Курсовая: Европейская денежная система

Курсовая: Европейская денежная система

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

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

European financial markets and all markets in general. The euro is

acting as a catalyst for European economic integration. And more

integration will lead to a greater economic and financial dimension.

Monetary and financial integration stemming from the euro and the

activity of the Eurosystem will affect the operation of the single

European 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, will lead to joining the

euro area, once certain economic conditions (the so-called convergence

criteria) have been fulfilled.

Monetary union is always a political operation, irrespective of its

technical and economic implications. Currency is one of the most genuine

expressions of sovereignty, because the power to issue money is one of

the greatest powers in existence. The Treaty on European Union led,

first, to the depoliticisation of monetary power in Europe, by means of

granting independence to the central banks and prohibiting the

monetising of public deficits, and afterwards to denationalisation or

supranationalisation (via the creation of the Eurosystem). The

Eurosystem was not only created for the purpose of improving the

operation of the Single Market, but also in order to make progress on

the building of the European political structure.

The euro should not only be seen as a catalyst for European economic

integration, it should also be seen as a main beam necessary to

construct the European political structure. The relationship between

political power and monetary power is an interesting subject which is

open to investigation and discussion, but that would certainly go beyond

the scope of this speech. I merely wish to point out that, in the case

of Europe, it is clear that following the achievement of a single

currency, the door remains open to political union, which would

represent a crucial step in the process of integration. In conclusion,

it would seem clear that the implications of the euro go "beyond

supply and demand" (to use the title of the work of Wilhelm Rцpke). We

are now fully immersed in "meta-economy", which means it is time to end

my speech.

Keynote address to be delivered by

Dr. Willem F. Duisenberg

President of the European Central Bank

on

The European System of Central Banks

Current position and future prospects

At a Conference organised by the Royal Institute of International

Affairs on

European economic and Monetary Union

Markets and Politics under the Euro

London 27 november 1998

1. Introduction

Ladies and Gentlemen, I should like to express my appreciation at being

invited to deliver a speech at this conference organised by the Royal

Institute of International Affairs. It is a great pleasure for me to be here,

in London, today.

The topic I am going to address relates to the current position and the

future prospects of the European System of Central Banks. I feel that this

topic provides me with an opportunity to deal with the objective of the ESCB

and its contribution to the other policies in the Community. I will also

briefly touch upon the decision-making in the ESCB, recall the main features

of our monetary policy strategy and talk about our regard for openness and

transparency. The final part of my talk will cover the views of the ESCB on

recent economic developments and the future outlook for price stability in

the euro area.

2. Independence, transparency and accountability

In the Maastricht Treaty the ESCB has been given an independent status. The

reason is that politicians all over the world have come round to the view

that monetary policy decisions taken with too close a political involvement

tend to take too short a time horizon into consideration. The consequence is

that in the longer term such decisions do not support sustainable gains in

employment and income, but only lead to higher inflation. This view is

confirmed by a host of economic research.

Independence, however, requires a clear mandate. The ESCB has such a mandate.

Its primary objective is to maintain price stability. Without prejudice to

the objective of price stability the ESCB shall support the general economic

policies in the Community. Price stability is not an end in itself: it

creates the conditions in which other, higher-order, objectives can be

reached. In particular, I share the deep concerns about the unacceptably high

level of unemployment in Europe. The ESCB will do what it can to contribute

to the solution of this problem. By maintaining price stability inflation

expectations and interest rates can be kept at a low level. This creates a

stability-oriented environment which fosters sustainable growth, a high level

of employment, a fair society and better living standards. Moreover, in

specific circumstances, if production, inflation and employment all move in

the same direction, monetary policy can play some role in stabilising output

and employment growth without endangering price stability. However, the

contribution from monetary policy can generally be only limited. Given the

structural nature of the unemployment problems the solution is to be found,

above all, in structural reforms aimed at well-functioning labour and product

markets.

