Курсовая: European Monetary System

Курсовая: European Monetary System

and the national banking supervisors, as is the case at the national level

where the two functions are separated. The most prominent reason for this is,

of course, the scenario where the provision of liquidity from the central

bank has to be made in a situation that is generated by problems of interest

to the supervisor. But beyond that, I do not know any country in which the

central bank is not very closely interested in the state of health of the

banking system, irrespective of its supervisory responsibilities.

33. In my view, we should move as rapidly as possible to a model in which the

present division of the geographical and functional jurisdiction between

monetary policy and banking supervision plays no significant role. I do not

mean necessarily a single authority or a single set of prudential rules.

Rather I mean that the system of national supervisors needs to operate as

effectively as a single authority when needed. While the causes of banking

problems are often local or national, the propagation of problems may be

area-wide. The banking industry is much more of a system than other financial

institutions.

34. I am clearly aware that we are far from having a common supervisory

system. But since the euro has just been launched and will last, we have to

look in prospective terms at what needs to be set in place. There is no

expectation, at least to my mind, that the division of responsibility in the

euro area between the central bank and the banking supervisory functions

should be abandoned. Although the Treaty has a provision that permits the

assignment of supervisory tasks to the ECB, I personally do not rely on the

assumption that this clause will be activated. What I perceive as absolutely

necessary, however, is that co-operation among banking supervisors, which is

largely voluntary but which finds no obstacles in the existing Directives or

in the Treaty, will allow a sort of euro area collective supervisor to emerge

that can act as effectively as if there were a single supervisor. This is

desirable in the first instance to render the supervisory action more

effective against the background of current and future challenges and,

second, to assist the Eurosystem in the performance of its basic tasks.

TABLES

Table 1. Market share of branches and subsidiaries of foreign

credit institutions as % of total domestic assets, 1997

From EEA countries From third countries TOTAL

Branches Subsidiaries Branches Subsidiaries

AT 0.7 1.6 0.1 1.0 3.4

BE 9.0 19.2 6.9 1.2 36.3

DE 0.9 1.4 0.7 1.2 4.2

ES 4.8 3.4 1.6 1.9 11.7

FI 7.1 0 0 0 7.1

FR 2.5 NA 2.7 NA 9.8

IR 17.7 27.8 1.2 6.9 53.6

IT 3.6 1.7 1.4 0.1 6.8

NL 2.3 3.0 0.5 1.9 7.7

SE 1.3 0.1 0.1 0.2 1.7

UK 22.5 1.0 23.0 5.6 52.1

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 2. Assets of branches and subsidiaries of domestic credit

institutions in foreign countries

as % of total domestic assets, 1997

In EEA countries In third countries TOTAL

Branches Subsidiaries Branches Subsidiaries

AT 2.6 NA 3.7 NA NA

DE 12.0 7.3 7.8 0.9 27.9

ES 5.5 1.4 2.1 5.9 14.9

FI 5.9 0.3 6.6 0.3 13.1

FR 9.1 6.9 9.4 3.8 29.2

IR 8.3 14.9 1.3 10.1 34.6

IT 7.2 2.7 3.8 1.5 15.2

SE 7.2 NA 5.4 NA NA

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 3. Concentration: Assets of the five biggest credit

institutions as % of total assets

1985 1990 1997

AT 35.8 34.6 48.3

BE 48.0 48.0 57.0

DE NA 13.9 16.7

ES 38.1 34.9 43.6

FI 51.7 53.5 77.8

FR 46.0 42.5 40.3

IE 47.5 44.2 40.7

IT 20.9 19.1 24.6

NL 69.3 73.4 79.4

SE 60.2 70.02 89.7

UK NA NA 28.0

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 4. Number of branches and subsidiaries of foreign credit

institutions, 1997

From EEA countries From third countries TOTAL

Branches Subsidiaries Branches Subsidiaries

AT 6 20 2 11 39

BE 25 16 15 15 71

DE 46 31 31 45 153

ES 33 21 20 6 80

FI 9 0 0 0 9

FR 46 118 43 98 305

IR 18 21 3 7 49

IT 36 4 17 4 61

NL 11 8 11 19 49

SE 14 0 3 1 18

UK 106 18 149 114 387

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 5. Private non-financial enterprises' bonds, credit

