Hearing of the President of the EMI by the Monetary Sub-Committee of the European Parliament

Introductory statement delivered by Dr. W. F. Duisenbergon 13 October 1997

It gives me particular pleasure to be able to address the members of the Monetary Sub-Committee of the European Parliament on the progress of the move to Stage Three of European Economic and Monetary Union (EMU) and on the main challenges which will affect, in the near future, the work of the European Monetary Institute (EMI).

As in previous years, the EMI continued to play a pivotal role in the preparations for EMU in 1997. In accordance with the Maastricht Treaty, its efforts have focused, on the one hand, on assessing the degree of sustainable convergence achieved by Member States in indication of their readiness to adopt the single currency and, on the other hand, on undertaking the necessary technical preparations required for the establishment of the ESCB.

Towards the end of March 1998 the EMI and the European Commission will be called upon to submit - to the European Parliament amongst others - their respective reports on the progress made by the Member States in the fulfilment of the necessary conditions for the achievement of EMU, the so-called "convergence reports". About one month later, having taken due account of these reports and of the opinion of the European Parliament, the Heads of State or Government will decide on the list of countries eligible to enter Monetary Union and will pre-announce the bilateral exchange rates between these countries' currencies which will be used as a basis for determining the rates at which these currencies will be converted into euro on the last day of 1998. On the recommendation of the EMI Council, the EU Finance Ministers recently reached agreement on this latter aspect. A public pre-announcement at the time of the selection of the eligible countries is expected to reduce uncertainty and thus to have a stabilising effect on the exchange rates concerned. As a matter of fact, the public statement that there will be such a pre-announcement at the time of the decision on the list of participating countries already appears to have had the effect of diminishing uncertainty in the markets.

You will recall that the EMI has the statutory obligation to produce, once a year, a report on the state of preparations for Stage Three which includes an assessment of the progress made in terms of convergence in the Community. The EMI has complied with this reporting requirement by releasing - in 1995 as well as in 1996 - a special report in early November. In order not to give confusing signals on the state of convergence in the Community shortly before its assessment - due in March 1998 - of the situation for the year 1997 as a whole, the EMI Council decided against releasing a special report in November of this year. Instead, the 1996 Annual Report, published in April of this year, is considered to have fulfilled the relevant statutory reporting obligation for 1997, as was indicated in the executive summary of the Report.

As regards the 1997 Annual Report, compliance with the normal schedule of publication, as laid down in the EMI's Rules of Procedure, would have meant publication in April 1998, following approval of its content by the EMI Council in early March. The one-month interim period is necessary to allow for its translation into all Community languages. One effect of this production time schedule is that economic information in the Annual Report never fully covers the whole of the previous year. The EMI's Convergence Report, scheduled for publication at the end of March 1998, will of course be based on outcomes for 1997. Again, to avoid sending confusing signals by releasing an Annual Report containing data which is unavoidably not completely up-to-date between the date of publication of its Convergence Report and that of the decision on the list of eligible countries, the EMI Council has agreed unanimously on the need to deviate from the Rules of Procedures. The 1997 Annual Report will therefore be released, and addressed to the European Parliament, in June rather than in April 1998. This timing will, in a way, symbolically close the "EMI chapter" vis-à-vis the public.

Next year's Convergence Report will, in conformity with the Treaty requirement under Article 109j, paragraph 1, also deal with the achievement of so-called "legal convergence". In this connection, in August 1997 the EMI produced a report on"the adaptation of national legislation, and in particular the statutes of the national central banks, of the Member States of the European Union with a view to Stage Three". In this report, which was transmitted to the European Parliament last September, the EMI established a list of features which could serve as guidance for national legislators in their endeavours to bring legislation into line with the requirements of Article 108 of the Treaty. These adaptations aim to eliminate inconsistencies with the Treaty as regards the requirements of central bank independence and to reflect the integration of national central banks into the ESCB. Recently, in particular, considerable attention has been paid in a number of Member States to the need to adapt their national central bank's statutes to this effect and the EMI has been and is being asked for its opinion on the draft legal texts. These legislative changes will have to be finalised by the date of the establishment of the ESCB, although the amendments designed to reflect the operational integration of national central banks into the ESCB will only have to take effect at the end of 1998.

As regards the technical preparations required for the establishment of the ESCB and the conduct of the single monetary policy, conceptual work was completed at the end of 1996 and the implementation phase has started. You will recall that in January of this year the EMI published a report on "The single monetary policy in Stage Three" which aimed to provide information to the public on the operational aspects of the ESCB's monetary policy, including strategic considerations and the main features of the instruments, procedures and supporting functions under preparation. Reflecting further progress on the detailed specification of the single monetary policy framework, last month the EMI published a report entitled "General documentation on ESCB monetary policy instruments and procedures".

Compared with the January "Framework Report", the September "General documentation" document provides more detail on the full set of monetary policy operations in terms of their technical and operational features. It also provides a more extensive description of all the procedures which the ESCB will apply in the execution of its monetary policy operations and which evidently are of considerable interest to the central banks' counterparties for their own preparations for Stage Three.

The "General documentation" does not deal with considerations of monetary policy strategy, on which subject the EMI released a special report in February 1997. This report extended the analysis provided in the January "Framework Report", explained why two potential strategies - namely monetary targeting and inflation targeting - have remained as candidates, and indicated the preparatory work needed from the EMI to enable the ECB Governing Council to choose a strategy and have it fully operational by 1 January 1999.

The EMI and the national central banks are also continuing their preparatory activities to make the TARGET system operational. TARGET will link national large-value payment systems so that banks can transfer bank reserves across the euro area at same-day value and so that the ESCB will be able to ensure quick and uniform transmission of interest rate signals throughout the area. A "Second Progress Report on the TARGET Project" was released by the EMI last month, and provided updated information to market participants, in particular on the progress made in terms of the organisational aspects (e.g. operating time), pricing and the technical implementation of the system. Part of this implementation involves making operational the ECB Payment Mechanism, which will, among other things, enable the ECB to execute, under exceptional circumstances, fine-tuning monetary policy operations and to conduct occasional foreign exchange intervention.

Let me also recall that other large-value payment systems will continue to operate in Stage Three in parallel with TARGET. One of these cross-border systems is the Clearing operated by the ECU Banking Association, or EBA, which will settle, on a net basis, end-of-day balances in central bank money in Stage Three. The EMI has reached an agreement on the method to be used for settlement of the EBA Clearing with the ESCB and has informed the EBA accordingly. The method provides for a single settlement account with the ECB, reflecting considerations of simplicity and safety of the settlement process. But it does not exclude decentralised settlement for clearing banks wishing to settle with their respective national central bank.

Still in the area of settlement, the EMI continues to work on preparations for the cross-border use of eligible debt instruments serving as collateral for ESCB monetary policy operations. In this connection, EMU requirements for EU securities settlement systems have been spelled out and discussions with the industry professionals are ongoing. The aim is to enable eligible assets to be used for operations with the ESCB throughout the euro area.

In many other areas - ranging from statistics via IT systems to accounting matters - highly technical preparatory work continues, about which I will spare you the details. The same holds for the preparation of the euro banknotes. In this connection you may recall that in July the EMI made public the draft euro banknote designs, following the presentation in December of last year of the design sketches.

Work has also been undertaken on the ECB's staffing requirements, taking into account the functions which the ECB will perform and the division of labour - in terms of operational activities - between the national central banks and the ECB, on which full agreement exists within the EMI Council. The EMI is now in the process of preparing for the recruitment of the roughly 500 ECB staff members expected to be in place by the end of next year. This compares with the approximately 350 staff members expected to be employed by the EMI at the end of this year.

The preparations for the changeover to the euro have gained considerable momentum over the past twelve months. The EMI has continued to monitor this activity while being of assistance, if so required, in its areas of competence. In particular, the EMI has provided a forum for the exchange of views among the EU-wide associations of the banking and financial industry, which has contributed, inter alia, to an agreement among the latter on a set of harmonised conventions for the euro-denominated money, bond and foreign exchange markets. A joint statement to this effect, released by the associations, has been explicitly welcomed by the EMI Council. The EMI has also reached an understanding with market practitioners on the role of the ESCB in the computation of an effective overnight rate in euro and in the publication of daily indicative exchange rates for the euro.

As Monetary Union draws nearer, attention has started to focus more and more also on the external aspects of EMU. In this context, the Amsterdam European Council invited the EMI to co-operate with the Council and the Commission in studying effective ways of implementing all the provisions of Article 109 of the Treaty. Given the responsibility of the ESCB for the single monetary policy in the euro area and the consultation requirements of the Treaty, it is important that an exchange of information and views takes place between the ECB and the ECOFIN Council on exchange rate matters. To this end, the EMI considers the Treaty provisions for inter-institutional co-operation and the continuation of the present informal arrangements to be fully adequate.

The EMI Council is of the view that the ECOFIN Council should make use only in exceptional circumstances of the possibility of formulating general orientations for exchange rate policy in relation to non-Community currencies which "shall be without prejudice to the primary objective of the ESCB to maintain price stability". Questions about the appropriateness and form of such orientations should be settled at a later stage in the light of the conditions prevailing at the time. In any case, it should be emphasised that the Treaty does not allow the ECB to make any commitment other than those indicated in the Treaty.

The EMI Council also considers that it should be possible for the ESCB to be represented by the ECB at the IMF. Further work in this area is planned.

In my brief introductory overview of the EMI's recent activities, I have attempted to illustrate that the institutional, legal and technical preparations for EMU are well under way from the point of view of the central banking community. Of course, much remains to be done and there is no room for complacency. The same holds true, I would say, for the preparatory work of all the other actors involved in this ambitious project of creating Monetary Union in Europe. EU Member States must continue their progress in terms of economic convergence, focusing in particular on the challenges remaining in the areas of fiscal policy and labour markets. As for the EMI, the challenge for the coming six months will be to deliver a thorough assessment of the state of convergence and to bring all the required preparatory work to a stage that will enable the ESCB to have at its disposal a well-tested, fully operational framework for the conduct of the single monetary policy.