An independent central bank does not only need a clear mandate. It has also

to be an open and transparent institution, for at least three reasons. First,

transparency enhances the effectiveness of monetary policy by creating the

correct expectations on the part of economic agents. A predictable monetary

policy contributes to achieving stable prices without significant adjustment

costs and with the lowest interest rate possible. The second reason is that

in a democratic society the central bank has to account for its policies.

Finally, transparency towards the outside world can also structure and

discipline the internal debate inside the central bank.

Let me now turn to the ways and means of achieving transparency. As a first

element the ESCB has defined a quantitative objective for price stability. It

reads as follows: price stability is a year-on-year increase in the

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

Although I do not consider deflation to be likely in the current environment,

I may add that a situation of falling prices would not be consistent with

price stability.

The Governing Council has made it clear that "Price stability is to be

maintained over the medium term". The ESCB cannot be held accountable for

short-run deviations from price stability, for example due to shocks in

import prices or specific fiscal measures. A monetary policy reaction to

short-run fluctuations in the price level would provide the wrong signals to

the market and cause unnecessary interest rate volatility. In summary, the

ESCB will react in an appropriate, measured and, when necessary, gradualist

manner to economic disturbances that threaten price stability in the medium

term, rather than in an abrupt way, in order to avoid unnecessary disruptions

of the process of economic growth. That said, the ESCB will, whenever

necessary, openly discuss and explain the sources of possible deviations from

the quantitative definition of price stability.

In addition, let me remind you that by focusing on the HICP for the euro

area, the ESCB makes it clear that it will base its decisions on monetary,

economic and financial developments in the euro area as a whole. The single

monetary policy has to take a euro area-wide perspective: it will not react

to specific regional or national developments.

The institutional implication is that the ESCB should develop into a strong

unity, with a strong centre and strong national central banks. It should

become a truly European institution, with a truly European outlook. Of

course, it may take some time to arrive where we ultimately want to be. We

have to get used to thinking in euro area-wide terms. In the ECB Governing

Council we are already "practising" that approach and are making progress. I

am confident that the ESCB will indeed act as a unity.

Transparency and openness will be apparent from the way in which the ESCB

communicates with the public. The ESCB will regularly present its assessment

of the monetary, economic and financial situation in the euro area and

provide information about each specific monetary policy decision, be it a

move in interest rates or an absence of change. This will notably be done by

way of press releases, press conferences, publications and speeches. Press

releases are made available immediately after the fortnightly meetings of the

Governing Council and, as you may know, they always include a precise list of

the decisions taken together with background information.

There will be a monthly press conference. Such a press conference will start

with a detailed introductory statement, as has been the case so far, and

these introductory statements will also be published immediately, without

delay. In this statement the Vice-President and I will present the Governing

Council's view of the economic situation and the underlying arguments for its

monetary policy decisions, followed by a question and answer session.

The publications of the ESCB will include, in particular, an ECB Bulletin

each month as well as an Annual Report. As from 1999, a detailed analysis of

the economic situation in the euro area will be presented in the monthly

Bulletin. Thematic articles in this Bulletin will include in-depth analyses

by the ECB on matters regarding the monetary policy of the ESCB and the

economy of the euro area. Further, you may also recall that, as required by

its Statute, the ESCB will publish its consolidated balance sheet on a weekly

basis.

My colleagues on the Executive Board of the ECB and I intend to be very

active in giving speeches dealing with all issues of relevance for the

conduct of monetary policy. I am convinced that the Governors of the national

central banks will also play their role in this respect.

Since I am talking about the communication and external relations of the

ESCB, I would like to underline that I am prepared to accept invitations to

appear before the European Parliament at least four times a year to present

the activities of the ESCB and the ECB's Annual Report. Finally, it should be

noted that the ESCB will have a regular exchange of information and views

with the ECOFIN. Representatives of the ECB will be invited to ECOFIN

meetings whenever issues of concern to monetary policy are discussed. A

similar relationship will naturally also exist with the EURO-11, whose

meetings will generally be attended by the President of the ECB, whenever

matters relevant to the ESCB are on the agenda.

