Willem F Duisenberg: The role of the ECB at the international level
Speech by Dr Willem F Duisenberg, President of the European Central Bank, at the Annual Meeting
of the Institute of International Finance, Inc (IIF), held in Prague, on 23 September 2000.
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Introduction
First of all, I should like to thank you for giving me the opportunity to address such a distinguished
audience. The Institute of International Finance (IIF) is the leading professional association of private
sector financial institutions acting at the global level. As such, the IIF serves as a prominent forum for
fostering a dialogue between the private financial community and policymakers on key issues, such as
the prevention of financial crises and the architecture of the international monetary system. This
explains why the European Central Bank (ECB) follows the IIF's initiatives with great interest and
why, this evening, I am pleased to be able to share some thoughts with you. Given the global nature of
the IIF's activities and the concomitance of its Annual Meeting with the Annual Meetings of the IMF
and the World Bank, I shall focus on the international dimension of the ECB's activities.
Let me start by recalling that, on 1 January 1999, the 11 Member States of what is now the euro area
transferred their monetary sovereignty to a new supranational institution, the ECB. Since then, the
Governing Council of the ECB has been solely responsible for deciding the euro area's monetary
policy. The Executive Board of the ECB has been implementing the Council's decisions mainly
through the national central banks (NCBs) of the countries which have adopted the euro. The ECB and
the NCBs together form the "Eurosystem". Accordingly, the Eurosystem is the central bank of the
euro area, although it does not have a legal personality; this is only conferred upon the ECB and the
NCBs. On 1 January 2001 the euro area will welcome a new Member State, Greece. Moreover, in five
days - on 28 September 2000 - the Danish citizens will decide in a referendum whether their country
shall also adopt the euro.
The Eurosystem enjoys full independence in pursuing its statutory mandate to ensure and maintain
price stability. "Independence", however, does not mean "isolation". The Eurosystem, in other words,
cannot perform its tasks without establishing appropriate external relations with both market
participants and other policymakers.
This evening I shall focus on the multilateral relations which the ECB - and more generally, the
Eurosystem - maintains with other policymakers at the international (ie neither euro area nor
European Union) level. These relations are promoted within organisations such as the IMF, the OECD
and the BIS, as well as in fora such as the G7 and the G20. I shall first provide a brief overview of the
current relations of the ECB and the Eurosystem, both from an institutional angle and from the point
of view of their rationale. Without wanting to be exhaustive, I shall then highlight a few challenges
which the ECB - and, more generally, the international official community - may be confronted with.
In this context, I shall outline the ECB's assessment of a more specific issue, namely the issue of
private sector involvement in the resolution of financial crises.
1. The ECB and the process of international cooperation
Institutional framework
The Treaty establishing the European Community (the "Treaty") stipulates which European
institutions are allowed either to speak or to act on behalf of the euro area at the international level.
The euro area, like the Eurosystem, has no legal personality. This implies that the euro area cannot
negotiate and conclude public international law agreements or become a member of international
organisations. This also implies that the euro area has to be represented externally by Community
institutions or bodies which have a legal personality; this means: (1) the Council of the Ministers of
Finance and Economy of the EU ("ECOFIN Council"); and (2) the ECB and, in accordance with an
ECB decision, one or more NCBs. While the Treaty provides for interaction between the ECOFIN
Council and the ECB in a number of cases, these entities have well-defined responsibilities.
This legal framework provides guidelines to give the euro area a voice at the international level. In
particular, when the external representation of the euro area in the field of international cooperation
involves the tasks entrusted to the Eurosystem, decisions are centralised in the hands of the Governing
Council of the ECB. This facilitates the decision-making process with regard to external
representation. While NCBs may participate in international fora depending on their respective
memberships (eg G7, G10, G20), the participation of the ECB in all relevant fora gives continuity and
visibility to the external representation of the euro area.