institutions' bonds and government bonds outstanding as % of GDP,

1997

Private Credit Government

non-financial institutions' bonds

bonds bonds

AT 2.7 31.1 30.6

BE 10.0 38.3 111.0

DE 0.1 54.6 37.6

ES 2.6 4.5 52.9

FI 3.7 7.1 35.5

IE 0.01 1.6 32.2

IT 1.6 19.4 100.4

NL NA 43.1 53.4

SE 3.6 38.6 46.5

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Euro and European integration

Speech delivered by Eugenio Domingo Solans,

Member of the Governing Council and the Executive Board of the

European Central Bank,

at the "Euro and Denmark" exhibition in Aalborg, Denmark,

on 10 September 1999

INTRODUCTION

It is a real pleasure for me to participate in the "Euro and Denmark"

exhibition in Aalborg. It is the first time since my appointment as a member

of the Executive Board of the European Central Bank (ECB) in May 1998 that I

have had the opportunity to speak in Denmark. Thank you for your invitation

and for asking me to share my views on the euro and on European integration

with investors and experts of this "pre-in" country.

I should like to refer to two main topics. First, and more extensively, allow

me to explain the ECB's view and my own view on the role of the euro as an

international currency. After this I intend to make some brief comments on

the key role that the euro and the Eurosystem are playing in the process of

European economic integration.

Before I begin, I should like to add that it goes without saying that the

institutional position of the ECB - and therefore my own official position -

concerning Denmark's entry to the euro area is one of strict neutrality. This

is an issue which has to be decided by the Danish people, whenever and in

whatever way they deem appropriate.

THE EURO AS AN INTERNATIONAL CURRENCY

The three basic functions of the euro

Every currency fulfils three functions: store of value, medium of exchange

and unit of account. Concerning the first function (store of value), the euro

is used and will increasingly be used as an investment and financing currency

by market players, and as a reserve currency by public authorities. Regarding

the second function of money (medium of exchange), the euro is used and will

increasingly be used as a payment or vehicle currency for the exchange of

goods and services and for currency exchange itself. It will also have an

official use as an intervention currency. Finally, as regards the third

function of any currency (unit of account), the euro is used and will

increasingly be used by economic agents as a pricing or quotation currency

and as a pegging currency by the authorities responsible for exchange rate

issues.

Let me give you some information about the present use of the euro in each of

these areas. I shall first refer to the private use of the euro, after which

I shall consider its official public usage.

The euro as a store of value

The available information seems to confirm that the euro already plays a

significant role as an investment and financing currency in international

financial markets. Without going into precise details (1), regarding the

international debt securities market (money market instruments, bills and

bonds), it can be said that in the first two quarters of 1999 net

international issues denominated in euro amounted to EUR 83.9 billion,

compared with EUR 74 billion for the US dollar and EUR 50.9 billion for

former euro area national currencies and ECUs during the same period of 1998.

In other words, in the first two quarters of 1999 net international issues of

debt securities denominated in euro were 13.4% higher than those denominated

in US dollars, and 64.8% higher than those denominated in former euro area

national currencies and ECUs issued during the same period of last year.

With regard to equity markets, the weight of euro area stock exchanges in

terms of capitalisation ranks a clear second, far behind the United States.

As to the banking sector, the latest data show that, at the end of March

1999, above 40% of deposits and loans vis-а-vis non-residents were

denominated in euro, with the share of the US dollar almost as high.

The euro as a medium of exchange

As for the second function of money (medium of exchange), the euro needs more

time to develop as a payment currency for goods and services in international

trade and as a vehicle currency in the foreign exchange markets. Although no

precise data are available at this stage, the value of world exports

denominated in euro is not likely to differ significantly from that of euro

area exports. By contrast, the value of world exports settled in US dollars

is nearly four times as high as that of US exports. This difference can

easily be explained by the combined and reinforcing effects of network

externalities and economies of scale in the use of a predominant

international currency, as is the case with the US dollar.