3. Monetary policy strategy of the ESCB

We are now approaching the start of the Third Stage of EMU. The decision-

making bodies of the ECB have made a certain number of important decisions

since the ESCB was established. As part of these decisions, the monetary

policy strategy of the ESCB was recently announced and explained to the

public. The selected stability-oriented strategy promotes as much continuity

as possible with the existing strategies of national central banks in the EU.

At the same time, its design is adapted to the unique situation of

introducing a single currency in eleven countries, which may to a certain

extent change economic behaviour. Therefore as much continuity as possible

and as much change as required is the thrust of our strategy.

Our strategy consists of two pillars. The first is an important role for

money and the second is a broad-based assessment of the outlook for price

developments in the euro area. The main reason for assigning a prominent role

to money is the empirically well-founded view that inflation, at least in the

long run, is a monetary phenomenon. This simple and obvious observation led

the Governing Council to announce a quantitative reference value for the

growth of a broad measure of money. This choice will create a "nominal

anchor" for monetary policy and therefore help stabilise private inflation

expectations at longer horizons. The reference value will be derived in a

manner that is clearly consistent with - and serves the achievement of -

price stability. It will be constructed such that, in the absence of special

factors or other distortions, deviations of monetary growth from the

reference value will signal risks to price stability.

However, it has to be clear that the reference value is different from an

intermediate monetary target, as the ESCB has not made any commitment to

correct deviations of actual monetary growth from the reference value over

the short term. In particular, it has been realistically recognised that the

move to a single currency and ongoing financial innovations may generate

fluctuations in the selected monetary aggregate which are not necessarily

associated with inflationary or deflationary pressures. For this reason, it

is important to continuously monitor the relevance of temporary factors or

even structural changes in order to avoid a mechanistic policy reaction to

deviations of the chosen monetary aggregate from the reference value. The

results of this analysis and its impact on the ESCB's monetary policy

decisions will be explained to the public.

Let me turn now to the second key element of the monetary policy strategy,

the broad-based assessment of the risks to price stability. The information

contained in monetary aggregates, while of the utmost importance, will by no

means constitute the whole of the "information set" in the hands of the ESCB.

In parallel with the analysis of money growth, a wide range of economic and

financial variables will be used to formulate an assessment of the outlook

for price developments. The envisaged strategy will enable the ESCB to

perform a cross-check between the information coming from the evolution of

monetary aggregates and those from other economic and financial indicators.

4. Recent economic developments and prospects

Let me turn to the current economic situation. The euro area experienced a

strengthening of economic growth in 1997, to 2.5%, and a further acceleration

has been anticipated for this year. The global environment has, of course,

deteriorated in the meantime, but this has not so far had an observable

impact on growth which has, in any event, been increasingly led by domestic

demand. Inflation has remained subdued and even fallen somewhat over the past

year, partly as a result of the impact of weaker global demand on oil and

commodity prices. However, the favourable pattern of inflation has also been

supported by domestic factors, such as a very moderate development in unit

labour costs and industrial producer prices.

Concerning recent price developments, HICP inflation for the euro area fell

to 1.0% in September, due to a strong impact from food prices, but I would

not want to read too much into this latest decline as some price components

can be relatively volatile over short periods. More significantly,

preliminary data suggest that various broad monetary aggregates for the euro

area are increasing at between 3 and 5%, and thus do not appear to signal any

strong incipient inflationary or deflationary pressures. We are in line with

the consensus view that inflation in the euro area will rise moderately in

1999, but remain below 2%. I do not consider deflation to be a serious risk

for price stability at present.

