Reden und Präsentationen

Es gilt das gesprochene Wort.

Ladies and Gentleman, 

It is a great pleasure for me to speak today at this distinguished conference on such a topical issue as globalisation and the challenges and chances globalisation poses for the euro area.

Before I would like to discuss the challenges and chances of globalisation for the euro area, let me first have a few words on the creation of the euro area and the important role the euro plays for the international financial stability.

The introduction of the euro in 1999 marked the inauguration of a completely new monetary policy framework in Europe. According to the Maastricht Treaty, the European Central Bank (ECB) is charged with the implementation of a single monetary policy for the entire euro area, comprising today a sample of countries with more than 310 million citizens.

With respect to the single monetary policy, the primary objective of the ESCB to guarantee price stabilityis laid down in the Maastricht Treaty. The ECB Governing Council (composed by the Board Members of the ECB and the Governors of the presently 12 NCBs of the euro area and responsible for the single monetary policy) defined price stability to keep annual consumer price inflation (HICP) at rates below, but close to 2 percent over the medium term. As a matter of fact, since the euro was launched in 1999, average euro area inflation has been very close to this target. Long-term inflation expectations have been securely anchored at levels consistent with the ECB’s definition of price stability despite the recent surge in oil prices and other inflationary shocks in the past years.

The obvious success of the single monetary policy for the euro area is based on three broadly accepted parameters of central banking: independency, transparency and credibility.

Independency in the pursuit of price stability for the Eurosystem (i.e. the ECB and the NCBs of the euro area) is laid down in the provisions of the Maastricht Treaty.

Transparency is important in terms of fostering public understanding on how the ECB Governing Council conducts monetary policy. Thus, economic agents and investors are able to base their investment and consumption decisions accordingly. This is a key issue to make monetary policy effective. In this respect, let me remind you that the ECB was the first major central bank to publicly present its overall assessment of the economy immediately after the meetings of the Governing Council in a regular monthly press conference. Moreover, the President of the ECB regularly reports to the EU Parliament.

Referring to the third parameter, I would like to briefly comment on the issue of credibility: With the euro area being a marked-based economy, the Eurosystem is able to steer short term interest rates via its monetary policy instruments. However, it is expectations about the future of the targeted monetary policy rate that determine interest rates along the entire yield curve up to the long end which is the basis of public consumption and investment decisions. In particular, it is expectations about the response of the central bank to price developments in the future that determine the expected rate of inflation. When markets form their expectations accurately and understand well the monetary policy strategy of the central bank, they have no incentive to deviate from the set inflation path. Therefore, the success of monetary policy crucially depends on market expectations and market confidence.

One of the most significant aspects here is that the level of credibility the Eurosystem had earned from the very beginning in 1999 was comparable to the high credibility levels, which most stable European currencies previously already had. The ECB Governing Council has continuously monitored inflation expectations and has remained ready to act – if necessary – in a timely fashion on any changes in expectations. One of the most remarkable achievements of the first eight years of life of the Eurosystem, however, has been its ability to anchor and control inflation expectations. Despite substantial economic shocks long-term inflation expectations have remained stable and well anchored at levels around 2 percent. This clearly signals that the public has not only understood the Eurosystem’s reasoning of monetary policy making but also that the monetary policy stance has been appropriate to ensure price stability over the medium term.

As a consequence of the high market confidence immediately from 1999 onwards, interest rates in capital markets of euro-denominated instruments were priced not at the average interest rate levels of the initially participating currencies, but at the lowest end. This, in particular, came to the benefit of some European countries which traditionally suffered from high budget deficits and high domestic interest rate levels.

In addition, speculative exchange crises, which occurred in the 1990s and happened to threaten the project of monetary integration in Europe belong to the past.

Another issue that is equally important for the proper and smooth functioning of the single monetary policy in the euro area is the deepening of financial integration. Progress in this field is vital for the Eurosystem for many reasons: Firstly, the Eurosystem is responsible for an efficient functioning of payment systems. Secondly, the Eurosystem is responsible for a smooth and safe operation of securities clearing and settlement systems. Thirdly, it is conventional economic wisdom that financial integration strongly increases the potential for non-inflationary economic growth.

