be complete. Constant reform
efforts are the key to achieving a path of sustainable high real growth. Maintaining a faster pace of
average real growth than in the European Union is a minimum requirement for keeping the
catchingup process going in the transition economies. But I am afraid that we have become very selective in
our perception of Central and Eastern Europe. We tend to take note only of certain developments and
give some good advice. And sometimes I have moreover the impression that we easily fail to
appreciate the enormous progress that has already been made in most of the transition countries,
especially in those which are most advanced in reforms and transformation.
Ladies and gentlemen!
The policy issues for a smooth further integration of accession countries into the European System of
Central Banks and finally into the Eurosystem were recently addressed at the "East-West
Conference", organized by the Oesterreichische Nationalbank and the Joint Vienna Institute, and at
the high-level "Vienna Seminar on the Accession Process", a specific conference of the Eurosystem
held here in Vienna.
I am convinced that the conclusions of these seminars will provide helpful guidelines for the years to
come. The main conclusions are:
• Accession countries will need to further advance the process of bringing down inflation rates,
while not delaying the much needed relative price adjustments within the economy. Such
price adjustments are part of the transition process and of structural real convergence and
will typically entail inflation rates that will, for some time, range above those prevailing in the
euro area.
•
The objectives of nominal and real convergence should be pursued in parallel. Progress in
nominal and real convergence will imply an orderly closing of the gap between the accession
countries and the euro area economy, both in terms of per capita income and price levels. In
order to reinforce each other, nominal and real convergence paths must be properly
sequenced and mutually balanced. A fast-track move towards full nominal convergence and,
in particular, towards complete monetary convergence could prove counterproductive in the
pre-accession period.
• An important element of structural real convergence is the further development of financial
services structures, which were practically non-existent when transition started a decade
ago. The main tasks are bank privatization, the development of a sound credit culture and
the transformation of banks into efficient and competitive financial intermediaries. The three
pillars of a functioning banking system are a high-quality corporate governance of banks, a
market discipline in accordance with best-practice standards and an efficient banking
supervision. In the transition economies, banking supervision should typically be located with
the central banks, at least for the time being, as central banks have the necessary funds to
perform this task, have established reputation and are, in any case, concerned with systemic
risk issues.
• In the field of legal convergence, the strict implementation of EU Treaty obligations, in
particular those concerning the independent status of central banks, will be of fundamental
importance. Institutional, personal and financial independence are constitutive elements of
central bank independence which are not an end in themselves but are instrumental in
attaining functional independence. Moreover, great importance should be attached to
responsibility, accountability and transparency as a counterpart of independence.
• As I already mentioned before, the euro has become the anchor or key reference currency in
most accession countries. However, there is no general guideline for monetary policy
strategies and exchange rate policies before EU accession. Different regimes are feasible,
as long as they support the nominal and real convergence process. Upon accession to the
European Union, new Member States shall treat their exchange rate policy as a matter of
common interest. After accession, although not necessarily immediately, accession countries
are expected to join ERM II. The key features of ERM II are that it has stable, but adjustable
central rates to the euro for the participating currency, with fluctuation bands of +/- 15%
around the central rate, and that it uses a common procedure for major decisions regarding
the conditions of (voluntary) participation in the mechanism. ERM II is flexible enough to
accommodate the features of a number of existing exchange rate strategies. The clear
incompatibilities with ERM II that can be identified already at this stage are the cases of free
floating, crawling pegs and pegs against anchors other than the euro.
• Entry into the euro area will be based on fulfillment of the Maastricht convergence criteria.
The Treaty establishing the European Community requires strict and sustainable fulfillment
of these criteria, which will be applied to future euro area entrants in the same way as they
have been in the past.
• The ongoing dialogue between the Eurosystem and accession countries ́ central banks will
be further expanded. In particular, the Eurosystem - and, of course the Oesterreichische
Nationalbank - stand ready to enhance its cooperation activities in all relevant areas,
including economic and monetary policy analysis, payment systems, statistics, legal issues
and other areas.
Ladies and gentlemen!
Let me conclude by saying that I welcome the conclusions of the European Council meeting in Nice
stating that it is time to give new momentum to the enlargement process. The institutional reform work
within the European Union has now reached a stage which makes the Union ready for enlargement,
and the road map for progressing with the accession negotiations endorsed by the Council in Nice
should provide a solid guide. I am pleased to hear that Sweden, now chairing the EU, has the firm
intention to speed up this process and to tackle some of the core issues during the first half of 2001.
Against this backdrop, EU applicant countries in Central and Eastern Europe would be well advised to
further strengthen their real convergence efforts. Moreover, legal, institutional and structural
convergence remains a key issue in the catching-up process in the preaccession period and, in a
number of ways, also beyond EU accession. Premature attempts to achieve full nominal convergence
could slow progress at the real convergence front and could therefore be ill-advised.
Personally, I am convinced that the preparations for EU accession and, ultimately, accession itself will
promote real convergence and will thus help to overcome the existing economic divisions in Europe.
Simultaneously, EU enlargement will be beneficial in economic terms for the European Union as a
whole. And last but not least, we should always be aware that the enlargement of the European Union
does not only follow an economic rationale, but can also be regarded as a milestone in fostering
lasting stability, security and peace on our continent.
Thank you very much for your attention.