Speeches and Presentations

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It is a pleasure for me to participate in your 12th conference to address this distinguished audience on EMU and the integration of financial markets in the EU. European Monetary Union is one of the most important landmarks of the European integration process and certainly a decisive factor which will influence the world economy in the future. 

In fact, the world is different after 28 February 2002, since all national currencies in the euro area have definitely lost their legal tender status, which is now exclusively held by the euro. It is a tangible currency not only for the more than 300 million citizens of the euro area, but also for travelers, tourists and professional cash handlers from all over the world. 

The introduction of the single currency marked the end of a Europe fragmented by monetary differences. Already, the Single European Market had aimed at removing obstacles to the free movement of goods, services, people and capital. For the countries participating, EMU has eliminated nominal exchange rate volatility and associated costs of exchanging different currencies within the euro area. This avoids a misallocation of resources, and hence fosters growth. The single currency makes prices across the euro area directly comparable, which increases competitive pressures and hence efficiency and growth. Further benefits result from the reduction of risk premia built into real interest rates and from the elimination of premia resulting from less liquid markets. Thus, the successful introduction of the euro and the price-stability oriented single monetary policy of the Eurosystem carry a number of benefits.   

The international role of the Euro: a stabilizing influence 

There is an important international dimension to the euro as the single currency of about 300 million people with an economic weight roughly equal to the USA. The number of principal actors in the international financial system has now been reduced to three – the USA, Europe and Japan. At present, Europe still is trying to find its own, distinguished voice in international financial matters. But the introduction of the euro has a stabilizing influence in the international financial system, as it was successfully demonstrated after the tragic events of September 11, 2001. 

This stabilizing influence will be felt most distinctly in those countries closest to the euro area such as the countries currently conducting accession negotiations with the European Union, thus creating a zone of stability that is even larger than the euro area itself. 

Let me therefore look beyond the confines of the Eurosystem and the European Union – and develop some thoughts about the role of the euro in the context of Europe as a whole. 

For the monetary policies of Central and Eastern European countries, the euro is a key currency already today. In most of the monetary policy strategies of Central and Eastern Europe, exchange rates play a vital role and, wherever they are not a formal or informal intermediate target, they are at least a key monetary policy indicator. In nearly all cases it is the euro upon which the Central and Eastern European currencies are oriented, or to which they are formally linked. As a result, the euro will also gain importance as an intervention and reserve currency in the region. On a microeconomic level the euro has, of course, a certain role to play as a cash currency in Central and Eastern Europe. 

Looking ahead, one of the challenges is, of course, to achieve economic and monetary integration of the candidate countries in a successful way. There, the Union and the Eurosystem will have to proceed in three steps. In a first step, the candidates will accede to the European Union, then they will participate in the ERM II, the exchange rate mechanism of the Union, and finally, they will introduce the euro as their national currency. 

The stabilizing effects of the euro, however, go beyond providing an anchor in the exchange rate regimes of not only EU accession countries but, all in all, about 50 countries within the gravity zone of the euro area. The euro contributes towards more stability in the international financial system by providing price stability, fiscal stability and financial stability. 
As to price stability, most analysts agree that the monetary policy decisions of the ECB Governing Council have been appropriate. Since the beginning of EMU, the euro-area has achieved low inflation and expectations thereof and thus interest rates have been low.   

Stable prices minimize the inflation risk premium, thereby lowering long-term interest rates and helping to stimulate investment and growth. By maintaining price stability, the Eurosystem – as the ECB and the 12 National Central Banks (NCBs) from the Member States of the euro area are called – almost automatically fosters the attractiveness of the euro as an international currency. The commitment of the Eurosystem to pursuing price stability as its main objective remains a key factor behind market confidence in the euro as a global and stable currency. 

As to fiscal policies, the macroeconomic policies pursued in the euro area at present are, on the whole, more conductive to price stability, fiscal prudence and structural changes than at any time in the 1970s, 1980s or early 1990s. 