Although the degree of financial integration varies between market segments – for instance integration is more advanced in the money market which is closer to monetary policy operations – it is safe to say that the introduction of the euro considerably strengthened financial integration in Europe.

As just one example among others, let me only mention the growing importance of the euro derivatives market, in particular the interest rate derivatives market. The euro interest swap market is currently the largest interest swap market in the world. The daily turnover (EUR 250 billion) is 50% higher than the equivalent US dollar market with a daily turnover of USD 160 billion. To further strengthen the role of the euro overnight index swap market, in June 2005 the EUONIA Swap Index was launched. This is just another example to highlight the importance and growing potential of the euro derivatives markets.

Finally a few words about the international role of the euro. Well developed financial markets are necessary for a currency to play a role as reserve asset. As already mentioned, the introduction of the euro greatly improved the functioning of euro area financial markets. The single currency and associated efforts to harmonise institutional structures led to a reduction in transaction costs as well as a decline in country-specific macroeconomic risks.

In 2004¹), Ben Bernanke, President of the Federal Reserve, pointed out that the development of euro financial markets is frequently seen as the most tangible benefit of European Monetary Union (EMU). 

Recent research, undertaken for instance by the Bank for International Settlement²), has confirmed that liquidity and breadth of euro financial markets are fast approaching those of USD markets.

Nevertheless the introduction of the euro has not yet resulted in a significant change in the currency composition of official reserve holdings. For the time being, the USD has maintained its place as the dominant reserve currency, supported by the edge that USD-based financial markets still have over euro-based markets, especially in terms of size and liquidity. Recent data show that about 64 percent of world currency reserves are held in US dollars and 20 percent in euros.

In addition to monetary stability and the further deepening of financial integration, let me now turn to another important principle for macroeconomic stability in the euro area, the rigorous adherence to the Stability and Growth Pact (SGP). According to the SGP, euro area countries have to maintain budgetary positions that are close to balance or in surplus in the medium term. Moreover, public debt has to be kept at low and sustainable level.

There are several good reasons for fiscal rules in a monetary union, in particular to prevent negative spillovers from fiscal policies to monetary policy or to reduce the risk of fiscal policy externalities: Sound fiscal policies allow for flexibility to shelter the economy from business cycle fluctuations through the working of automatic stabilisers. Moreover, balanced budgets give room for domestic economic management to adapt tax and spending polices. This would significantly help to create a system of incentives for saving, investing and innovating with the ultimate goal of stability and sustainable growth. Besides, it has to be kept in mind that sound fiscal positions are not only in the interest of individual countries but also of the euro area as a whole since the budgetary impact of high deficits on interest rates has to be born by all euro area countries.

Concluding the first part of my speech, I would like to underline that the obvious success of European Monetary Union is based on the efficient interaction of three pillars: a stability oriented monetary policy, sustainable sound public finances and dynamic structural policies. In short, these three principles are the basis of economic stability and growth. I have already expanded on the first two issues. Let me briefly comment on the third pillar – structural policy.

Although some structural reforms have been carried out in the euro area, like the liberalisation of the electricity market and the progress in pension and labour market reforms, flexibility and dynamism could be improved in some euro area economies further. That is why the success of Economic and Monetary Union has not been accompanied by higher real growth.

Indeed, recent research by the ECB³) suggests that euro area countries typically have undertaken more comprehensive and far-reaching reforms than other OECD countries over the past decade. However, comparison of reform progress across policy areas shows that euro area countries have generally not made more progress in reforming the “difficult” areas, where political resistance is strong, than other OECD countries. In the past, these “difficult areas turned out to be – for instance – modification of employment protection legislation (EPL), i.e. relaxing the rules governing temporary contracts; moreover extension of the working age while reducing incentives to retire early or reduction of automatic indexation of wages.⁴)

Furthermore, there appears to have been a slowdown in the reform process in many euro area countries after the formal advent of the euro.

It is vital for an ongoing success of EMU to keep in mind that structural reforms are essential to raise factor productivity and potential output, to create new jobs and to achieve lower prices and higher real incomes! The need for reforms is clearly backed by the fact that euro area potential output growth seems to have moved to the lower bound of its previously estimated range of 2–2.5 percent. I will return to the need of structural reforms in the euro area in more detail later on.