The roles the ECB plays in the international community differ depending on the Eurosystem tasks
involved in international relations. In particular, the ECB can play three different roles. First, the ECB
is a primary and autonomous counterpart whenever the Eurosystem's exclusive competencies
- ie monetary policy and related central banking tasks - are involved in international relations. Second,
with regard to issues related to the exchange rate of the euro, the ECB shares with the ECOFIN
Council the responsibility for both consultations with third parties - for example at G7 level - and
communication to the general public. However, the ECB is solely responsible for deciding foreign
exchange operations. Third, within the limits of the Eurosystem's field of competence, the ECB can
advise other euro area policymakers on international issues. In specific circumstances the ECB may
also act as a "catalyst for cooperation". This may happen when the Eurosystem develops common
views on issues which fall within the competence of other euro area authorities (mainly national
governments), but in which the Eurosystem has a strong institutional interest, in accordance with its
statute. This applies, for instance, to issues related to the stability of the global financial markets and
the architecture of the international monetary system. In dealing with these issues, the ECB may
provide value added to the development of common euro area positions to be taken at the international
level.
Rationale for cooperation
The relations of the ECB with other policymakers at the international level involve a number of
cooperation activities designed to increase the "joint welfare" resulting from their policies.
Generally speaking, "international cooperation" takes place within the relevant organisations (eg IMF)
and fora (eg G7), between the competent authorities of different countries for either a given policy
(eg monetary policy) or a set of policies (eg macroeconomic policies). In this context, the term
"country" should be understood to include monetary unions such as the euro area. In principle,
cooperation can include a wide spectrum of activities, namely:
• Consultation, which simply consists of a mutual exchange of information and views;
• Surveillance, ie the systematic monitoring and assessment, by an independent organisation,
of the economic policies of its members. Within this context, the international community
may also develop "standards" and "codes", which constitute a form of multilateral
rule-making to be implemented on a voluntary basis; and
• Coordination, ie the agreement between separate policymakers to take and implement joint
decisions.
As I shall discuss, the Eurosystem is directly involved in most, although not all, of these activities.
The economic rationale for the ECB's involvement in international cooperation activities rests on the
international externalities of domestic policies, ie spillover effects which policies in one economy can
produce on other economies via, for instance, interest rates, exchange rates and equity prices. The euro
area, however, is a large and relatively closed economy. The degree of trade openness of the euro area
is much smaller than that of its constituent countries. Measured by the average of exports and imports
as a share of euro area GDP, the degree of openness is 16% in the euro area. By contrast, prior to
Monetary Union, the average export ratio of individual Member States stood at around 35% in 1997.
This helps to understand both why the euro area is not affected by spillover effects to the same extent
as small open economies, and why the Eurosystem is in a position to pursue its primary objective
- maintaining domestic price stability - in the most effective way.
This does not mean, however, that the ECB neglects external economic developments when
establishing the euro area monetary policy. On the contrary, the ECB takes these developments into
due account as they may have an impact on domestic economic developments, and thus on price
stability.
The ECB's approach to external economic developments has three implications for the participation of
the Eurosystem in the process of international cooperation in the area of macroeconomic policies.
First, a substantial component of the ECB's cooperation is the reciprocal exchange of information and
views within international organisations and fora. Regular consultation on external economic
developments enhances the ECB's ability to analyse the outlook for price developments in the euro
area. By taking into account possible spillover effects from third countries' policy actions,
consultation plays a part in reducing the likelihood of misinterpreting the impact of external
developments on domestic variables. Given its voluntary nature, consultation does not impinge on the
ECB's independence.
Second, consultation is supplemented by international surveillance. In this case, a third and
independent party, such as the IMF or OECD, regularly monitors and assesses the economic policies
of its members. In this regard, whenever the euro area monetary policy is under surveillance, the ECB
is solely responsible for interaction with the IMF and OECD. International surveillance adds to the
ECB's transparency as both the IMF and the OECD make their assessments of euro area economic
policies available to the public. In the context of surveillance, the international community is also
developing common understandings on a number of "rules of the game" to be implemented in each
individual country on a voluntary basis. An example is given by the IMF Code of Good Practices on
Transparency in Monetary and Financial Policies. The selection of best practices and rules enhances
competition and transparency among policymakers, thus making the idea of good public governance a
central component of international cooperation.