The multilateral surveillance and the strict adherence to the Stability and Growth Pact are important tools here. The fact that the developments of all Member States’ public finances are continuously scrutinized in detail by the ECOFIN Council implies peer pressure and shared responsibility. Increasing competition has also strengthened the incentives to further improve the efficiency and viability of public sector, labour markets and pension system structures. 

The euro as a catalyst of financial market integration 

Finally, I would like to turn over to the effects of EMU toward greater financial stability. Given the size and the economic clout of the single currency area in Europe, the stability-oriented institutional framework of EMU and the growing integration of the financial markets of the participant countries, the euro stands every chance of becoming a currency of global importance. And in fact, the euro rapidly established itself as one of the leading investment, trading and issuing currencies. The euro is one of the principal currencies on the forex markets, and euro/U.S. dollar trade is by far the most active trading segment. In addition, the euro has become a premier issuing currency. 

In short, the euro has become a catalyst for change in the integration of the up to then largely fragmented European financial markets. Capital can be allocated more efficiently, euro area financial markets have gained significantly in size and depth. 

Generally, the implementation of monetary policy in the euro area has proved highly efficient in fostering financial (market) stability. The Eurosystem has successfully introduced a market-oriented, modern and flexible operational framework. The money market has clearly benefited from this in its refinancing operations. Short-term interest rates have totally converged and the money market within the euro area has become fully integrated.     

In the bond market, too, the euro played and of course continues to play a crucial role in fostering a deeper and more liquid market. The introduction of the euro paved the way for issuers to access a broader base of investors. Investors too have gained access to a wider spectrum of investment opportunities. According to BIS statistics, the euro’s share in net issuance in the first three quarters of 2001 amounted to 44 % , which is almost as high as the share of the US-dollar, namely 48 %. 

The euro has become the second most widely used currency as a result of the overall weight of the euro area economy in the world. When we look at the official international use, the euro is second only to the US dollar among the world’s official reserve currencies. According to the latest available data, the euro accounted for around 13% of the world’s official foreign reserve holdings, compared with a US dollar share of around 66% or the pound sterling and yen, which amount to about 5% each. Historical experience such as the transition from the Pound Sterling to the US Dollar standard has shown, however, that there are considerable time lags before the importance of a currency, as indicated by its economic weight, is reflected in its use as an official reserve currency. 

However, we still face challenges of extending and solidifying the benefits of the euro to all segments of the financial market. Short-term securities markets or repo markets denominated in euro are still insufficiently integrated. Similar to other areas of the EU, several obstacles have to be removed to end those fragmentations. To name just a few of them: Heterogeneous national infrastructures of the market, different regulatory and legal regimes or varying market practices still impede full financial integration. It is in our own interest that the European banking system and its financial markets integrate further. For you as market participants, this would entail the liquidity benefits of deeper and wider markets and lower transaction costs. For us, the benefits would result from a more consistent and efficient implementation of the single monetary policy. 

As others have already observed, the euro was a quantum leap in the direction of creating an economic area without internal frontiers, now we have to remove the many other sources of fragmentation. Furthermore, due to the growth in financial services, both in volume and in depth, and contagion effects of financial crisis, issues of monetary and financial stability have moved up on the international agenda. I strongly believe that the EU’s Financial Services Action Plan shows the way forward with respect to financial market integration and crisis prevention. But we also need the support and the involvement of the private sector and industry associations in order to further the integration of the financial system.    

The EU initiatives to further integration of financial markets 

The Financial Services Action Plan is the EU’s regulatory roadmap to integration. It contains more than 40 legislative and non-legislative measures. The deadline agreed by the European Council in Lisbon and Stockholm for implementing the entire Plan is 2005, with an earlier deadline of 2003 for the securities and risk capital markets. While the ultimate goal is still out of reach considerable progress has been made and the European Council in Barcelona gave political confidence a big boost and contributes to accelerating the delivery of the necessary measures. 