Let me now move to the second part of my speech, the chances and challenges for the euro area in the context of the globalisation process:

Globalisationis characterized by increasing economic interdependencies and linkages between countries as regards trade in goods and services, free cross border capital flows and a spread of technology in the widest sense. With geographical distance and national borders becoming less important, international corporations produce in one country or one region and offer their products and services in other countries or regions. The same applies to the financial industry: economic deregulation and financial liberalisation coupled with rapid progress in the information technology sector enables investors to engage in financial transactions directly on an international basis without having to take recourse to intermediaries.

Up to now, I have concentrated on the domestic dimension of European Monetary Union which has put an end to Europe being an area of monetary tensions, exchange rate crises and macroeconomic imbalances. Let me now point to the – what I would call – regional dimension: the introduction of the euro played an anchoring role for economic and institutional policies in Central and Eastern Europe. With the prospect of joining the European Union and later on the euro area, the new Member States increasingly geared their policies from a command to a market economy. This prospect certainly fostered macroeconomic stability in this part of the global economy.

Full monetary integration will be the ultimate goal of all new Member States according to their progress of sustainable convergence. Trade integration has already fully occurred, financial integration is also highly advanced as EU commercial banks are intensively involved in the banking and other financial systems in Central and Eastern Europe. Recall that Austrian banks currently play a leading role in this area!

In terms of nominal convergence, several years ago inflation rates were still at 10 percent in most of the countries in the region. In the meantime, they have declined to slightly above 3 percent without any loss in economic growth. It is remarkable that at the time of their EU-accession most of the new Member States were closer to the Maastricht criteria than most of the current euro area member countries were five years before the introduction of the euro.

Although rapid progress has been achieved in nominal terms, the achievement of ongoing real convergence will still be an enormous challenge for the new Member States. For instance, purchasing power per head in the new Member States – on average – still amounts to around 50 percent compared to the EU-15 Member States. However, the catching-up potential in terms of real GDP growth still has momentum and could well be around 5 percent per annum for the next years. This is perfectly in line with recent growth experience in the southern part of Germany, Ireland or the North-East of Italy. Thus, the primary focus or challenge for the former “EU-15” and the new Member States in particular will be to retain and bolster nominal convergence within the European Union while accomplishing real catching up.

The anchoring effect of the euro also applies to many other countries than the new EU Member States, located in the neighbourhood of the euro area.

A tightening of economic, financial and institutional links is an integral part in the Stabilisation and Association process (SAp)⁵) with the countries of the Western Balkans, furthermore in the Barcelona Process⁶) with Mediterranean countries and the Partnership and Cooperation Agreements with countries of the Commonwealthof Independent States, notably Russia.

From an institutional perspective, the current framework in partnership, currently prevailing in Europe, is virtually comparable to the European integration process after the Second World War. This development is also reflected in the official and private use of the euro.

Around fifty countries – with varying degree of intensity – use the euro as their anchor or reference currency, most of these countries are near the euro area. As regards the private use of the euro, the euro is the major vehicle currency in foreign exchange markets in countries close to the euro area. In addition, the euro is frequently used as a parallel currency in EU neighbouring countries.

Turning now to the global dimension of EMU, the euro has well established itself as a respected international currency, second after the US dollar. I have already stressed this point. Financial institutions, in particular from the United States, Canada and Great Britain increasingly benefit from the greater size and liquidity of an integrated euro bond market. The share of the euro in the stock of international debt securities has augmented from 20 percent in 1999 to currently more than 30 percent. In addition to this financial markets perspective, the euro contributes largely to global monetary and financial stability.

The euro area constructively takes part in the post-Bretton Woods international setting and actively commits itself to multilateral cooperation. Let me draw your attention to the IMF’s review of the Medium Term Strategy, currently under way, where a strengthening of the IMF surveillance framework figures prominently on the agenda. In addition to an overhauling and streamlining of existing surveillance activities in terms of individual country analysis and exchange rate surveillance, IMF member states agreed on the conduct of multilateral consultations. Multilateral consultations form part of the IMF’s multilateral surveillance responsibilities and are intended to provide “… a forum for debate among parties to a common economic issue …”.

In summer 2006, the IMF has begun the first of its proposed multilateral consultations and the main issue is how to address global imbalances while maintaining robust global growth.

What could be the contribution of the euro or the euro area to deal with the challenge of global imbalances, a major challenge that industrial countries and emerging market economies have to deal with? These imbalances, unprecedented in size and duration, mainly result from developments and policies of three large economic areas, the United States, Asia – in particular China – and the euro area.

In 2005, the U.S. has recorded the highest current account deficit ever, amounting to 6.4 percent of GDP. The predominant factor is the low level of public and private saving. Demographic developments, expectations of continued productivity growth and the large public deficit play an additional role. It is uncontested that the current U.S. imbalances are not sustainable. The crucial point is not whether adjustment will take place, but rather when and how.

Two factors are at work here: The first factor refers to the ability of US agents to continue borrowing and the second to the willingness of other countries to invest in US dollars and hence finance the US economy. Up till now, this willingness – particularly by Asian and oil-exporting countries – seems to be unbroken due to strong growth of the US economy, ample liquidity of US Treasury markets and the security offered by US dollar assets.

Let me now turn to Asia as the second region, thereby focusing on China: China recently recorded a record in its currency reserves of 1 trillion USD and a current account surplus of 6 percent of GDP. The main reason is the high propensity to save (a phenomenon generally referred to as “global savings glut”), largely due to an ageing society and a financial system, which has to be further developed. An interesting point to mention here is that in order to improve their standard of living, large migration flows from rural areas to cities occur. This is one of the major socio-economic challenges for Chinese policymakers. In a nutshell, Chinas primarily export-led growth model will hardly be sustainable over time.

Finally, let me also touch the euro area, the third region with an imbalance that is – in contrast to the U.S. and China – not external, but internal. The euro area current account balance is widely balanced. Unfortunately, the widely balanced current account is more the result of comparably low growth, rather high unemployment and – in general – sluggish consumption and investment activity. Moreover, international competitiveness has to be improved. With structural reforms still ahead the euro area economy seems vulnerable to an abrupt unwinding of global imbalances in the U.S. and Asia. 

Today, there is large consensus in Europe that lower growth in the European Union is, to a large extent, structural in nature. The lesson is, we have to work on the reduction in growth differentials in particular vis-à-vis the United States. The euro area has to put more emphasis on increasing its actual and potential growth via speeding up structural reforms!

This is the main challenge, but also chance for the euro area in a globalized economy. There is no doubt that globalisation has worked well for the people in Europe. 

The European Commission⁷) recently estimated that one fifth of the increase in living standards in the EU-15 over the past 50 years is the result of European integration in the world economy with – and this is remarkable – no expense at higher levels of unemployment.

Rising international economic integration offers direct access to new markets and sources of finance and technology. Companies are provided with the potential for significant cost advantages. As a result, EU Member States benefit from lower prices for consumers and firms, greater volumes of international trade, and potentially higher levels of productivity, real wages and growth.

However, in many EU-countries people are critical and see little benefit from globalisation. Fears spread around that increased import competition from low-wage countries would put too much pressure on domestic producers and workers, economic activity would allegedly be relocated abroad. These anxieties are reinforced by sluggish economic growth and persistently high unemployment in many EU countries. There is no other way to reap the potential gains from globalisation but to adjust towards further specialisation, innovation and diversification into new areas of comparative advantage. This is also one of the key messages of the “Lisbon Strategy”.

The progress made on the economic policy strategy that the EU adopted in 2000 – the Lisbon Agenda – has been limited so far. Yet structural policies are a key factor in advancing the responsiveness of economies to change and in bringing about all benefits of economic and monetary union (EMU). 

When the EU reviewed the implementation of the Lisbon agenda in spring 2005, a number of Member States did report significant progress in several areas – as I mentioned before with regard to the liberalization of electricity and gas markets, the upgrading of the powers of independent competition authorities as well as pension and labor market reforms implemented by individual countries.

Nevertheless, the overall speed of reform has not been satisfactory at all – initially, the Member States set too many priorities, responsibilities were not clearly defined and the pace of implementation was slow.

Therefore, economic growth has remained noticeably below expectations in recent years. Potential output growth has not increased as hoped for, even when taking into account that the full benefit of some structural reforms will materialize only with a certain time lag. Moreover, it seems that policymakers have only partly succeeded in building public confidence by communicating the long-term growth-enhancing effects of structural reforms.

This somewhat sobering assessment notwithstanding, I believe that the targets of the Lisbon strategy are more important today than ever. The European Union continues to face the challenge of defending and improving its position in a global economic environment. The Single Market is yet to completed, especially in the service sector. The framework conditions for establishing and developing innovative enterprises – especially small and medium-sized enterprises (SMEs) – need to be improved further.

On a more positive note, I would like to emphasize that the latest enlargement of the EU may stimulate structural reform in the former EU-15 Member States. While these Member States have partly lost their enthusiasm to modernize, the new members’ willingness to embrace reform has been remarkable. They have shown that it is possible to implement such painful measures as pension reforms comparatively fast and smoothly. It would be wise of the former EU-15 countries to see not only the danger that lies in the competition by the new Member States but to use it as a chance to promote their own competitiveness.

The resolution to re-launch the Lisbon strategy after the mid-term review was an excellent move. It was a wise decision to refocus efforts on a smaller number of key areas, such as strengthening competitiveness, promoting innovation and R&D, cutting red tape and advancing deregulation. We all know that wage competition is a battle Europe cannot possibly win – but it pays to move up a gear and strive to provide top products and services.

To this end, the reform programs submitted by the Member States must of course be ambitious in the first place, and Member States must actually implement them, too.

Not to forget, however, that at the same time, the Lisbon Strategy stresses the necessity to modernise the European social model, inter alia by increasing employment, reforming social protection systems in order to confront the ageing population and struggling against social exclusion.

Therefore, more emphasis should be given by European policymakers to innovation and a more business-friendly environment. It is a worrying sign that the EU is losing attractiveness for R&D-investment relative to the U.S. and other third countries, in particular China. The EU also lags behind its ability to attract highly skilled immigrants. The major challenge in labour markets is to accomplish a smooth but rapid reallocation of labour from shrinking to growing sectors of the economy.

In addition, to realise the potential benefits from globalisation, production structures will have to shift considerably towards further specialisation and diversification into new areas of relative comparative advantage. This process, however, is very likely to be associated with considerable frictions. Throwing sand into the wheels of deeper international economic integration in order to reduce adjustment costs is not a viable option. Policymakers have to withstand protectionist tendencies in face of short-term costly adjustment needs. Gains from economic integration often materialise only in a medium- to long-term horizon. In the past, policies have often been defensive with the aim to shield established industries from new sources of competition. Experience, however, has shown than the adjustment process can only be postponed and frequently has to be carried out with higher costs under higher external pressure later on. Therefore, the adequate response to globalisation cannot be trying to bring the process to a halt.

The response should rather be to design policies to grasp on the chances and opportunities of globalisation in particular in the fields of productivity and growth, while minimising unavoidable adjustment costs. This, exactly, is the focus of the renewed Lisbon strategy, agreed upon in spring 2005. In other words, progress in structural reforms is needed. The right answer to globalisation and international competition is to continue or even to intensify the reform process. A standstill neither creates stronger growth nor new jobs.

In this context, let me remind you of the apparent deadlock in the Doharound, even calling the future of the WTO in doubt. Open trade is of crucial importance for the globalized world economy, suggestions in favour of protectionist measures to counter the increasing competition from Asian economies should be taken seriously. The threat of protectionist pressures needs to be firmly resisted!

Ladies and gentlemen, let me finally return to the starting point of my speech and once more stress the relevance the euro area has for providing a stable monetary and financial environment in Europe.

By maintaining price stability, the euro area significantly contributes to safeguarding an efficient and stable international monetary system. Domestically, a strict adherence to the Stability and Growth Pact, sound public finances and further and ambitious progress in structural reforms within the framework of the New Lisbon Agenda to achieve strong and sustainable growth in the euro area should remain high on the agenda of European policymakers to manage the challenges and chances of globalisation.

Thank you very much for your attention!