WRITTEN QUESTION E-2256/00

by Theresa Villiers (PPE-DE) to the Commission

(4 July 2000)

Subject: Action to support the euro

Following the Ecofin meeting of 8 May 2000, the French Finance Minister, Laurent Fabius, commented that concrete action could be taken to boost the euro.

It was reported that the Finance Ministers agreed that an instrument of intervention exists, and is available, referring to the reserves of the European System of Central Banks.

Could the Commission indicate which instruments could be invoked to support the euro, the circumstances under which they could be invoked, and who would be responsible for taking such a decision?

Answer given by Mr Solbes Mira on behalf of the Commission

(28 July 2000)

Economic policies have an impact on the development of the exchange rate through various channels. While monetary policy has a direct impact through its interest rate and intervention policies, other economic policies have an indirect influence as they affect expectations of economic agents.

The European Central Bank (ECB) can modify the attractiveness and profitability of portfolio investments in euro by changing interest rates. An increase in the main refinancing rate, the main policy instrument of the ECB, would normally attract capital inflows, thus supporting the exchange rate. Rising interest rates would also favourably influence inflation expectations, thus underpinning the stability oriented credibility of the ECB. Another instrument for exchange rate policy is intervention on foreign exchange markets. By buying the euro on foreign exchange markets against foreign reserves, the ECB would signal to the market that the exchange rate is undervalued. Unsterilised interventions would reduce liquidity on the domestic money market and tend to increase interest rates while sterilised interventions would have a demand effect only. The effect of interventions on the exchange rate would be larger if jointly undertaken by the respective central banks.

Other economic policies, in particular fiscal and structural policy, have an indirect effect on the exchange rate. A well balanced fiscal-monetary policy mix would strengthen the exchange rate development in the medium term. Structural reform and a well-functioning labour market may raise the expected rate of return thus attracting investment in the euro area.

The EC Treaty distinguishes clearly between the responsibilities for economic policies in the euro area. While the ECB decides independently about monetary policy, fiscal and structural policies are in the responsibility of the Member States. Therefore, the ECB decides about interest rates with a view to safeguard price stability in the euro area. Fiscal policies are decided at the national level with a view to support monetary policy in its goal of price stability. The stability and growth pact is an effective co-ordination tool to achieve this objective.

Concerning interventions, the EC Treaty provisions (Articles 105, 111) suggest that the ECB conducts foreign exchange operations consistent with general orientations formulated by the Council. However, such general orientations are without prejudice to the primary objective of the European system of central banks (ESCB) to maintain price stability. For the time being, the Council has not formulated such general orientations.

So far, the ECB has not intervened on foreign exchange markets. As the exchange rate is not a target variable for the ECB, interactions to support the euro could become necessary only if the exchange rate is clearly misaligned, threatening the inflation target of the ECB. The ECB disposes of foreign exchange reserves of 50 100 million (30 June 2000) which could be used for interventions. The Eurosystem as a whole has foreign exchange reserves of almost 390 000 million.