christian noyer : the euro, a stabilising factor at home and abroad speech by mr christian noyer, governor of the bank of france, at “ paris europlace " a financial meeting in hong kong, 21 march 2005. * * * introduction • the legal basis for the single monetary policy is the treaty on the european community, whose article 105 states that “ the primary objective of the european system of central banks shall be to maintain price stability ”. • price stability, combined with the convergence of euro area economies, is the key issue enabling the euro to become a stable international currency. • thanks to a strong macroeconomic framework and to the convergence of euro area economies, the introduction of the euro has limited the risks of disequilibrium inside the euro area ( part 1 ). furthermore, the international role of the euro as a vector of stability has increased ( part 2 ). part 1 : the euro has been a key factor for maintaining stability inside the euro area the efficient macroeconomic framework of the euro area ( a ) has made the economies of the euro area more homogeneous and reduced the risks of macroeconomic disequilibrium ( b ). as a result, the euro area is characterized by strong economic fundamentals ( c ). a the macroeconomic framework of the euro area is an efficient framework • for the past six years, the eurosystem has been responsible for defining and implementing the single monetary policy. the primary objective of the eurosystem is to maintain price stability, which has been defined as a year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 % in the medium - term. in may 2003, the ecb governing council confirmed this definition and specified that, in the pursuit of price stability, it will aim to maintain inflation rates close to, but below, 2 % over the medium - term. the monetary policy conducted by the eurosystem has led to a low level of inflation, which averaged 2 % between 1999 and 2004, and to very favorable financing conditions as both short - term and long - term interest rates have reached very low levels. • moreover, in principle, fiscal policies cannot undermine the objective of price stability as the treaty prohibits monetary financing and as member states are committed to implementing the stability and growth pact. however, the lack of fiscal discipline in some euro area countries and the recent debate at the eu level have illustrated the fact that it is still necessary

to enhance the efficiency of the european fiscal framework and, especially, to strengthen the preventive arm of the stability and growth pact, which deals with the surveillance of budgetary positions. the fiscal framework enshrined in the treaty on european union and in the stability and growth pact is a cornerstone of economic and monetary union and, thus, of central importance to the cohesion of monetary union itself. b the introduction of the euro has increased the homogeneity of european economies and limited the risks of macroeconomic disequilibrium inside the euro area the convergence process, the homogeneity of european economies and the synchronization of business cycles have increased since the introduction of the euro • regarding business cycles, some recent work presented by a working group joining the cepr ( centre for economic policy research ) and the eurosystem shows that the correlation between business cycles as a whole and also consumption and investment in most euro area countries has increased since 1999. a common european component seems to play a more important role in these economies than the national components do. the degree of correlation between national cycles and the euro area aggregated cycle varies between 0. 70 and 0. 92. • concerning inflation, the research conducted by the eurosystem shows that the degree of dispersion of inflation rates inside the euro area is not significantly superior to that observed in the usa, where the federal budget and the much more unified market of goods and services constitute additional room for manoeuvre. the standard error of the annual growth of prices in the 12 euro area countries is in the vicinity of 1. 1, compared with 0. 8 in the 14 regions of the usa. • finally, the updating of the vast work on monetary transmission mechanisms led by the eurosystem shows that member states ’ economies are more homogeneous as regards the transmission of monetary impulses since the introduction of the euro. the emu has limited the risks of exchange rate crises and catalyzed the financial integration of the euro area economy • the euro has put an end to the potential effects of exchange rate crises and favoured the emergence of a stable environment characterized by historically low interest rates. thanks to these developments, the euro area countries have not been confronted with difficulties stemming from the uncertainties due to recent geopolitical troubles. • the introduction of the euro has catalyzed the financial integration of the european economy, which is totally complete as regards the money market. in the first weeks following the introduction of the euro