Opinion of the Economic and Social Committee on 'An assessment of the introduction of the single currency'
Date: 2000-03-02
Institutions: European Economic and Social Committee
Subjects: European Central Bank, euro, financial market, monetary policy, national currency

26.4.2000

EN

Official Journal of the European Communities

C 117/23

Opinion of the Economic and Social Committee on ‘An assessment of the introduction of the
single currency’

(2000/C 117/05)

On 29 April 1999, the Economic and Social Committee decided, under Rule 23(3) of its Rules of
Procedure, to draw up an opinion on ‘An assessment of the introduction of the single currency’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 1 February 2000.
The rapporteur was Mr Sepi.

At its 370th plenary session on 1 and 2 March 2000 (meeting of 2 March), the Economic and Social
Committee adopted the following opinion by 69 votes to two, with no abstentions.

1.

Introduction

2. The economic climate in the euro area and the ECB’s

view of monetary policy

It may seem premature to draw up an opinion only
1.1.
months after the launch of the euro, and doubtless the short
interval will not permit an exhaustive evaluation of
the
structural
impact of monetary policy in the Eurosystem.
However, given public interest in euro-related matters, this
report meets a widely felt need. The aim is also to develop a
methodology for future use.

The two meetings with the president of the ECB (1)
1.2.
were very important and helped to give a clearer and more
detailed insight into the broad thrust of monetary policy. In
the Committee’s view, these meetings are very useful for
analysing the issues and establishing an on-going dialogue
between the Central Bank and civil society organisations. It is
therefore hoped that the dialogue will continue in the form
that proves most useful.

1.3.
As for the method used, an analysis is needed of
monetary trends, such as credit and interest rates for instance.
However, the Committee is primarily interested in the role of
monetary policy in the development of elements in the real
economy such as employment, GDP, industrial output and
exports.

1.4.
Special attention must also be given to the euro and its
exchange rate, with the dollar in particular, and to the possible
consequences of its growing importance as a reserve currency.

1.5.
The third strand in the analysis concerns institutional
issues: the relationship between the Commission, the Council
of Ministers, the European Parliament, the Economic and
Social Committee and the ECB, and between the ECB and the
national bodies governing the banking and finance sector.

(1) On 11 November 1997 and 30 June 1999.

2.1.
The monthly bulletins issued by the ECB provide very
useful information on the economic climate and, in particular,
on monetary trends.

2.2.
Following the decision in April to cut the interest rate
on refinancing operations, it remained stable at 2,5 %. The
interest rates on deposit and marginal lending facilities were at
1,5 % and 3,5 % respectively.

2.3.
On 4 November, the ECB decided, however, to raise
the refinancing rate by 50 basis points, bringing it back up to
3 %.

2.4.
It would appear that the economy is now recovering
from the sluggishness of the first few months of 1999, though
the signs of recovery have still to be confirmed. The growth
forecasts for GDP within the Community have in any case
been revised upwards by the EU; the ECB believes that rather
than being detrimental to recovery, this interest rate rise will
provide the foundation for non-inflationary growth.

The ECB gives two basic reasons: increased liquidity
2.5.
(M3 aggregate) in the Eurosystem, which has settled at 6,1 %
in contrast to the 4,5 % reference level set by the bank, and
the upswing of certain internal price indicators

2.6.
Regarding the extent of the rise, i.e. the 50 basis points,
the ECB felt it was necessary, first, to give the financial markets
a clear sign of the Bank’s intention to maintain price stability
and, second, to pre-empt the need for further more drastic
measures at a later date.

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2.7.
The acceleration of economic growth, arising primarily
from an improvement in the international climate, especially
in the areas hit by crises, and a recovery in demand in the
Eurosystem, should help to speed up the process of change in
the business and services structure in the EURO area.

2.8.
The indicators published by the ECB in recent months
have been sending contrasting messages with regard to prices.
On the one hand, it is reasonable to assume that national wage
and deregulation policies launched at Community level might
be enough to contain inflationary pressure. On the other hand,
however,
increases in oil prices, and also in those of the
majority of other raw materials, as well as the revaluation of
the dollar, give cause for concern, given the strong growth
in liquidity, especially regarding its more volatile elements
(banknotes and short-term credit).

