The Governing Council first assessed current economic developments in the euro
area. The general picture is one of continued economic expansion combined with broadly low
inflation.
Several forecasts made during spring 1998 have even suggested slightly lower
rates of inflation for 1998-99 compared with expectations in autumn 1997. As far as price
developments are concerned, inflation as measured by the harmonised consumer price index
(HICP) is estimated to have risen slightly in April, to 1.4%, but has not increased further in May.
Output growth has remained strong in recent quarters, with annual growth rates
close to or even exceeding 3%. Economic growth has been driven increasingly by domestic
demand rather than net exports, as might be expected at this stage of the cycle. Private
consumption and stockbuilding have been the main factors underlying domestic demand to date.
The favourable conjunctural situation has started to feed through into the labour
market, although improvements here have in some countries been too slow to appear. It is
evident, however, that economic growth alone will not reduce the urgency to proceed with
structural adjustments in order to tackle unacceptably high rates of unemployment.
As regards monetary and financial developments in the euro area, the annual
growth rate of the broad money supply (M3H) accelerated in April to around 6% from 5.5% in
March. The growth rate of M1, the narrow money supply, also picked up, to around 10%. We
shall monitor these developments very carefully.
In principle, the economic performance I have just described provides a
favourable environment for continued fiscal consolidation. It is with some concern that we
observe that in a number of member countries the prospects for this to actually develop seem to
be, to put it mildly, rather subdued.
In this respect, I should like to underline three aspects. First, any "growth
dividend" resulting from the current cyclical upturn should be used to bring deficit and debt
levels down, rather than relaxing control over expenditure. Second, most Member States need to
go a step further, and indeed improve structural balances as they are not yet in compliance with
the obligations under the Stability and Growth Pact. This implies that the benchmark for fiscal
policy must now be a budget close to balance or in surplus - in surplus especially in countries
with high ratios of debt to GDP. Third, further structural adjustments in fiscal policy would also
help to improve the policy mix in some countries and in the euro area as a whole from the start of
Stage Three.
I would not at the present time want to try to convey too strong an impression of
the implications of these various economic developments for the appropriate stance of monetary
policies in euro area Member States. Although the responsibility for these policies remains with
national central banks until the end of this year, the Governing Council had an extensive and
thorough discussion on a euro area perspective of monetary policy. We will continue to study
this issue closely before we enter the regime of a single monetary policy. For the time being, it is
encouraging to see the credibility of monetary policy being reflected in the exchange rates of
euro countries. There is currently no sign of exchange rate tensions among euro area currencies.
Forward exchange rates are expected to be virtually identical to central rates, suggesting that the
pre-announced rates are considered credible. I consider this a remarkable achievement.
Following its review of economic developments, the Governing Council settled a
number of organisational issues.
i. It adopted the Rules of Procedure of the European Central Bank. These
will be published in the Official Journal of the European Communities;
ii. It approved, in accordance with the Rules of Procedure, the establishment
of eleven ESCB committees to assist in the work of the European System
of Central Banks (ESCB). The committees are as follows (listed in
alphabetical order): Accounting and Monetary Income Committee,
Banking Supervision Committee, Banknote Committee, External
Communications Committee, Information Technology Committee,
Internal Auditors Committee, Legal Committee, Market Operations
Committee, Monetary Policy Committee, Payment and Settlement
Systems Committee, and Statistics Committee;
iii. It formally adopted a budget for the European Central Bank for the second
half of 1998 and agreed on the establishment of a Budget Committee to
assist the Governing Council in ECB budget-related matters;
iv. It laid down specific rules applicable to staff transferring from the
European Monetary Institute to the European Central Bank. ECB
Decisions relating to the Conditions of Employment will be published in
the Official Journal of the European Communities.
The Governing Council also took a number of decisions relating to various
aspects of its preparatory work for Stage Three.
(a) Monetary policy issues
The Governing Council decided on the introduction of a minimum reserve system
by the ESCB at the start of Stage Three. Among the three main functions that a minimum reserve
system could usefully perform, the Governing Council attaches particularly high importance to
its contributions to the stabilisation of money market interest rates and to the enlargement of the
demand for central bank money by creating or enlarging a structural liquidity shortage in the
market.
In the light of the potential burden which a minimum reserve system could impose
on the private sector and the effects it might have on the financial activity of credit institutions in
the euro area, the Governing Council has decided on features which fulfil the two money market
management purposes outlined above, while at the same time allowing an adequate remuneration
of minimum reserves.