The euro as a unit of account

The use of the euro as a unit of account (its third general function) is

closely linked to its use for the other two main functions. The use of a

currency as a unit of account is, in a way, the basis for its use as a store

of value or as a medium of exchange. The value stored in euro, or the

payments made in euro, will tend to be recorded in euro. Therefore, we can

conclude that the euro is playing an ever larger role as a unit of account

for all the financial assets linked to the use of the euro as an investment

and financing currency, and has a much less relevant role as a standard for

pricing goods and services, owing to the widespread use of the US dollar as a

payment and vehicle currency in international trade. The convenience of using

a single standard for pricing commodities in the international markets,

allowing traders to make direct comparisons between prices, makes it

difficult for the euro to acquire a significant role in this respect. We can

conclude that the development of the euro as a unit of account will follow

the pace at which the issuers or suppliers of assets, goods or services

priced or quoted in euro obtain a predominant position in the international

markets.

The official use of the euro

The euro also has official uses as reserve, intervention and pegging

currency, all three functions being strongly interrelated in most cases.

With regard to its official use, the euro is currently the second most

international currency after the US dollar, this being a legacy of the former

euro area national currencies.

Compared with the former euro area national currencies, there has been a

technical decline in the share of the euro as a reserve (and, therefore, as

an intervention) currency, mainly owing to the fact that such former national

currencies became domestic assets within the euro area. However, there are

good reasons to expect an increase in international public use of the euro as

a reserve and intervention currency, inasmuch as the public authorities

understand that it is worthwhile to allocate their foreign reserves among the

main international currencies and to give the euro a relevant share in

accordance with its internal and external stability and the economic and

financial importance of the euro area.

In connection with the use of the euro as a pegging currency, approximately

30 countries outside the euro area currently have exchange rate regimes

involving the euro to a greater or lesser extent. These exchange rate regimes

are: currency boards (Bosnia-Herzegovina, Bulgaria, Estonia); currencies

pegged to the euro (Cyprus, FYROM [the Former Yugoslav Republic of Macedonia]

and 14 African countries in which the CFA franc is the legal tender);

currencies pegged to a basket of currencies including the euro, in some cases

with a fluctuation band (Hungary, Iceland, Poland, Turkey, etc.); systems of

managed floating in which the euro is used informally as the reference

currency (Czech Republic, Slovak Republic and Slovenia); and, last but not

least, European Union currencies pegged to the euro through a co-operative

arrangement, namely ERM II. As you well know, Denmark and Greece joined ERM

II on 1 January 1999 with a ±2.25% fluctuation band for the Danish krone and

a ±15% fluctuation band for the Greek drachma. Although the euro remains in

second position after the US dollar in terms of its official use, the role of

the euro will increase in the future, without a doubt.

The position of the Eurosystem concerning the international role of the euro

As a general conclusion stemming from the previous analysis of the use of the

euro in the world economy, we can affirm that the euro is the second most

widely used currency, behind the US dollar and ahead of the Japanese yen. The

private use of the euro as an investment and financing currency and its

official use as a reserve, intervention and pegging currency are increasing

rapidly, while it is developing at a slower pace as a payment currency in the

exchange of goods and services. The use of the euro as a unit of account is

linked to its use as store of value and a medium of exchange.

Taking the current situation as a starting point, the Eurosystem's position

concerning the future international role of the euro is crystal clear: we

shall not adopt a belligerent stance in order to force the use of the euro

upon the world economy. We are convinced that the use of the euro as an

international currency will come about anyway. It will happen spontaneously,

slowly but inexorably, without any impulses other than those based on free

will and the decisions of market participants, without any logic other than

that of the market. In other words, the internationalisation of the euro is

not a policy objective of the Eurosystem; it will neither be fostered nor

hindered by us. The development of the euro as an international currency will

be a market-driven process, a free process, which will take place, without a

doubt.

Factors determining the importance of the euro in the world economy

We understand that the euro fulfils the necessary conditions to become a

leading international currency with the US dollar and not against it. There

is enough room for both currencies in the world economy.

The necessary conditions for a currency to become an international currency

are based on two broad factors: low risk and large size. The low risk factor

is related to the confidence inspired by the currency and its central bank,

which in turn mainly depends on the internal and external stability of the

currency. The low risk factor tends to lead to diversification among

international currencies, since diversification is a means to reduce the

overall risk; it acts, so to speak, as a centrifugal force. By contrast, the

large size factor relates to the relative demographic economic and financial

importance of the area which supports the currency; in other words, the

"habitat" of the currency. The large size factor generally tends to lead to

centralisation around one or several key international currencies. It can be

seen as a centripetal force, as a virtuous circle, which will tend to lead to

an increasing use of the euro as an international currency. Let us consider

these two factors in more detail.

The stability of the currency and the credibility of the ECB

The first factor concerns low risk, credibility and stability. The stability

of the euro is a priority for the ECB. Compared with the idea of stability,

the strength of the euro is of lesser importance. This does not mean that the

exchange rate of the euro does not constitute an element to be considered in

the monetary policy strategy of the ECB. However, the basic factor that will

determine the importance of the euro as a widely used currency in the world

economy, in addition to the demographic, economic and financial dimensions of

the euro area, is, without a doubt, the stability of the new currency,

understood as a means to maintain the purchasing power of savings.

In the global economy the transmission of financial crises by means of

different mechanisms (devaluations of weak currencies, subsequent increases

in interest rates, etc.) is frequently mentioned. Less is said about the

spillover or transmission of positive economic circumstances, such as

stability. The Eurosystem will "export" stability to the rest of the world

economy, and not only in the case of those countries which decide to tie

their currencies, formally or otherwise, to the euro (through the ERM II or

other arrangements). In a global economy the euro area cannot be an island of

stability, but it can transmit its stability to the rest of the world economy

as the links between regions increase.

Stability is the basic requirement for a good currency. It is what we at the

ECB want for the euro. We want a stable euro, not necessarily a strong euro.

In the long term the euro will derive strength from its stability.

The stability of the euro is the basis for the confidence in and the

credibility of the ECB, without which a large international role for the euro

would be unthinkable. Stability is the proof of the effectiveness of the

institution. Yet in order to be credible it is not sufficient for the ECB to

maintain stability. Other parameters of its action must be considered:

accountability, transparency and communication, a Europe-wide perspective.

The conditions for the credibility of the euro are certainly demanding.

However, the achievement of these conditions is the aim of all those of us

who have responsibilities in relation to the operation of the Eurosystem.

The "habitat" of the euro

The second factor, which we have called the large size factor or the habitat

of the euro, is important because without a certain critical mass, a currency

cannot have international relevance, however high its degree of stability. In

addition to quality, quantity is required, as suggested by the example of the

reduced degree of international use of the Swiss franc in relation to other

stable currencies, such as the US dollar or the Deutsche

Mark until 1998.

The figures relating to the population and the GDP of the euro area

illustrate this. With 292 million inhabitants, its population exceeds that of

the United States (270 million) and that of Japan (127 million). The GDP of

the euro area is, on the other hand, equal to 76% of the GDP of the United

States (EUR 5,774 billion compared with EUR 7,592 billion), though it is

higher than that of Japan (EUR 3,327 billion). The source of this

information, which refers to 1998, is Eurostat.

However, even more important than the current figures is the potential for

the future development of the euro area, in terms of population and GDP, if

and when the so-called "pre-ins" (Denmark, Greece, Sweden and the United

Kingdom) join the Eurosystem.

The entry of these countries would result in a monetary area of 376 million

inhabitants, 39% larger than the United States and almost triple the size of

Japan, with a GDP of EUR 7,495 billion, only slightly less than that of the

United States and 125% higher than that of Japan.

All these facts and figures which demonstrate the demographic and economic

importance of the European Union would be further strengthened by enlargement

to Eastern Europe. Our continent has a historical, cultural and geographical

identity - from the Iberian Peninsula to the Urals, with certain additional

external territories - which, in the future, may also come to form an

economic unit. However that is, for the moment, a distant prospect.

The degree of openness of an economic area is also a relevant factor as

regards the international role of its currency. In this respect the euro area

is more open than the United States or Japan, with a percentage of external

trade of around 25.8% of GDP, compared with 19.6% for the United States and

17.9% in the case of Japan (data from Eurostat for 1997). However, a euro

area consisting of the 15 countries of the European Union would be more

closed, by the mere arithmetic fact that the transactions with the present

pre-ins would become domestic transactions, resulting in a coefficient of

openness of 19.4%, similar to that of the United States. Clearly, the size

and the degree of openness are parameters that move in opposite directions:

the larger the euro area, the smaller its degree of openness to other

countries.

The financial dimension of the euro

The size or habitat of an economy does not only depend on demographic or

economic factors; it also has to do with the financial base or dimension of

the area. In considering the financial dimension of the euro area, the first

relevant feature to observe is the low level of capitalisation of the stock

markets in comparison with the United States and Japan. Compared with a stock

market capitalisation of EUR 3,655 billion in the euro area in 1998, the

United States presents a figure almost four times this amount (EUR 13,025

billion). Japan ranks third, with EUR 2,091 billion. There would be a marked

difference if one were to include all 15 countries of the European Union,

since the stock exchange capitalisation would increase to EUR 6,081 billion.

Although these figures could give the impression that the euro area has a

relatively small financial dimension relative to its economic dimension, this

is not the case. The lower degree of development of the capital markets is

offset by a higher degree of banking assets. This means that the financial

base of real economic activity in Europe is founded on bank intermediation,

which is also a feature of the Japanese economy. For example, private

domestic credit in the euro area amounts to 92.4% of GDP, while in the United

States it is only 68.9%. Conversely, fixed domestic income represents 34.2%

of GDP in the euro area compared with 66.1% of GDP in the United States

(statistics from the International Monetary Fund and the Bank for

International Settlements as at the end of 1997, taken from the Monthly

Bulletin of the European Central Bank). We therefore have two distinct models

of private financing which clearly have to be taken into account when

assessing Europe's financial dimension compared with the United States or

Japan.

THE ROLE OF THE EURO AND THE EUROSYSTEM IN THE PROCESS OF

EUROPEAN INTEGRATION

The euro as a catalyst for European integration

The euro, the Eurosystem's monetary policy and, in general, the activity of

the ECB and the Eurosystem will play a key role in the integration of

European financial markets and all markets in general. We can say that the

euro will act as a catalyst for European economic integration.

Monetary and financial integration

The integration of the European money markets relies, of course, on the

existence of a single system for refinancing the banks in the euro area, that

is to say on the common monetary policy. However, it also relies technically

on a system of instantaneous data transfer and on the new common payment

system, TARGET, enabling real-time gross settlement. Thanks to the smooth

operation of the information, communication and payment systems, a common

monetary policy is realistic and the integration of the markets can take

place. Such integration will, in turn, involve greater liquidity and further

development of the financial markets.

A specific channel through which the monetary policy of the ECB and the

TARGET system can have a direct impact on the development of the financial

markets of the euro area is the requirement to have guarantees or collateral

for operations with the ECB. This requirement for adequate collateral can

stimulate the process of loan securitisation, especially in the case of the

banking institutions of certain financial systems. The underlying assets can

be used across borders, which means that a banking institution in a country

belonging to the European System of Central Banks (ESCB) can receive funds

from its national central bank by pledging assets located in other countries,

which is also relevant from the perspective of the integration of the

financial markets of the area.

The trend towards further integration of the European financial markets,

accompanied by increased use of the euro as a vehicle for international

investment, should logically follow a process which would start in the short-

term money market, subsequently be expanded into the longer-term money market

and finally extend to the public and private bond and equity markets. In the

short term there must be a tendency for the differentials in money market

interest rates to be eliminated, as the functioning of the market improves,

while in the long-term securities markets - both public and private, of

course - interest rates will always include a risk premium linked to the

degree of solvency of the country (deficit and public debt, commitments on

pensions), or to the credit risk of the private issuer, and to the liquidity

of the securities.

Economic integration Monetary and financial integration stemming from the

euro and the activity of the Eurosystem will affect the operation of the

European single market in a positive way. The European market, with a single

currency, will tend to be more transparent, more competitive, more efficient

and will function more smoothly. This is the reason why joining the European

Union, as a general rule, leads to joining the euro area, once certain

economic conditions (the so-called convergence criteria) are fulfilled.

The case of Denmark, as you will know better than I, constitutes an accepted

exception to the general rule, formalised in Protocol No. 8 on Denmark of the

Treaty on European Union signed in Maastricht on 7 February 1992, and in the

so-called "Decision concerning certain problems raised by Denmark on the

Treaty on European Union" of 11 and 12 December 1992, which contains the

notification from Denmark that it would not participate in the third stage of

the European Economic and Monetary Union.

However, the Danish krone was in fact pegged to the Deutsche Mark from 1982

until the end of 1998. Furthermore, since 1 January 1999 it has been

participating in ERM II with a rather narrow fluctuation band of ±2.25%, and

effectively has had an almost fixed exchange rate vis-а-vis the euro.

Therefore, the Danish monetary policy, through this exchange rate strategy,

is the monetary policy of the Eurosystem. In other words, Denmark follows

"the rules of the game" almost entirely, or as the Governor of Danmarks

Nationalbank, Ms Bodil Nyboe Andersen, often says, "The Danish krone shadows

the euro".

In this connection, and before the question and answer session begins, let me

conclude by addressing the following key questions to you, on the

understanding that this is a rhetorical way to express my ideas and that I do

not necessarily expect any of you to answer them.

If Denmark already is following "the rules of the game", why, then, should

you not make use of the advantages of belonging to the Eurosystem? Why, then,

should you not participate in the decisions concerning the monetary policy

which, in actual fact, applies to Denmark?

______________________

(1) For a more detailed analysis, see the article entitled "The international

role of the euro", in the August 1999 edition of the ECB's Monthly Bulletin,

pp. 31-35.

***

European Economic and Monetary Union - principles and

perspectives

Summary of a presentation by Ms Sirkka Hдmдlдinen,

Member of the Executive Board of the European Central Bank,

The Tore Browaldh lecture 1999,

School of Economics and Commercial Law, Gцteborg University,

Gothenburg, 25 February 1999

The European integration process started shortly after the Second World War

and was, at the time, strongly motivated by political factors. The aim was to

eliminate the risk that wars and crises would once more plague the continent.

The first concrete result was the establishment, in 1952, of the European

Coal and Steel Community between six countries (Belgium, France, Germany,

Italy, Luxembourg and the Netherlands). This was followed by the adoption of

the Treaty of Rome in 1957, laying the foundations for the European Economic

Community.

The first concrete proposal for a Monetary Union was presented in the so-

called Werner Report in 1970. The Report was intended to pave the way for the

establishment of a Monetary Union in the early 1980s. However, the proposals

of the Werner Report were never implemented - being overtaken by world

events. After the break-up of the Bretton Woods system and the shock of the

first oil crisis in 1973, most western European economies were contaminated

by the economic sickness popularly labelled "Eurosclerosis", characterised by

high inflation and persisting unemployment. At that time, the European

economies were protected by regulations and financial markets were still

poorly developed. In this environment, it was concluded that a Monetary Union

would not be possible and the project was postponed.

The idea of establishing Monetary Union was revived only in 1988 and a

detailed proposal was presented the following year in the Delors Report,

after the launch (in 1985) of the Single Market programme on the free

movement of goods, services, capital and labour. Because of the single

market, the Report could be more explicit and credible with regard to how

best to achieve closer economic ties between the EU economies before the

introduction of a single currency. Moreover, the Report was supported by a

detailed description of an institutional set-up geared towards ensuring

stability-oriented economic policies.

Notwithstanding the thorough work invested in the Delors Report, almost 10

years of convergence and technical preparations were required in order to

ensure the successful implementation of the euro on 1 January 1999. And the

project is still not over: the euro coins and banknotes will be introduced

only in 2002 - 13 years after the presentation of the Delors Report and 32

years after the presentation of the Werner Report.

Achieving a credible currency

Today, almost two months after the introduction of the euro, we can say that

the technical changeover to the euro was successful. Now, the Eurosystem

(i.e. the ECB and the 11 national central banks of the participating Member

States) must focus on ensuring the long-term success of the new currency. The

credibility of a currency is built up by several factors, the basis of which

is the central bank's commitment to price stability. Here, the Eurosystem is

in the fortunate position of being assigned, through the Maastricht Treaty,

the unambiguous primary objective of maintaining price stability in the euro

area. Another fundamental building block of credibility is ensuring that

monetary policy decisions are independent of political pressures. This

building block was also laid down in the Maastricht Treaty, which ensures

that the ECB and the participating national central banks enjoy a very high

degree of independence, possibly more than any other central bank in the

world.

The credibility of a currency also relies on the preparedness of governments

to pursue stability-oriented policies of fiscal discipline and to undertake

necessary structural reforms. On this point, the Stability and Growth Pact

adopted by the EU countries provides a basic framework for fiscal discipline

and should enhance the governments' incentive to proceed with structural

reforms.

In order to enhance credibility, it is also important that the central bank's

strategy for achieving the primary objective is clear and that the link

between the strategy and the central bank's policy actions is easily

understood by the public. By following a transparent approach, the central

bank can directly improve the efficiency of monetary policy. This contributes

to achieving stable prices with the lowest possible interest rates.

Striving towards increased transparency led the Governing Council of the ECB

(composed of the Governors of the 11 national central banks and the six

members of the ECB's Executive Board) to establish a precise definition of

price stability in order to bring about absolute clarity as regards the

primary objective; price stability was defined as a year-on-year increase of

the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

This is a medium-term objective. In the short run, many factors beyond the

scope of monetary policy also affect the price movements.

The adoption of the Eurosystem's monetary policy strategy also aimed at

enhancing transparency in the implementation of monetary policy. The strategy

is based on two key elements: First, money has been assigned a prominent role

in the form of a reference value for the growth of the euro area wide

monetary aggregate M3. Second, the Eurosystem carries out a broadly based

assessment of the outlook for price developments and the risks to price

stability in the euro area on the basis of a wide range of economic and

financial indicators.

In order to explain to the public the Eurosystem's policy actions against the

background of the adopted monetary policy strategy, the Eurosystem uses

several channels: the ECB's Monthly Bulletin; the issuance of a detailed

press release after each Governing Council meeting, in which the decisions

are explained; the organisation of a monthly press conference at the ECB; the

appearances of the President at the European Parliament; and, finally, the

numerous speeches and articles by the members of the Governing Council. Taken

as a whole, the Eurosystem is probably among the more active central banks

when it comes to explaining its policies to the public.

A further important building block in order to establish credibility is the

promotion of an efficient implementation of the monetary policy decisions.

The Eurosystem has aimed to set up an operational framework which is

consistent with market principles and which ensures equal treatment of

counterparties and financial systems across the euro area. The Eurosystem's

operational framework is based on the principle of decentralisation in order

to take advantage of the established links between the national central banks

and their counterparties. The monetary policy operations will therefore be

conducted by the national central banks, while decisions are taken centrally

in the ECB's decision-making bodies.

The consequences of a single currency: perspectives for the future

The most important effects of the single currency relate to the possibility

of improving macroeconomic stability and credibility for the policies

pursued; these effects are particularly important for the smaller European

economies. Moreover, important benefits can be derived from microeconomic

factors, such as lower transaction costs, wider and deeper financial markets,

improved price transparency and increased competition.

Starting with the macroeconomic factors, Monetary Union makes it possible for

the participating countries to combine their credibility. In this way, small

countries can, to a certain extent, "borrow" credibility from some of the

large countries which have pursued stability-oriented policies for a long

time. Under credible conditions, the financial markets are no longer under

pressure from speculative attacks by large institutional investors. Price and

interest rate developments are stabilised, and the investment climate for

companies is secured. In the microeconomic field, the most obvious

consequences relate to lower transaction costs and increased price

transparency across national borders. These factors are likely to contribute

to increased competition and downward price pressure on many products.

One very important consequence is that the use of a single currency will give

rise to larger and more competitive financial markets in the euro area. In

most European countries, the financial markets have, by tradition, been

rather shallow, with few participants and a rather narrow set of financial

instruments on offer. A high degree of segmentation and a lack of cross-

border competition have implied relatively low trading volumes, high

transaction costs and a reluctance to implement innovative financial

instruments.

On the introduction of the euro, the foreign exchange risk of trading in the

different national markets in the euro area fully disappeared. This has

triggered increasing cross-border competition and has provided an incentive

for the harmonisation of market practices. In fact, the trading of money

market paper and euro area government bonds can already be considered to be

largely integrated. The markets for private bonds are still segmented owing

to the differing institutional and regulatory conditions across Member

States, but they, too, will gradually integrate and provide an incentive for

increasing the issuance volumes of private bonds. This will contribute to

reducing the financing costs for private companies, and it will provide

improved opportunities for investors.

Monetary Union provides much needed assurance of exchange rate stability for

exporters, importers and investors. This is particularly important for small

and open economies. In fact, most countries in Europe are to be considered

small in the current global perspective. The active use of the exchange rate

as a tool of economic policy could be an alternative for a large reserve-

currency country. For a small country, experience has shown that large

changes in the exchange rate tend to give rise to higher costs rather than

benefits, due to the harmful effects on expectations and higher interest

rates.

Some of the economic effects of the Monetary Union may partially benefit also

the countries remaining outside Monetary Union. Nevertheless, it is important

for the "out" countries, to assess whether they find that the benefits of

maintaining a national monetary policy "autonomy" - if there is any such

autonomy in an integrated and globalised market situation - outweigh the

possible drawbacks of not being able to fully draw on the credibility of the

euro area, the integration of the euro area financial markets, lower

transaction costs, improved price transparency and increased competition.

The euro and the Nordic countries

The Nordic countries have chosen to organise their monetary policy ties to

the euro area in very different ways: Finland is the only Nordic country

taking part in Monetary Union as from the start of Stage Three; Denmark

negotiated an opt-out from Monetary Union but follows a fixed exchange rate

policy vis-а-vis the euro within the new Exchange Rate Mechanism (ERM II);

Sweden decided not to participate in Monetary Union from the start of Stage

Three, without having a formal opt-out and the Swedish krona still floats

freely against the euro; and Norway and Iceland remain outside the EU

altogether.

The divergent approaches taken by the Nordic countries as regards one of the

most important economic and political projects in Europe in modern times are

somewhat strange in view of their traditionally close cultural, historical,

political and economic ties. Nordic co-operation has always been very

important and close. I note with satisfaction that the public opinions in

Denmark and Sweden now seem to be swinging in a more favourable direction

with regard to future membership. Maybe the successful implementation of the

euro has made the public understand that Monetary Union is aimed at ensuring

long-term stability in Europe. In this context, the recent signals from the

Government of the United Kingdom in favour of membership in the Monetary

Union are also very encouraging.

Personally, I think that it would be beneficial to all Nordic countries - and

the United Kingdom - to join Monetary Union within the not too distant

future. I hope that Sweden and Denmark can become members already before the

introduction of the euro banknotes and coins in 2002.

It is important for these countries to also assess the political aspects of

remaining outside Monetary Union. Experience has shown that EU Member States

which have taken initiatives and worked constructively towards European

integration have been generally more successful in gaining influence than

those less committed to the project. In this respect, it should be noted that

the aim of the Maastricht Treaty is clearly to establish a Monetary Union

comprising all EU Member States.

Personally, I also think that the Nordic countries could provide a fruitful

joint contribution to the long-term success of Monetary Union. There is no

need to overemphasise the role of small countries in this process, but it is

clear that co-ordinated views by a group of small countries would have a

larger influence than the views of individual countries. One of the benefits

of the Nordic countries - and small countries in general - is that they are

seldom bound to their old traditional system. In contrast, they typically

fight for efficient solutions which would be in the interest of the whole of

the euro area.

Concluding remarks

The project to establish European Economic and Monetary Union was carefully

prepared and based on very strong political commitment. It has contributed to

the co-ordination of economic policies - even in a wider sense - in an

environment of deregulated financial markets and the free flow of capital.

The stability arguments behind the introduction of the euro have been so well

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