The ECB considers that its monetary policy, which has
2.9.
also helped to reduce long-term interest rates,
is doing as
much as monetary policy can do to help address the economic
and social problems facing the EU. In the ECB’s opinion, it is
up to economic and social policies to launch the structural
reforms that are necessary to restart the growth of investment
and reduce unemployment.

3. The euro and the economy

3.1.
The Committee considers that price stability is an
important precondition for boosting investment; a view shared
by the ECB, which deserves recognition for its courageous
interest rate policy.

However,

in some countries,

3.2.
investment has been
in spite of an apparently
noticeably slow in picking up,
sustainable level of stability and interest rates that are still very
low. In the last few months (since May), long-term interest
rates have picked up. In the light of weak inflation, the real
level of the rates has risen. Long-term rates have reacted to
international developments, and to the rise in US rates in
particular (although the economic climate in the EU is quite
different).

3.3.
The ECB puts this delay down to a lack of flexibility in
the European economy. On the grounds that business behav-
iour depends on highly complex evaluations, described in part
by the ECB (labour supply and demand structure, incomplete
integration of the financial and product market, and fierce
international competition owing to market globalisation), the
Committee believes that the current situation is compounded
by insufficient activity in internal demand and, not least, in
public investment, although it is aware that it is too early to
make a definitive judgement.

The requirements of the Stability and Growth Pact
3.4.
have obliged all
the countries to adopt restrictive wage
and public spending policies; and the result has been the
development of a contradiction, at least in the short term,
within price stability policies, which on the one hand are a
prerequisite for development, and on the other a major brake
on growth in internal demand in most countries. (The foreign
component of demand is relatively unimportant at European
level. The countries in the euro area must therefore be more
aware that foreign demand plays a secondary part.)

3.5.
The question now is whether the balance between
stability and development achieved under the Stability and
Growth Pact is enough to trigger an upturn in the European
economy, which must be driven largely from within.

The ECB justifies the increase in interest rates by trends
3.6.
shown by indicators within the Eurosystem, but it is surely no
coincidence that the last two rate increases applied by the US
Federal Reserve have been matched by similar ECB decisions.

3.7.
The Committee does not intend to go into technical
matters in its evaluation of the ECB’s decisions, and it is not
yet possible to assess its impact on the recovery. Nevertheless,
it would seem appropriate to underline the fact that the price
level was considerably lower than the 2 % set by the Ecofin
Council and that
in
addition to its positive effect on inflation, slow down the
economic turnaround that had only just begun in certain
countries.

the ECB’s anticipatory move could,

The ECB’s analysis looked first at trends in liquidity
3.8.
and then at a selection of
indicators designed to show
underlying inflation. A clearer definition of these indicators
to provide
and their reciprocal bearing would be useful
greater assurances for operators and, above all, for the other
institutions working to promote economic recovery in the
Eurosystem.

3.9.
The Committee supports the ECB’s decision to play a
consultative role in the European Employment Pact. It would
nevertheless like to see a consultation process on employment
involving all the European institutions, to reflect the scale of
the problem. The macroeconomic dialogue in which the ECB
intends to play a part will be of decisive importance here.

3.10.
The Committee is in favour of changing economic
structures to encourage an upswing. It would also , however,
emphasise the value of the European social model, provided
for under Article 2 of the Treaty and included among the
Eurosystem’s own objectives.

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3.11.
The ECB focuses on the need for a structural policy
to trigger new growth, but the debate has not given enough
weight to the potential of public investment to provide the
European economy with a structural boost. The Committee
sees no contradiction between a policy aimed at liberalising and
privatising certain public industries and public intervention
policies designed to strengthen productive structures when
private input proves inadequate.

The euro will become a circulating currency in 2002.
3.12.
More attention must be given to technical, psychological and
logistical difficulties that could upset the currency launch. The
central banks should act fast to give the banking systems the
support they need to cope with the change. The necessary
monetary tools must be provided in advance to prevent
imbalances that would have a damaging effect on consumers,
distribution companies and, more generally, SMEs. The Com-
mittee intends to draft an opinion to explore this specific issue
in more depth.