Third, consultation and surveillance are the forms of international cooperation which are relevant to
the ECB in the area of macroeconomic policies. Any form of ex ante international coordination of
monetary policy with other macroeconomic policies could easily be incompatible with the
Eurosystem's mandate and independence. Attempts to coordinate ex ante would not only blur the
specific responsibilities of individual policymakers, but also reduce their accountability. In
determining its monetary policy stance, the ECB should and does take into account all relevant
information. It cannot let its policy be determined solely by the current and future course of other
policies. This could easily compromise the maintenance of price stability. The inappropriateness of ex
ante policy coordination also applies to the more specific option of exchange rate coordination
between large economic areas, for instance by setting ranges for the fluctuation of the major
currencies. In this regard, I should like to take the opportunity to reaffirm that the ECB does not
pursue any exchange rate target. Our objective is to maintain stable prices in the euro area and not a
specific level of the euro's exchange rate.
Last but not least, the Eurosystem takes part in the process of international cooperation not only in its
role as a "primary player" - ie when euro area monetary and exchange rate policies are involved - but
also in its roles as advisor to other euro area authorities on international issues and "catalyst for
cooperation". In this case, international cooperation is mainly designed to ensure global financial
stability and enhance the architecture of the international monetary system. The economic rationale for
this kind of cooperation can be summarised as follows. First, financial instability can materialise even
with sound macroeconomic policies, as a result of factors such as inadequate supervision in emerging
market economies and so-called "contagion", ie the international transmission of instability. Second, a
world divided into sovereign states has inevitably moved more rapidly towards full capital mobility
than towards common rules. The asymmetry between the free movement of capital, which takes place
on a global scale, and policymaking, which remains mainly in the national domain, can have
implications for financial stability and calls for enhanced international cooperation.
2. The challenges ahead
Let me now turn to the challenges ahead. I shall distinguish between challenges related to the
institutional framework for international cooperation and challenges pertaining to the specific contents
of international cooperation.
Institutional challenges
Over the past two years, the representation of the euro area in international organisations and fora has
been decided in accordance with the aforementioned guidelines laid down in the Treaty. These
guidelines and decisions, however, have no direct legal bearing on the statutes and/or internal rules
governing international organisations and fora. This implies a need for the gradual adaptation of the
traditional institutional framework for international relations. That framework was not tailored to the
involvement of monetary unions as such, nor to the advent of the Eurosystem - and, more generally,
the euro area - as a new actor in international relations. Until now, this process of adaptation has been
conducted to a large extent on the basis of ad hoc solutions. In the longer run, however, a more
fundamental approach may be needed.
A first challenge arises from the fact that the international intergovernmental organisations - the IMF
and the OECD - were created at a time when only national states were responsible for domestic
policymaking. As a result, only individual countries - and not the ECB and other representatives of the
euro area as such - are members of the IMF and the OECD, even if these organisations deal, among
other things, with the euro area monetary and exchange rate policy. Both the IMF and the OECD have
adjusted their internal rules to reflect the new context. In particular, the Executive Board of the IMF
has granted permanent observer status to the ECB, and the OECD has allowed the ECB to participate
in the work of its relevant committees and working groups as a separate member of the European
Community delegation alongside the Commission.
A second challenge is the definition of an adequate representation of the euro area in those
international fora where both ministers and central bank governors are represented (eg G7 and G20).
Here the problem raised by the creation of the euro area was its capability to speak - if and when
appropriate - "with one voice". Specific arrangements between the euro area and its counterparts in the
various fora have dealt with this problem. These arrangements, however, may still call for some
improvement. For instance, it is true that issues such as the architecture of the international monetary
system fall primarily under the competence of individual euro area countries. The ECOFIN Council,
however, needs to gain an increasingly higher profile when these issues are discussed in the competent
fora (eg G7). This would strengthen the European stance and simplify the process for decision-making
at the international level. In this respect, the Eurosystem may provide - as I will discuss afterwards
- significant value added to euro area governments. More generally speaking, the ECB would welcome
any initiative of euro area governments designed to enhance - in compliance with the respective
competencies of the ECOFIN Council and the Eurosystem - the credibility and clout of the euro area
in the international community.
The content of cooperation: the ECB's assessment of "private sector involvement"
The other major challenge for the ECB and the Eurosystem in the years to come will be to become
more directly involved in the process of international cooperation beyond the area of macroeconomic
cooperation. This relates, in particular, to current work being done to strengthen the international
financial architecture, which is close to the area of traditional competence and expertise of the central
banking community. The Eurosystem supports this process for two reasons. First, because the
achievement of its primary objective of safeguarding price stability in the euro area would be
facilitated by a safer and more resilient international financial system. Second, because the statute of
the Eurosystem establishes that the Eurosystem shall contribute to the smooth conduct of policies
relating to the stability of the financial system.
A wide range of topics could be discussed here. However, the interest that the IIF has shown in the
recent past in the issue of "private sector involvement" leads me to focus on the ECB's assessment of
ongoing discussions.
Owing to changes in the magnitude and composition of capital flows, the private sector is playing an
increasingly important role in the financing of emerging market economies. According to recent IIF
estimates, in the 1990s 85% of total net inflows of capital to the major borrowing countries came from
the private sector. Such inflows averaged USD 170 billion per annum, compared with USD 35 billion
per annum in the 1980s. By contrast, net official flows averaged USD 30 billion per annum throughout
the 1990s and reached only USD 5 billion in 1999, their lowest level for over 20 years.
Despite these developments, however, in times of financial distress the role of the official sector
remains crucial in providing financial assistance to emerging market economies. It is true that informal
arrangements are in force in order to facilitate negotiations with the main creditors of the private
sector. The so-called "London Club" has become a kind of permanent institution, like the Paris Club
for obligations vis-à-vis official creditors. However, the development of new instruments for lending
to emerging market economies and the increasing diversification of the creditor base, while facilitating
the financing of the countries concerned, render negotiations between debtor countries and their
private sector creditors more difficult in the event of a crisis. This explains why, so far, only ad hoc
measures have been developed in order to involve private sector creditors - on a case-by-case basis - in
the resolution of financial crises.
In addition to enhanced efforts to improve the communication channels between debtor countries and
their creditors, which would also enhance crisis prevention, the ECB would support a move to
strengthen the existing framework for the management of financial crises. Three fundamental
principles may be helpful to this aim.
First, the framework should rely more on rules and less on discretion than was the case in the second
half of the 1990s. A case-by-case approach, lacking clear "rules of the game" on the respective roles of
private and official sectors in times of distress, runs the risk of creating the perception that official
resources would provide a "safety net" if need be. Such a perception is likely to distort debt
management on the borrowers' side and risk assessment on the creditors' side, thus engendering
problems of moral hazard on both sides.
Second, the IMF cannot - owing to its limited resources which do not match private capital outflows
- and should not - owing to moral hazard problems mentioned above - act as an international lender of
last resort. IMF financial assistance can neither be unlimited nor cover all the financing needs of a
country. The IMF should rather play a catalytic role. IMF conditionality in the form of adjustment
programmes should, in conjunction with IMF financing, be instrumental in improving the external
position of member countries and quickly restoring market confidence. Actual ceilings on access to
IMF financing facilities should also be established.
the private sector should be involved in
Third, as a logical consequence of limited official financing,
the resolution of financial crises. It is a matter of fact that a country running into financial difficulties
will need to involve its creditors in one way or another. In this context, the crucial question is how
"orderly" such an involvement should be. In their efforts to secure adequate private sector
involvement, debtor countries should try to reach market-based and cooperative solutions with all
classes of creditors, respecting comparable treatment among and within different classes.
We are convinced that a strengthened framework based on these principles would create the right
expectations in both the private sector and the official sector. It would also allow for sufficient
flexibility to address specific cases in the course of a crisis.
Conclusions
I shall bring this talk to a close by drawing a few basic conclusions.
In principle, the introduction of the euro should simplify international cooperation by reducing the
number of key players in the international arena.
In this new streamlined international setting, the euro area can be expected to play a greater role and to
gain a higher profile.
In this respect, the ECB is already a potentially influential participant in the process of international
cooperation. At the same time, the ECB is a new player in this process, and its role will therefore
evolve over time.