Speeches and Presentations

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It is a great pleasure for me to welcome you all to the conference on "Monetary Union: Theory, EMU Evidence and Prospects for Latin America" hosted by the Oesterreichische Nationalbank and the University of Vienna. I am particularly grateful to the Banco Central de Chile, which agreed to be a co-sponsor of this academic conference. This is the first joint venture of the OeNB with a central bank from Latin America, which is particularly valuable for the topic at hand. We are honoured that so many of you are attending this conference to share with us your views and your expertise. I would like to extend a specially warm welcome to my colleague, Governor Carlos Massad from the Central Bank of Chile, and to the keynote speaker of this conference, Sebastian Edwards. 

Since 1st of January this year, more than 300 million European citizens have been using the same new euro banknotes and coins for their daily transactions. The high speed of the changeover and the enthusiastic reception of the new currency in all 12 euro area countries has been remarkable. It represents a big leap forward in the process of European integration, which now finds a visible expression in the daily life of its citizens. Every coin and every banknote bears the map of Europe. The citizens carry Europe literally in their hands. 

The idea of a common currency based on sound economic policies is proving attractive beyond the borders of the euro area. I am not only referring to the Central and Eastern European accession countries, which show a keen desire to participate in the "success story" of the euro, but especially to the three EU countries that have not yet adopted the common currency – Great Britain, Denmark and Sweden. I am personally convinced that they will not want to be on the sidelines for long. According to opinion polls, the popular support for the euro has increased significantly in all three countries after the physical introduction of the currency. 

It is worth reminding, however, that the euro was not created overnight, but rather in a demanding process of convergence that took many years to complete. The first ideas for a European Monetary Union came up in the late 60s. However, the terms and conditions for such a challenging project were not yet mature – neither in political nor in economic terms. Thus, only in the late 80s new progress was made that led to the Treaty of Maastricht more than 10 years ago (on the 7th of February 1992). The exact timetable and the name for the new currency were determined by the heads of state at the end of 1995. Finally, the euro was introduced to financial markets in 1999, and three years later to the retail level as a physical currency. 

As a result of these decisions, and in order to get in shape for the proposed monetary union, the member countries embarked on a remarkable process of economic convergence. Fiscal policy was tightened, inflation declined to the low single digits, and the legal systems were brought in line. 

The creation of EMU was a careful process that built on international best practices, and on a large body of economic research. The trust of the markets in a large and diverse geographic area is of utmost importance. Thus, in order to foster the market´s trust in "monetary stability", the Eurosystem was built around the principle of price stability. Its framework was laid down in international treaties and enjoys constitutional status in all member countries. 

Of its many features, I would like to stress the following five principles, which I consider essential for the success of EMU: 

Independence of the central bank 

First of all, the Treaty of Maastricht has endowed the ESCB with a very high degree of political independence. This came as a recognition of the empirical evidence that good inflation performance around the world is linked to central bank independence. While the economic profession has subscribed to this view for a long time, the issue was more contentious on the political level. The European Monetary Union comprises countries with very different traditions of macroeconomic policy. In some countries, the goal of price stability was subordinate to other economic goals, and often monetary policy was dominated by the financing needs of the state. This was not the case in a second group of countries, where price stability ranked high in the eyes of the public, and legal system set barriers to fiscal incursions into the central bank. The last decade saw a remarkable convergence around this second, stability-oriented approach, which is fully reflected in the design of the ESCB. 

Clear Priority: Price Stability 

According to the Treaty of Maastricht , the Eurosystem´s primary objective is to maintain price stability and, by that, the purchasing power for more than 300 million people. The Treaty leaves no doubt about this priority, even as it retains operational flexibility in the choice of the instruments of monetary control. The emphasis on price stability is important, since it reduces uncertainty and sends an clear signal to the markets. 

Our two-pillar monetary policy strategy allows us – and compels us – to follow closely and systematically a wide range of monetary, economic and financial indicators which give indications of the possible risks of future inflation. After more than three years of EMU we can observe that the Governing Council of the ECB performed very well in safeguarding price stability, i.e. to keep the inflation rate (HICP) for the euro area below 2% in the medium term. Apart from the elimination of exchange rate fluctuations among the former currencies of the euro area, price stability is the main contribution of the EMU to sustained long-run growth, employment creation and better standards of living. 

Fiscal Discipline 

In order to ensure stability, the institutional framework of EMU extends beyond monetary policy. A key ingredient is the Stability and Growth Pact, which intends to promote sound fiscal policies at the level of individual member countries. Fiscal discipline plays a crucial role in keeping pressure off monetary policy. In the end, unsustainable debt burdens have always been monetized. Economic history has shown time and again that monetary policy can not be truly independent, if fiscal policy is not sound. 

True price stability can only be ensured if budgets are broadly balanced over the medium term. This policy will reduce the ratio of public debt to GDP over time and keep real interest rates low. It encourages the "crowding in" of private investment and frees resources for the most productive sectors that are the engines of economic growth. 

Finally, the progressive ageing of the population will result in an important burden on future budgets. Intense strain on Europe´s pension systems will start to be felt in the course of this decade. On this matter, time is not on our side, and the possible size of the problem calls for precautionary actions already today. Fiscal prudence is thus not an end in itself, but also an investment into the well-being of the current working population and of our children. 

Structural Policies

Structural reform is the third pillar of success for the European Monetary Union, especially in the longer term. Structural reform is needed both for its indirect effects on monetary policy via the budget, and for its direct effects on the competitiveness of the Monetary Union.

