A Wellink: The Euro, a major challenge and catalyst for Europe
Speech by Dr A Wellink, President of De Nederlandsche Bank and President of the Bank for
International Settlements, for the Dutch Business Round Table, Zürich, 12 March 2002.
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Introduction
It was in here in Zürich over 55 years ago that Winston Churchill held his famous speech on the future
of Europe. He depicted a United States of Europe that would put an end to centuries of conflicts and
bring prosperity to its peoples. Indeed, since then we have come a long way in actually fulfilling his
grand vision, although without Switzerland - the nation he addressed - playing an active role.
Of course, there are many reasons - mostly of a historical -political nature - why Switzerland chose to
stay outside the process of European integration. In this respect, I certainly do not want to pass
judgement. Nevertheless, you find yourselves surrounded by an ever closer union of Member States
that has also introduced a single currency. In this light, I would like to elaborate on the introduction of
the Euro and it ́s consequences for the European Union - taking into account, where possible - the
position of this country.
First, I shall briefly touch on the actual changeover to the Euro at the beginning of this year. Then I shall
go into the merits that monetary union already brought over the last few years. Finally, I will give my
vision on future challenges and dynamics of the Euro.
Changeover
Ten years after the Treaty of Maastricht, the Euro finally found its way into the pockets of 300 million
Europeans. This unprecedented process - comprising the distribution of 239,000 tonnes of coins and
2 million kilometres of notes - was an outstanding logistical success. Moreover, doom scenarios
predicting mass forgery, robberies and threats to public security proved wrong.
Of course, a clear, central scenario and tight planning, especially within the European System of Central
Banks, provided a firm foundation, but the operation remained highly dependent on local players;
transporters, retailers, bankers, administrators, law-enforcers. In fact, there were also a number of
Swiss companies (Lanqart (paper), OVD Kinegram) involved in developing and producing the high
quality Euro notes. The efforts of these local players and the sheer public enthusiasm for the Euro were
central to the success of the changeover. Indeed, through the sale of so-called eurokits, people on
average had already 14 eurocoins in their pocket before 1 January. This "euro-eagerness" explains that
by the first week, already 75% of cash payments were in Euro.
In the Netherlands, this 75% level was already reached on the second day, and after one week, the
changeover was virtually completed. As such, it was not without pride that I proclaimed my country
European champion - though that could not entirely wash down the bitter aftertaste of missing this
year ́s World Championship soccer. In hindsight, people felt well-informed about the Euro and found the
Euro introduction in no way the drama that some had predicted.
Finally, on 28 January, the Dutch Guilder was the first of the former euroland currencies that in practice
lost its legal tender status. To ease the minds of Dutch Roundtable members present, Guilders can -
under certain conditions - still be exchanged for Euros at my central bank; coins until 2007 and
banknotes even until 2032.
One tiny spot on the otherwise shiny, new currency is the anecdotal reporting of price changes
associated with the changeover. There is, however, little evidence of any significant effect on aggregate
inflation figures in the Euro area. According to the European statistical office, Eurostat, the effect is likely
to fall within the range of 0.0% to 0.16%. On a country-by-country basis, the possibility to round up
prices would, of course, be linked to the conversion rate of the national currency. For example,
calculating back from Euros to German Marks is much easier than from Euros to Dutch Guilders. In
addition, the cyclical position of the economy would influence the direction in which rounding may have
occurred.
For the Netherlands, our research suggests that there might have been a slight upward effect on the
price level of 0,2% to 0,4%. Overall, competition and peer pressure from consumer organisations would
clearly limit room for manoeuvre. Moreover, possible one-off effects will be more than compensated by
increased price transparency over the years to come.
The merits of the Euro so far
This brings me to the reasons why the Netherlands decided to give up its beloved currency. Foremost,
the Euro is a political project in which the Dutch could not afford to stay out. Integration in a
supranational context protects the interests of smaller European players.
In economic terms, the Euro increases macro-economic stability and cross-border price transparency. It
reduces transaction costs by eliminating exchange rate risks. Moreover, the Euro is a catalyst for further
economic reform and integration. In this respect, the economist Andrew Rose recently published an
interesting article on common currency arrangements. Using cross-country panel data, he shows that
countries with the same currency, trade substantially more than those with different currencies.
Interestingly, the impact of a common currency is also larger than of a fixed exchange rate regime,
which reduces volatility but retains separate monies.
In this light, the Euro is the icing on the internal market cake by broadening and deepening its scale.
But, as always, the proof of this cake is in the eating. Indeed, the three years of the Euro ́s virtual
existence confirm the Dutch political and economic motives. Though some tend to be misled by its
exchange rate, the Euro has proven to be rock solid with low inflation and, with it, a credible European
Central Bank. Now, with hard currency in hand, the public will become more aware of the fact that a
Euro is a Euro, and that the internal stability of the Euro counts. Stable price developments and a low
level of long-term interest rates provide a firm basis for growth.
In addition, the Euro ended once and for all the uncontrolled spending dynamics of the past. Indeed, the
EU is unique in having set itself a standard for sound government finances through the Stability and
Growth Pact. In this light, you probably all heard about the early warning that the European Commission
recommended for Germany and Portugal. As a consequence, both countries strongly re-committed
themselves to budgetary consolidation and the close to balance rule of the Pact. The outcome clearly
reflects the respect of all countries involved for the Pact, and underlines the credibility of the
macro-economic policy framework in general. Thus, the Euro has offered a stable environment both to
governments and business.
Finally, the Euro has already made a spectacular impact on financial markets in Europe. These have
become broader and deeper, with a sharp rise in both the volume of capital issues and the spread of
credit quality. Compared to 1998, total international bond issuance in Euros have more than doubled,
and now compares well with the level of dollar-bonds. The sharp rise in the corporate bond market has
increased financing possibilities and enhances merger & acquisition activities in Europe.
Switzerland and the Euro
Being closed in by Euro-territory, the Swiss can also reap the Euro fruits, all be it partly, in terms of
bigger investment and borrowing opportunities in the Euro-market. In addition, the trading environment
has improved with more price transparency in comparing potential trading partners and less exchange
rate risks. On the downside, potential exchange rate volatility remains, as you have experienced
between the Frank and the Euro.
Given that business services and tourism are central to the Swiss economy, there is no doubt that Euro
coins and notes will increasingly pop up cross border. Indeed, large retailers appear to accept Euros
and a large number of cash dispensers in major cities and at the border produce Euro notes. I heard
that in this city even ticket machines for car parks are made "euro-fähig".
Some point to a possible parallel use of the Euro in economies surrounding the Euro area. In fact, it was
the British that first introduced the notion of a parallel currency back in the early seventies, and again
during negotiations at Maastricht. As an alternative to monetary union, they wanted the intangible
European Currency Unit to compete with the national money. Should the European currency prove
stable and successful, it would by the laws of nature become the sole legal tender. Along these lines,
Helmut Kohl argued recently that Switzerland would adopt the Euro in 2010 at the latest.
However, I think that mature countries such as the UK, Sweden or Switzerland, are not likely to take on
the Euro as national currency without further political integration with the EU. In other words, they will
have to be part of - and committed to - Economic and Monetary Union. Here, we can draw a parallel
with, for example, the limited role of the US dollar in Canada - despite the relative economic weight of
the US and strong trading relations in the context of the North American Free Trade Area.
Future challenges and dynamics of the Euro
It appears, I am already looking into a crystal ball, so let me move on to the future challenges and
dynamics of the Euro for Europe. The dynamics of the Euro clearly lie with the expectations and
pressures of markets and the public opinion at large. A good example is the recent agreement in the EU
that the costs of cross border bank transfers should be substantially reduced. In a similar vein,
economic agents simply do not accept that cross border security transactions are more expensive than
within the US. Therefore, the European Parliament recently accepted the report, prepared under
chairmanship of Baron Lamfalussy, that foresees in speeding-up decision-making on the elimination of
barriers in the European security market. This plan is part of an ambitious EU programme to create a
truly integrated financial market by 2005.
This political spin-off is not limited to the EU alone. For example, the European Commission has
recently opened discussions with Switzerland, and other third countries, on banking secrecy and the
fiscal treatment of savings. I understand that on the Swiss side, this sensitive dossier has been linked to
other fields of negotiations such as Schengen and European immigration policy. It goes to show that
even in third countries the impact of the Euro surpasses the economic domain.
Clearly, the Euro enables the "E" of EMU to reach the critical mass necessary for progress in many
policy areas. In that sense, a further deepening of financial markets will enhance labour mobility, for
example through the portability of pensions and social security entitlements across borders. More
importantly, there are signs that labour market flexibility has been improving. Thus, the European labour
force tends to absorb cyclical fluctuations more effectively. In a similar vein, wage negotiations appear
to adjust faster to changing economic conditions, while inflation expectations have decreased. This
change in behaviour is a reflection of the fact that in the Euro-countries exchange rate flexibility is no
longer available to neutralise structural deficiencies.
The extent of success is determined by one, major factor - European policy makers must recognise the
Euro dynamics and live up to the expectations of long-term integration. Here lies the central challenge
that follows from the introduction of the Euro: Politicians have to deliver. In that sense, the European
Council, that convenes in four days ́ time in Barcelona, will have to put its political weight behind the
liberalisation of the energy market and the deadlines of the Financial Services Action Plan. Moreover,
the Council should be committed to - for example - the speedy adoption of the European take-over and
patent directives, both of which have been on the table for decades.
Conclusion
Let me conclude. A representative of the Deutsche Bank recently said that  ́there has been a lot of
positive Euro speak in the last couple of years, but nothing that has led to better growth ́. I disagree; the
virtual Euro has brought macro-economic stability and increased dynamics in the internal market, the
financial market in particular.
Moreover, the changeover to the tangible Euro has been a major success thanks to the great
acceptance and enthusiasm around Europe for the common currency. The historical and political
importance of the Euro for "an ever closer union among the peoples of Europe" (preamble Treaty of
Rome) is without any doubt.
However, I agree that one needs to put the money where the mouth is. The benefits of the Euro can
only be reaped to the full if its dynamics are acknowledged. In this respect, the Euro is a catalyst for
more growth and employment, while it is a challenge for European policy makers to shape the right
climate.
In a way, the Swiss also face this challenge - the more, now that the EU is on the brink of a sizeable
enlargement. Following Winston Churchill ́s address here half a century ago, the time might come when
sensitive questions on sovereignty and neutrality no longer tilt the balance against playing an active role
in Europe. In fact, an historic breaking point might have been reached with the recent, public majority
support for membership of the United Nations. Should Switzerland ever decide to take part in European
integration, I am convinced that you will embrace the Euro as warmly as the Dutch did on 1 January.