A number of details of the minimum reserve system that will be applied were
already specified in previous documents published by the European Monetary Institute.
Additional features agreed upon yesterday include the liability base, the lump-sum allowance and
the rate of remuneration. With regard to the latter, the ECB will remunerate minimum reserve
holdings at a level corresponding to the rate of its main refinancing operations. The Governing
Council intends to decide on the exact specification of the minimum reserve system in November
1998 at the latest. This decision, in particular as regards the reserve ratio (which is currently
defined within a range of 1.5% - 2.5%), will be based on the early data from the new system for
money and banking statistics.
Further details are provided in the separate press release that is being issued to you
this morning.
It is intended that the precise features of the minimum reserve system will be
published in the form of an EU Council Regulation. For this purpose, the Governing Council
adopted an ECB Recommendation for an EU Council Regulation on the application of minimum
reserves by the European Central Bank. In accordance with the provisions of the Statute of the
ESCB, the EU Council, acting by a qualified majority and after consulting the European
Parliament and the Commission, is expected to adopt this Regulation.
The Governing Council also adopted ECB Recommendations for EU Council
Regulations concerning the collection of statistical information by the ECB and concerning the
powers of the ECB to impose sanctions. All three ECB Recommendations will be published in
the Official Journal of the European Communities for general notice.
(b) Foreign exchange issues
The Governing Council decided on the size and form of the initial transfer of
foreign reserve assets to the European Central Bank from the national central banks participating
in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the
initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards
by deducting the shares in the ECB's capital subscription key of the EU central banks which will
not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of
EUR 50 billion, i.e. approximately EUR 39.46 billion.
The Governing Council furthermore agreed that this initial transfer should be in
gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85%
being transferred in foreign currency assets. I should stress that the decision on the percentage of
gold to be transferred to the ECB will have no implications for the consolidated gold holdings of
the ESCB.
The precise modalities of the initial transfer will be finalised before the end of the
year.
Before the end of the current year the Governing Council will also have to adopt
an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all
operations in foreign reserve assets remaining with the national central banks - including gold
to approval by the ECB.
In connection with the setting-up of common market standards, the Governing
Council also reached agreement on a number of issues related to the quotation and publication of
reference exchange rates for the euro. Specifically, it was agreed to recommend to market
participants the "certain" method for quoting the exchange rates for the euro
(i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates for the euro
computed and published by the ECB.
Further details are provided in the separate press release that is being issued to you
this morning.
(c) Payment systems issues
The Governing Council decided on the conditions for the participation of the
non-euro area EU central banks and credit institutions in the TARGET (Trans-European
Automated Real-time Gross settlement Express Transfer) system. In TARGET the ESCB will
provide central bank liquidity in the course of the day (i.e. intraday liquidity) to the extent
necessary to avoid delays in the execution of payment orders. If intraday liquidity is not
reimbursed at the end of the day it becomes overnight credit granted by the ESCB, which, for
evident monetary policy reasons, cannot be offered to institutions outside the euro area.
Nonetheless, non-euro area EU central banks and institutions in those countries will be
connected to TARGET.
The Governing Council considered that giving such institutions outside the euro
area unlimited access to intraday credit would have created risks for the conduct of monetary
policy that it was not ready to take. A facility will therefore be put in place to enable the non-euro
area EU central banks to provide collateralised intraday credit in euro to their credit institutions,
subject to a ceiling both at the level of the non-euro area EU central banks and at that of non-euro
area credit institutions. There will also be a liquidity deadline, set at 5 p.m., for non-euro area
credit institutions so that they do not incur an overnight overdraft in euro.
Further details are provided in the separate press release that is being issued to you
this morning.
The Governing Council also agreed that a report on recent developments in the
field of electronic money - and their monetary policy implications - would be published in
September 1998.
(d) Legal protection of euro banknotes
Finally, the Governing Council agreed on a number of legal instruments aimed at
enhancing the protection of euro banknotes. In particular, an ECB Decision on the
denominations, specifications, reproduction, exchange and withdrawal of banknotes has been
adopted, as well as an ECB Recommendation regarding the adoption of certain measures to
enhance the legal protection of euro banknotes and coins. Both documents will be published for
general information in the Official Journal of the European Communities.