1999, it weakened by 14 % against the dollar, while, in overall terms, the effective exchange rate was down by about 13 %. currency developments largely reflected an unexpected divergence in economic performance between the us and the euro area. growth in the us economy accelerated beyond expectations in 1999, while the expected recovery in the euro area economy was slow. stock markets in the us lent further support to the dollar while outward investment from the euro area weighed on the euro. it was also weighed down by the impression that structural impediments were retarding economic activity in europe. besides, it did not help matters that, in the early days, there was a variety of spokespersons with different prescriptions for the new currency. most commentators accept that the currency is now significantly undervalued and that the tide will turn. the question is sometimes asked whether the absence of political integration is a drawback to the currency. perhaps there is some disadvantage ; all other major international currencies are underwritten by political union. i would not wish to exaggerate the significance of this. the integration of financial markets within the euro area is going ahead at different speeds in different markets. while the money market has been unified quickly, the bond market is still not fully integrated. market structures differ and most of the smaller countries do not have sufficient issue sizes to achieve benchmark status. investors have a preference for the larger markets, where there is greater liquidity. this is not to our advantage. equity markets are least advanced in terms of integration. for many stocks, national considerations are still important. in time, however, trading may become concentrated in a small number of larger centres and the existence of small equity markets may be put in doubt. in this context, the ability of national markets to be competitive, especially in terms of transaction costs, will be a very important factor. emu has brought these issues of competition to the fore and increased the urgency of resolving them successfully. these developments are a source of concern to us because of the tendency towards centralisation. the european central bank is realising its primary objective, which is to maintain price stability within the euro area. although the harmonised index of consumer prices ( hicp ) rose by 1. 7 % in the year to december 1999, this was boosted by a rise of over 10 % in energy prices. while the bank does not target an exchange rate for the us dollar or any other currency, it would be entirely wrong to imply that it pursue

mr o ’ connell gives a review on the euro and the european central bank and makes a few brief remarks on the world economy statement by mr maurice o ’ connell, governor of the central bank of ireland, to the irish parliament ’ s joint committee on european affairs, dublin, on 23 february 2000. * * * before i speak about the euro and the european central bank, may i make a few brief remarks on the world economy. the outlook is quite positive. the us economy has surprised even the most optimistic of observers. growth was of the order of 4 % last year and inflation remains low. europe appears to have turned the corner and to be on a path of stable, if unspectacular, growth. the european economy should expand by 3 % this year and this should be sustained in 2001. the far east generally is recovering, though the recovery in japan appears to be very tentative. as always, there are risks. in the us, factors such as the persistent balance of payments deficit or a declining stock market could undermine success. europe must address vigorously the structural deficiencies that are a dead hand on the economy. japan has yet to demonstrate convincingly that reforms, including consolidation of the financial sector, are beginning to work. at the international level generally, the succession of economic crises in recent years has prompted the authorities to review comprehensively the whole international financial architecture. central to this response have been efforts to improve the quality and availability of economic and financial data and strengthen financial regulation. this is underpinned by institutional developments, such as the creation of two new bodies - the financial stability forum and the g20. this is not today ’ s subject. i mention it, however, because there will be changes ahead which will enforce new standards of regulation and transparency worldwide. the euro it is against this background that we should assess the progress of the euro. the new currency is now in its second year. it is an accepted element of the international financial system, being the second largest currency - second only to the us dollar and ahead of the yen. the euro area has an internal market of about 290 million people, some 20 million more than the us. exports from the area account for almost 20 % of world exports. in 1999 the euro became the most popular currency for new bonds in international markets, accounting for some 45 %, compared with 42 % in us dollars. while the launch of the euro has been a remarkable success, the first year has not been without difficulty. during