So far, despite the worsening of the global environment, euro area-wide

activity has continued to expand at a fairly stable rate. At around 3%,

annual real GDP growth was broadly unchanged in the first half of 1998 from

the solid growth seen in the second half of 1997. Industrial production

growth has slowed somewhat since the spring. More recent evidence,

particularly that of the area-wide survey data, may also suggest a moderation

in the pace of growth and further developments in these indicators will

continue to be monitored closely. Area-wide growth should, however, be

supported by a number of domestic factors. One factor supporting continued

growth, particularly in private consumption, is the gradual improvement in

labour market conditions. Moreover, the lowest short-term interest rates in

the euro area currently stand at 3.3%, and several countries have cut

interest rates towards this level recently as part of the process towards

interest rate convergence. The process of convergence towards this level has

been gradual, but should imply a reduction in the average short-term interest

rate in the euro area of about 0.5 percentage point since July. Long-term

rates also stand at low levels. And, there has been a marked degree of

exchange rate stability among countries participating in the euro. This is

undoubtedly a welcome development from the standpoint of encouraging trade

and investment. Thus, our assessment is similar to that of other

international organisations, that - unless the international environment

deteriorates further, which is not currently expected - growth will be

somewhat weaker in 1999. Growth should, however, remain high enough to

support continued employment creation and, assuming a recovery in the

international environment, there should be a pick-up in growth in the year

2000. At the meetings in December the ECB Governing Council will again assess

the outlook for economic and price developments.

Although the economic outlook may be less favourable than expected - let us

say - half a year ago, I believe that the conditions for a successful launch

of the euro are in place. You can be sure that the ESCB will do its utmost to

make the euro a stable currency.

The euro: pushing the boundaries

Presentation by Ms Sirkka Hдmдlдinen,

Member of the Executive Board of the European Central Bank,

at the symposium arranged by the European Private Equity and

Venture Capital Association

on 11 June 1999 in Prague

It is a great honour for me to be invited here today to this symposium

arranged by the European Private Equity and Venture Capital Association to

speak about the new European currency - the euro. Indeed, the theme of this

symposium - "Pushing the boundaries" - is very appropriate when speaking

about the euro. To my mind, the establishment of Economic and Monetary Union

can be characterised as pushing the boundaries in several ways, such as:

* pushing the boundaries in the process of European

integration;

* pushing the boundaries of stability-oriented policies in

Europe; and

* pushing the boundaries of market integration in Europe.

In today's presentation, I shall give an overview of these three aspects of

Economic and Monetary Union. Thereafter, I shall discuss more thoroughly the

implications of the single currency for the development of the European

financial markets, focusing on the capital markets. Finally, I shall reflect

briefly on the importance of equity prices, and other asset prices, in the

formulation of monetary policy.

1. Pushing the boundaries of the process of European integration

I shall start with a few comments on the role of the euro in the overall

European integration process: I think there is little doubt that in future

books on European history the start of the third stage of European Economic

and Monetary Union on 1 January 1999 will be marked as a significant and

unique event in the long process of European integration. On that day, the

national currencies of 11 EU countries became denominations of the euro. At

the same time, the "Eurosystem" (which is composed of the European Central

Bank (ECB) and the 11 national central banks (NCBs) of the participating

Member States) assumed responsibility for the monetary policy of the euro

area.

In order to put this event into a historical context, I should like to note

that the establishment of an Economic and Monetary Union in Europe was, in

fact, originally motivated more by general political arguments than by

economic arguments. In the current debate, these overall political arguments

have almost disappeared. Instead, the media and economic analysts are

increasingly focusing their assessment of the new currency on the recent

short-term economic and financial developments in the euro area.

The process of European integration started shortly after the end of the

Second World War and gained momentum in the 1950s. At the time, the striving

for integration was mainly driven by the aim of eliminating the risk that

wars and crises would once more plague the continent. Through the

establishment of common institutions, political conflicts could be avoided or

at least resolved through discussion and compromise.

The idea of establishing a monetary union and a common monetary policy was

raised at an early stage of this process. It was argued that the full

economic effects from integration in Europe could only be gained if the

transaction costs of exchanging different currencies were eliminated. Other

benefits of a monetary union in Europe were emphasised less in the early

stages of the discussion, partly due to the fact that at that time the

Bretton Woods system was already providing a high degree of exchange rate

stability.

The first concrete proposal for an economic and monetary union in Europe was

presented in 1970 in the so-called Werner Report, named after the then Prime

Minister of Luxembourg, Pierre Werner. However, this proposal was never

implemented. In the aftermath of the break-up of the Bretton Woods system and

the shock of the first oil crisis in 1973, the European economies entered a

period of stagnation with high inflation, persisting unemployment and

instability in exchange rates and interest rates. The European countries

applied very different policy responses to the unfavourable economic

developments, and policy co-ordination deteriorated. In this environment, it

was not realistic to establish a monetary union.

The experience of this volatile period showed that large exchange rate

fluctuations between the European currencies led to a disruption of trade

flows and an unfavourable investment climate, thereby hampering the aims of

achieving growth, employment, economic stability and enhanced integration.

Therefore, the benefits of eliminating intra-EU exchange rate volatility

became an increasingly powerful argument when the issue of establishing an

economic and monetary union was revisited in the so-called Delors Report in

1989.

The Delors Report contained a detailed plan for the establishment of Economic

and Monetary Union and eventually became the basis for the drafting of the

Maastricht Treaty. This time, the time schedule for establishing the Economic

and Monetary Union took into account the need to first achieve a high degree

of nominal convergence for the participating countries.

The fact that the plan for the introduction of the single currency was then

pursued and implemented in such a determined and consistent manner implied,

in itself, a boost for the overall process of integration. The momentum of

the process of integration is no longer crucially dependent on political

decisions. By contrast, the integration of the European economies has become

an irreversible and self-sustained process, which is proceeding automatically

in all areas of political, economic, social and cultural life. The euro can

thus be seen as a catalyst for further co-ordination and integration in other

policy areas. This is one way in which the introduction of the euro has

definitely helped to push the boundaries in the process of European

integration.

Another way to push the boundaries in the European integration process

relates to the geographical extent of the euro area and the European Union.

Here, I sincerely hope that the four EU countries which have not yet adopted

the euro will soon be able to join the Monetary Union. At the same time, I

hope the process to enlarge the European Union with the applicant countries

will progress successfully. An enlargement of the euro area and of the

European Union would further strengthen the role of Europe in a global

perspective and should be for the benefit of all participating countries.

However, it is clear that countries aiming to join the Economic Monetary

Union would have to fulfil the same degree of nominal convergence as was

required from the participating countries when the Economic and Monetary

Union was established. This is essential in order to avoid tensions to emerge

in the euro area, which could eventually compromise macro-economic stability.

2. Pushing the boundaries of stability-oriented economic policies

Economic and Monetary Union in Europe also provides an opportunity to push

the boundaries in areas of economic policy. The convergence process prior to

the establishment of Economic and Monetary Union was helpful in order to

achieve a broad consensus among policy makers on the virtues of stability-

oriented policies, i.e. policies directed towards price stability, fiscal

discipline and structural reform geared at promoting growth and employment.

The convergence process also helped policy makers to focus their efforts on

the formulation of stability-oriented economic policies in the participating

countries and it also facilitated the acceptance of these policies among the

general public.

In the new environment of Economic and Monetary Union, monetary policy can no

longer be applied as a means of accommodating economic developments in an

individual Member State. Such nation-specific developments would have to be

countered by fiscal and structural policies, while the best way in which the

single monetary policy can contribute to improved conditions for growth and

employment is by ensuring price stability in the euro area as a whole. In

this respect, the formulation of the Maastricht Treaty is instrumental, since

it guarantees the Eurosystem's firm commitment to price stability; it clearly

specifies that price stability is the primary objective of the single

monetary policy.

The Eurosystem has put a lot of effort into establishing a monetary policy

framework that will ensure that it can fulfil its primary objective of price

stability as efficiently as possible. There are several aspects to this

framework.

First, the Eurosystem has adopted a quantitative definition of the primary

objective - the Governing Council of the ECB has defined price stability 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 price movements.

Second, the Eurosystem has made public the strategy to be used for the

implementation of the single monetary policy. This strategy is based on two

key elements, whereby money has been assigned a prominent role, as signalled

by the announcement of a reference rate of 4Ѕ% for the 12-month growth of the

euro area monetary aggregate M3. The other element consists of 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.

Third, the Eurosystem puts significant emphasis on the need to carefully

explain its policy actions in terms of its monetary policy strategy.

Therefore, the Eurosystem has established various channels for the

communication with market participants and the general public. The most

important communication channels are the ECB's Monthly Bulletin, its press

releases and the press conferences following the meetings of the Governing

Council, the President's appearances in the European Parliament and the

speeches given by the members of the Governing Council.

Fourth, the Eurosystem's monetary policy is implemented in a marketed-

oriented manner. The Eurosystem's key policy instrument is its weekly tender

for two-week repo operations, the so-called main refinancing operations. The

features of the monetary policy operations are decided by the decision-making

bodies of the ECB, but the operations are conducted in a decentralised manner

by the NCBs.

The experience gained from the first five months of operations has shown that

the Eurosystem's procedures for decision-making and operational

implementation works very well. There are therefore no operational reasons to

call into question the ability of the Eurosystem to fulfil its mandate to

ensure price stability in the euro area. However, stable macroeconomic

policies cannot be achieved by monetary policy alone. It is also necessary

for governments to pursue fiscal and structural policies consistent with such

macroeconomic stability.

In order to ensure fiscal discipline in the participating countries, the EU

Council agreed in June 1997 to establish the so-called Stability and Growth

Pact. This Pact sets an upper limit of 3% of GDP for the fiscal deficits of

the countries participating in the euro area. Furthermore, the Pact specifies

as an objective that Member States are to bring government budgets close to

balance or even into surplus in the medium term. Only if this objective is

met will sufficient room for manoeuvre be created to enable fiscal policy to

react to cyclical developments without risking a loss of credibility.

As regards structural policies, the policy framework is, so far, less well

developed. This is worrying given that the need for structural reform is

urgent in many areas in order to be able to effectively promote greater

growth potential and higher employment. I appreciate that these problems are

generally acknowledged, and some action has been taken in recent years. For

example, it is encouraging that the European Employment Pact adopted at the

EU Summit in Cologne last weekend explicitly recognises the need to pursue

comprehensive structural labour market reform.

Nevertheless, experience from several countries shows that it usually takes a

long time for the full effects of structural reforms to be seen. Therefore,

it is worrisome that structural reforms, in particular as regards labour

markets as well as those to limit expenditure on social security and pension

systems, are long overdue in several Member States.

Clearly, the establishment of Economic and Monetary Union does not mean that

the efforts undertaken during the convergence process can be relaxed. On the

contrary, the need for policy co-ordination among the participating countries

is now even more pressing. We have already seen examples of negative market

reactions to any perceived slippage in fiscal discipline or postponement of

structural reform. Personally, I think that these swift market reactions,

although sometimes exaggerated, may be helpful in promoting a continued

stability-oriented policy thinking in Europe. Any move towards less

responsible policies would come up against intense peer pressure from other

countries.

In this context, I would once more like to underline how important it is that

a consensus has emerged among European policy-makers on the virtues of price

stability, fiscal discipline and market-oriented structural reform. In this

way, we have already pushed the boundary significantly towards a

macroeconomic environment conducive to growth and employment, although much

still needs to be done in the years to come.

4. Pushing the boundaries in the development of financial markets

However, the success of the euro is not only in the hands of central bankers

and policy-makers. An important area in which the private sector has an

instrumental role in meeting the challenge of pushing the boundaries is in

the development of the European financial markets. In order for the euro to

be a success, it is important for the euro area financial markets to become

wider, deeper and more diversified. The introduction of the euro has provided

further input into this process; the elimination of exchange rate risks has

removed one of the main barriers to financial market integration in Europe.

In most European countries, the financial markets have, traditionally, been

rather shallow, with few participants and a narrow range 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. This segmentation has been a function of exchange rate borders,

tradition, differing practices and, of course, national regulations and tax

regimes.

Following the elimination of the barriers implied by different currencies, it

is now up to the European Commission and the relevant national authorities to

further the integration process in the areas of regulation and taxation.

Meanwhile, it is up to market participants to take advantage of the business

opportunities implied by the increased scope for market integration.

The introduction of the euro brought about an almost immediate integration of

the national money markets into a euro area-wide money market. This was made

possible thanks to the establishment of pan-European payment systems, such as

the TARGET system set up by the Eurosystem, which enables banks to access

liquidity throughout the euro area in real time.

The cross-border integration of bond markets in the euro area is progressing

at a slower pace, as is also true of equities and derivatives markets. This

notwithstanding, we are also experiencing important developments in these

segments of the financial markets. These developments are partly due to the

general trends towards globalisation and technological refinement and partly

related to the introduction of the euro. As a result of the introduction of

the euro, market participants increasingly perceive similar instruments

traded in the different national markets to be close substitutes. This holds

true, in particular, for bonds issued by the euro area governments, where the

establishment of common benchmarks, the narrowing of yield spreads and

increased market liquidity seem to indicate that a high degree of cross-

border substitutability has already been achieved.

The fact that euro area financial instruments are increasingly considered to

be close substitutes increases the competitive pressures on national markets

to attract issuers and investors wishing to benefit from increased cross-

border competition and lower transaction costs. In this context, we have

recently experienced several initiatives aimed at creating capital markets

across national borders, such as the plans to establish common trading

platforms linking the European stock exchanges. Similar initiatives have also

been taken to establish links between national securities settlement systems,

which would facilitate the cross-border mobilisation of securities. In the

longer run, such developments will make it possible for investors to manage

their investment portfolios more efficiently.

The Eurosystem welcomes such initiatives aimed at improving the cross-border

integration of financial markets in the euro area, and globally, since they

may result in a wider range of financial instruments on offer, and at a lower

cost, than is currently the case in the national markets. This could lead to

a virtuous circle in which the increased issuance of instruments denominated

in euro will draw the attention of international investors to the euro area

capital markets, in turn making the euro an increasingly attractive currency

for private as well as public issuers.

In fact, the experience of the first few months of the life of the euro seems

to indicate that such a positive development may already be under way. In the

first quarter of 1999, bonds denominated in euro accounted for around 50% of

the bonds issued internationally. This share is considerably higher than the

traditional aggregate share for bonds denominated in the constituent

currencies, which had been in the range of 20% to 30% in recent years. We

have also seen a considerable increase in the average size of bond issues

denominated in euro, as compared with those of bonds denominated in the

former currencies, which may indicate that the trade in euro-denominated

issues is likely to become increasingly liquid.

Despite the recent developments in the euro area capital markets, euro area

companies are still mainly dependent on financing through the banking system.

Hence, there is still plenty of scope for further development in the area of

corporate financing. For example, the amount of private bonds traded in the

euro area is still very low compared with the United States. The market

capitalisation of equities is considerably lower in most euro area countries

as compared with the United States and the United Kingdom. Likewise, the

venture capital business in the euro area is still in its infancy compared

with the relatively mature venture capital markets in the United States and

the United Kingdom. Personally, I am convinced that the introduction of the

euro will also be helpful to the development of these segments of the

financial markets.

In this context, I should like to say a few words on how the introduction of

the euro may underpin the reshaping of the European banking sector. The

increased scope for securitisation will put pressure on the European banking

sector to move away from traditional retail banking activities in favour of

more advanced financial services. The European banking industry is still

segmented into relatively small national markets. The introduction of the

euro is likely to add momentum to cross-border integration in the European

banking sector. Although a considerable consolidation of the European banking

sector has taken place over the last decade, this consolidation has so far

been almost exclusively based on mergers and acquisitions within national

borders. It is only recently that we have also started to see such deals

taking place across national borders.

I welcome this trend towards an expansion beyond national borders with open

arms, since the establishment of truly pan-European - and global - banking

groups will be instrumental in efforts to enhance competition in the

provision of financial services.

5. The Eurosystem and the equity markets

I should like to conclude my presentation today by briefly discussing about

the euro area equity markets as seen from the perspective of the Eurosystem.

It is clear that the Eurosystem has no direct control or influence over the

development of equity markets. However, the Eurosystem acknowledges the

importance of well-functioning and efficient equity markets for the economy

as a means of mobilising savings into productive investment. Hence, efficient

equity markets with transparent price formation, high market liquidity and

low transaction costs are of great value in the capital formation process.

The existence of efficient equity markets should also reduce the risk of the

emergence of asset price bubbles, which is desirable from a monetary policy

perspective. Prior to the emergence of asset price bubbles in some

industrialised countries in the early 1990s, few central banks paid much

attention to the development of prices of equities or other assets in their

monetary policy formulation.

However, the effects of the bubble economies in the early 1990s, notably in

Japan, the United Kingdom and Scandinavia, led to an intense debate among

economists on how monetary policy could have responded better to the

situation. Some research was carried out in order to establish price indexes

that would incorporate asset prices and which could be used as target

variables or indicators within the monetary policy framework. However, no

central bank is explicitly making use of such asset price-weighted indexes in

monetary policy formulation. Nevertheless, this development in the early

1990s made most central banks aware of the fact that large swings in asset

prices can have important effects the price formation in the economy through

its implications on real economic developments and, in particular, financial

market stability.

However, in practice it is not easy to let monetary policy actions respond to

asset price developments. Central banks have only one tool for the

implementation of monetary policy - the short-term interest rate. They can

therefore not effectively try to achieve several objectives at the same time.

It is also difficult to judge how developments in asset prices actually feed

into consumer prices, thereby making it tricky to assess the need for the

appropriate monetary policy response to their changes. This difficulty is

exacerbated by the rather high volatility of certain asset prices, such as

equities, which could result in frequent changes in policy interest rates if

the central bank were to incorporate them mechanistically into its reaction

function.

In this respect, the present situation in the United States, as well as in

several European countries, is interesting: equity prices have risen rapidly

for an extended period but consumer prices remain very subdued and there are,

so far, no signs that there is going to be a spill-over from asset price

developments into consumer price inflation.

Against the background of the rather unclear relationship between asset price

developments and consumer price inflation, the development of equity prices

does not have a prominent role in the formulation of the Eurosystem's

monetary policy. This notwithstanding, the Eurosystem closely monitors the

prices of equities and other assets within its broadly based assessment of

economic developments in the euro area, which forms the second pillar of its

monetary policy strategy. The Eurosystem will therefore remain vigilant in

order to detect any influence from asset prices, through their impact on real

economic developments and financial market stability, on the formation of

consumer prices.

***

THE MONETARY POLICY OF THE EUROPEAN CENTRAL BANK

Speech by Eugenio Domingo Solans

Member of the Executive Board of the European Central Bank

during the "Working Breakfast" at the Permanent Seminar

on 4 December 1998 in Madrid

Introduction

It was with immense pleasure that I accepted the invitation to take part in

this event, organised by Euroforum. In view of the prestigious nature of

Euroforum, the professional standing of its President, Eduardo Bueno,

Professor at the Universidad Autуnoma de Madrid and consultant to the Banco

de Espaсa (there is a great deal of similarity between our respective

professional histories) and, above all, the value I have attached to his

friendship over the past thirty years, there was no question as to whether to

agree to join you for this working breakfast.

I have been asked to keep my presentation brief in order to allow as much

time as possible for discussion. Therefore I will try to put forward a few

ideas on the monetary policy of the European Central Bank (ECB) which I can

develop during subsequent discussions. During the discussion period please

feel free to raise any questions on other aspects of the ECB's operations.

The three fundamental principles underlying the monetary policy

As in the case of any other central bank, the ECB's monetary policy is based

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