The position of the Member States outside the euro
3.13.
area varies, with the pound sterling essentially aligned to the
dollar, and the other currencies mirroring the euro to greater
or lesser degrees.

3.14.
The Committee believes that it is important, even at
this early stage, to assess the benefits of the euro in terms of
exchange costs to companies and consumers,
in order to
ensure that Community legislation is applied as rigorously as
possible. The Commission has drafted a memo on this subject
and the Committee would like to see it published.

4. The institutions and monetary policy

The institutional position of

4.1.
the ESCB is unpre-
cedented. It was established under an international treaty, has
sovereignty over monetary policy, liaisons with supranational
and national economic policy institutions, and is part of an
historic process of economic and political integration, whose
institutional framework has still to be finalised.

4.2.
It could be said to represent a very bold transfer of
sovereignty in a highly important area of traditional national
policy,
in a framework in which executive and legislative
power have not yet achieved a satisfactory configuration.

4.3.
The primary objective of the ESCB is to maintain price
stability. Its next task is to support ‘general economic policies
in the Community’ and further the objectives ‘laid down in
Article 2’ of the Treaty (1).

4.4.
The Committee notes that following initial teething
problems, dialogue with the other institutions has begun to
develop, in spite of the less than ideal circumstances created
by the crisis in the Commission and the European Parliament
elections.

it

The Treaty provides for the seat and timing of meetings.
4.5.
However,
is not always easy to translate the abstract
provisions of the Treaty into the practicality of everyday
relations, which are still not quite up to par. What is needed
above all
the general
is a long-term common vision of
objectives of Community integration.
In this respect, the
practice of holding periodical meetings with the European
Parliament’s committee on economic and monetary affairs
marks a major step forward.

4.6.
Furthermore, the ESCB’s objectives require ECB monet-
ary policy, the supranational institutions’ market integration
policy and national governments’ tax policies to be perma-
nently interlinked. Cooperation and coordination on budget
policy between the governments of the Eurosystem countries
is now becoming a primary requirement for monetary union.
The Committee nevertheless accepts that for the time being
the Stability and Growth Pact has favoured the necessary fiscal
discipline and convergence.

4.7.
A further institutional issue that needs clarifying is the
role of the Council of Ministers in the Eurosystem and its
relationship with the other institutions.

4.8.
The monthly bulletins and speeches by the President
and the other members of the ECB management are important
channels of information for experts in the field and the other
institutions. The Committee would nevertheless recommend
that the ECB also focus on individual country data in its
publications. An effort should probably be made to be more
transparent and to provide more information for the rest of
the public. In this respect, the Committee can see a significant
role for itself as the link with civil society organisations, in the
belief that the backing of public opinion is of vital importance
to the work of the ECB.

(1) Article 2 of the ECB statute: ‘In accordance with Article 105(1) (ex
Article 105(1)) of this Treaty, the primary objective of the ESCB
shall be to maintain price stability. Without prejudice to the
objective of price stability, it shall support the general economic
policies in the Community with a view to contributing to the
achievement of the objectives of the Community as laid down in
Article 2 (ex Article 2) of this Treaty. The ESCB shall act in
accordance with the principle of an open market economy with
free competition, favouring an efficient allocation of resources,
and in compliance with the principles set out in Article 4 (ex
Article 3a) of this Treaty.’

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5. Financial policy

5.1.
Trends in the euro/dollar exchange rate over the
coming months will depend primarily on interest rate develop-
ments in the United States and Europe.

5.2. Meanwhile, the US financial market is bolstered not
only by the dynamism of the economy, the interest rate gap
and the consequent flow of financial resources towards US
markets, but also by the fact that the European financial
market is still too fragmented and heterogeneous in its national
laws and that most domestic trade is still conducted with
national currencies. Nonetheless, there have recently been
encouraging developments in the integration of the euro
monetary and financial markets.

In this context it might be useful to take a look at the
5.3.
supervision of banks, financial establishments, and also that of
financial markets, currently the responsibility of the national
central banks (or other special supervisory bodies), with the
ECB playing only an advisory role. As the Treaty (Article 105)
gives it a degree of power in this respect, the Council should
look carefully into expanding the coordinating role of the ECB
regarding the major European banks, with a view to effectively
harmonising practice and regulations, and applying a single
set of criteria.