Competitiveness includes increasing the flexibility of the labor market, creating a more efficient tax system that encourages job creation, and reducing the overall tax burden on the economy. The process of coordinating structural reform in member countries, which was started by the European Council of Lisbon and continued by the Council of Barcelona this March, must be strengthened and deepened. The European Single Market needs to be completed and extended to the areas of public utilities, opening them up to international competition.

The introduction of the euro has increased transparency for consumers who can now easily compare prices accross countries. Thus, the Monetary Union is contributing to the pressure for accelerating structural reform. People are beginning to wonder why large price differentials still exist, and markets will find ways to erode them. However, where price differentials are the result of regulatory impediments to trade, people will start to question the regulations and press for change. The introduction of the euro will give a new impetus to eliminate obstacles to the Single Market. Structural reform – and European integration in general – may become a more "bottom-up" process that is driven by the citizens of Europe, and less the "top-down" process it has been so far, driven by experts and politicians.

Public involvement

This leads me to the fifth and last pillar of success for the Monetary Union, the high degree of public awareness. A deliberate transparency of EMU´s institutions fosters a close involvement of the citizens. The Treaty of Maastricht has imposed extensive reporting requirements on the ECB and on member countries in order to ensure transparency and accountability. The ECB itself goes to great lenghts to keep the public at large well informed. Monetary policy decisions are explained in press conferences at least once month. A large collection of economic data is provided to the interested public in the "Monthly Bulletin" and in corresponding publications of national central banks. The ECB reports in regular hearings to the European Parliament. Finally, it is integrated closely into the decision-making structures of the EU, as the president of the ECB is a member of ECOFIN, and the president of ECOFIN sits at the Governing Council of the ECB. In sum, the ECB is probably one of the most transparent central banks worldwide.

Both the policy of deliberate transparency and the broad popular support for European integration have helped making the physical introduction of the new currency remarkably smooth. The public was well-prepared for the euro change-over, and has greeted the new banknotes and coins with more enthusiasm than anyone anticipated.

The challenges ahead

In many ways, EMU and the euro have already contributed to a deeper economic and political integration of Europe. Nevertheless, I am convinced that the euro will turn into a prime catalyst of further integration, by being an anchor of economic stability, but also by embodying the very idea of an open, dynamic and modern Europe.

More specifically, the next challenge after the successful launch of the common currency will be the enlargement of the European Union. This project is visionary and comprises both new opportunities and risks. The process of integration has given Western Europe a period of political and economic stability not known before in its history. I am therefore deeply convinced that the enlargement of the Union will be to the advantage of all countries on the continent, especially of Austria, and will be regarded as a great historical step in the years to come.

Negotiations have begun in 1998 and are now being conducted with a total of 12 candidate countries. Progress of the talks is encouraging, and many applicant countries have made striking efforts to bring their economies in shape for membership in the EU.

With regards to the monetary aspects of integration, at present a three-step procedure seems plausible:

In a first step, the country becomes a new member of the European Union and adopts the body of community law. This includes laws that guarantee the independence of the central bank and prohibit monetary financing of government deficits. Also, international capital flows have to be fully liberalized. A second step is the participation in the so-called Exchange Rate Mechanism II. This implies maintaining a stable exchange rate within a band of +/- 15 percent vis-à-vis the euro. A successful participation in the ERM II band for at least two years is required before the country can introduce the euro. The mechanism serves as a trial period, to determine how well the economy copes with the loss of exchange rate flexibility and monetary independence. The third and last step before the integration of the central bank into the Eurosystem is a strict and sustained adherence to the Maastricht criteria for economic convergence, especially price stability, sound fiscal policies and low long-term interest rates.

The European Commission and the ECB are monitoring progress closely. The criteria will be applied equally and fairly to all candidate countries, and there will be no discrimination between old and new members of the Monetary Union. Convergence criteria serve as an instrument to ensure sustainable and stability-oriented policies in the long run. Speed must not come at the expense of quality in this process, in the interest of both candidate countries and the present members of EMU.

Euro-ization

Independently of the process of EU enlargement, the euro has become a currency of reference for many countries in the region and beyond. Almost all candidate countries already use the euro in one way or another as their monetary anchor. Even countries that do not count to the group of membership candidates have adopted a close monetary arrangement with the euro. In some cases, the euro replaced an existing peg to the Deutsche Mark or the French Franc, as for instance in the countries of the Western and Central African Monetary Union. In other cases, especially in the Balkans, the euro has been unilaterally adopted as legal tender. Overall, the euro has become the monetary anchor for about 50 countries all around the world. This is a trend that compares in many aspects to the situation in Latin America, where the US dollar has played a prominent role for decades.

The topic of this conference is thus both timely and aptly chosen. Europe and the neighboring regions stand to benefit strongly from studying the experience with dollarization in Latin America. There are important lessons to draw for transition economies, especially about the benefits and risks of giving up their national currencies in favor of a foreign one. The liberalization of international capital flows will automatically lead to a certain extent of currency substitution, as citizens are offered the choice of foreign currency deposits and loans. Should this substitution be promoted or discouraged? Should countries "euro-ize" rapidly, or rather keep their national currency until the latest possible date? What effects has the choice of a particular exchange-rate regime on economic growth and the stability of the real sector?

Ladies and Gentlemen,
The task to provide answers and solutions to these challenges and questions is rewarding. It will ultimately benefit the citizens all over Europe, and, moreover, contribute to international stability. It is my hope that our conference can contribute to these efforts.