One of the latest achievements was the adoption of the 2nd Money Laundering Directive last December. It is especially important in the light of the events of September 11 which underlined the necessity of a forceful money laundering policy for the integrity of the financial sector. The two Directives on UCITS also adopted in December will give much more freedom to fund managers to invest cross-border in a market worth nearly four billion euro. 

The Directives on a the application of International Accounting Standards, on the creation of a uniform EU legal framework on collateral and on the establishment of a comprehensive European regime on market abuse were adopted after barely six month of negotiation. The agreement reached in Council on the Distance Marketing Directive paves the way for developing an integrated financial market for consumers. It will complement the E-Commerce Directive, which entered into force this January. 

A key concern is still the Takeover Bids Directive, which was rejected by the European Parliament last summer. Nevertheless the aim of the Spanish EU Presidency is to conclude not only this Directive but also to adopt the Directive for a single European prospectus, which has been lively discussed also in the newspapers and whose aim is to facilitate it for European issuers to raise capital, whilst ensuring an adequate level of investor protection. 

The Spanish Presidency is also sparing no efforts to come to an agreement over the most sensible points of the Directive on Pension Funds before June. The current negotiations have definitely been to slow and inconclusive as the promotion of occupational retirement savings can help balance the financing of pension system and alleviate the burden of state schemes. The aim is to achieve equilibrium between investor protection and free market access for financial institutions through the definition of common terms. Pension funds, as long-term investors, can play a key role in the integration, efficiency and liquidity of financial markets. To do so, their investment decisions should not be impeded by restrictive rules which limit opportunities for diversification and reduce returns. The best approach to investment rules will be one that combines greater affordability with security of pension.  

All in all the Council and the European Parliament will have to adopt ten or so legislative acts in order to meet the target dates. The range of topics to be covered is wide and demanding – from the coverage of terrorist risks through re-insurers, which have announced their intention to exclude or strictly limit such risks in the future, till creating conditions for efficient, cost-effective and competitive cross-border post-trading processes, as an integrated market for securities requires adequate clearing and settlement facilities. The political will to achieve these ambitious goals of the Financial Services Action Plan was firmly stated by the European Council in Barcelona and will help to foster the momentum.

International initiatives 

In the wake of globalization there is no doubt left about the importance of a strong and well-regulated financial sector. The crises that have swept emerging markets in recent years were a reminder of the danger that a weak financial sector poses to economic stability. Therefore the International Monetary Fund and the World Bank launched in 1999 the Financial Sector Assessment Program as a joint initiative. It is designed to help countries to enhance their resilience to crises and cross-border contagion, and to foster growth, by promoting financial system soundness and financial sector diversity. 12 countries participated in the pilot phase, 23 in 2001 and 24 assessments are planned for 2002. 

While financial sector assessment has always been an important part of IMF and World Bank activities, the Financial Sector Assessment Program is a more comprehensive analysis with a much higher degree of scrutiny. To supplement the staff of the two organizations, more than 50 institutions – central banks, supervisory agencies and others – provide experts for the assessments.

The core of the Financial Sector Assessment Program are "stress tests" that show whether individual institutions, and the banking sector as a whole, would remain solvent in the face of shocks such as large changes in world interest rates or movements in exchange rates. The Program also provides a reading of "macro prudential indicators" that have in the past signaled crises. For example, high short-term borrowing in foreign currencies (in excess of a country’s foreign exchange reserves) has been associated with past crises. 

Observance of internationally accepted standards and codes, such as the Basel Core Principles for Effective Banking Supervision, is also assessed as part of the Financial Sector Assessment Program. Finally the financial sector’s reform and development needs are scrutinized.    

Conclusions

In concluding and summing up my remarks, I strongly believe that we are on the right track. The substantial potential benefits of fully integrated financial markets clearly show that it is worthwhile to push forward. The best contribution the Eurosystem can make to this process is to ensure price stability and hence create an environment which facilitates macroeconomic stability and further integration and will lead to open, healthy and growing financial markets in Europe. It is determined to turn the successful culmination of European monetary integration into a trigger force to enhance further the irreversible wave of economic integration inside and outside Europe.