6. The international role of the Euro

6.1.
The ECB considers that monetary reserves in the central
banks of third countries have slowly started to diversify in
favour of the euro. It is reasonable to assume that there will
have been no major transfers in the early months, particularly
in view of the persistent trade surplus.

The rise of the euro as an international reserve currency
6.2.
could in any case pose problems for the world economy that
would be very difficult to manage. The Committee hopes that
an international agreement will be sought to help steer a
peaceful course through the transition towards a significant
diversification of the monetary reserves of the national banks
of third countries.

There is a high risk of systemic crises on the world
6.3.
financial market, which could have a negative impact on the
Eurosystem. For this reason, support must be given to
G7-led efforts in the area of global coordination, control and
terms, an area of
supervision.
monetary stability in Europe should help to make capital
markets less volatile and unpredictable.

In any event,

in practical

6.4.
In this context, the persistent dominance of the United
States in IMF decisions should spur the European countries —
starting with Eurosystem members — to speak with a single
voice, particularly now that 11 of them share a single currency.

The high value of the dollar can be explained by the
6.5.
fact that in the last few years the trade deficit has been offset
by an influx of foreign capital resulting from specific profit
conditions in the US. The risk of accelerating inflation or,
more generally, changes in these favourable conditions, could
lead to an outflow of capital and a consequent reduction in
the value of the dollar against the euro.

7. Conclusions

7.1.
The Committee believes that the introduction of the
single currency has, in just a short time, had a positive impact
on the Eurosystem economy, by preventing an increase in
speculation on national currencies and establishing conditions
that will strengthen the European financial markets, for bonds
and shares alike, and consequently bring down interest rates.

7.2.
The establishment of the euro has brought a degree of
stability, lessening the risk that individual countries will adopt
restrictive policies to counter speculation.

7.3. With time, the single currency could provide third
countries with an alternative to the dollar as a reserve currency,
promote cohesion within the European Union and pave the
way for a more harmonised budget policy.

7.4.
The credibility of a currency always depends on
expectations for the future; in the euro’s case, this means
expectations for the sustainable growth of the Eurosystem.
The performance of the euro at international level may partly
be explained by the institutional uncertainty which clouds the
management of the Eurosystem economy. In the Committee’s
view, the starting points for enhancing the role of the euro as
faster market
a world currency are stronger institutions,
integration and reform, and measures to lay the foundations
for development.

7.5.
The strength and stability of the euro will depend not
only on purely monetary measures, but also, and above all, on
income or economic policies to promote structural reform,
employment and social cohesion. These measures should
equip the Eurosystem to compete even more effectively with
the world’s other economic areas.

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7.6.
The Committee believes that the institutional dialogue
launched with the ECB could play an important role as it sets
the scene for better coordination between monetary policies
and the objectives, needs and prospects of the European
economy as a whole.

8. Latest rise in the interest rate on the main refinancing

operations

8.1.
The fact that over the last 20 years the rate of the ecu
against the dollar has fluctuated between 1.7 and 0.6 (1), would
suggest
trends are far from exceptional. The
Americans rarely discuss the dollar quotation, and the Euro-
peans would do well to accept variations in the euro’s exchange

that recent

(1) See article in the Wall Street Journal of 28 January 2000.

Brussels, 2 March 2000.

rate. If the basic strengths of the European economy are to be
translated into a more positive exchange rate movement,
structural reforms in the product, service and capital markets
will have to be stepped up (Cardiff process).

8.2.
The European capital market must develop a better
climate for new business in the more technologically dynamic
areas of the economy.

8.3.
The 25 basis point increase introduced by the Federal
Reserve and then by the ECB beg one further comment from
the Committee. The Federal Reserve decision was followed by
an announcement by the US treasury secretary of a consider-
able debt buyback programme, meaning that the restrictive
measure imposed by the monetary authority was largely offset
by the treasury’s liquidity injection. This would not have been
possible in the Eurosystem, where, in the absence of a single
body to govern the economy (or a treasury secretary), the ECB
is alone in determining the system’s liquidity.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI