Euro, European Integration and the world economy
Speech delivered by Ms Sirkka Hämäläinen, Member of the Executive Board of the European Central Bank, Turku School of Economics and Business Administration, 50th Anniversary, Turku, 17 March 2000
The "shrinking of the globe", the strengthening of the powers of market forces, the limitation of national sovereignty and the growth of companies into global giants are topical subjects all over the world and especially in Europe. There is a widely held belief that we are experiencing new and unprecedented phenomena.
The increase of international interdependencies is not, however, a new phenomenon, any more than the important role that major technological developments are playing in this process. International connections were already taking shape especially fast in the 19th century when, for example, the average real growth of world trade was almost 4%. Technological development improved transportation possibilities considerably, thereby quickly bringing the countries and people of the world closer to each other.
The widespread national self-interest that started at the end of the 19th century and continued into the first part of the 20th century reached appalling military and economic proportions and caused economic growth and international co-operation to collapse. The real growth of world trade shrank to less than 1% and different regulatory systems - especially those concerning trade and movement of capital - were established.
The frightening experiences in the first part of the 20th century did, however, give rise to a strong counter-movement, both globally and especially in Europe, the aim of which was to solve problems caused by nationalistic self-interest and nationalistic contradictions and to prevent their recurrence.
In the 1940s, in a climate of political unanimity, several systems were established to foster free and balanced world economy, the most important of which were the United Nations and what are referred to as the Bretton Woods institutions, i.e. the International Monetary Fund and the World Bank. These Bretton Woods institutions were based on the ideas of the British economist John Maynard Keynes and aimed at creating rules for the international economic and monetary system, thereby creating, through international co-operation, stability in the relationships both among the industrialised countries and between the industrialised countries and the developing countries. The basic principles of this process were exchange rate stability in the form of fixed but manageable exchange rates, and the liberalisation of foreign trade and the movement of capital.
In Europe the project aiming at integration also started after the Second World War, with the creation of the European Coal and Steel Community. The immediate goal of integration was to agree on the use of key raw materials, thus tying together, above all, the economies of France and Germany, so that military conflicts could be prevented. This integration project, originally aiming at political goals, was mainly based on the initiative of Jean Monnet, and in the minds of many it already envisaged the far-reaching ultimate goal of a "United States of Europe" having an important role as a world power alongside the United States of America. The next important step was the creation in 1958 of the European Economic Community (EEC) by the Treaty of Rome: a union was created that was more than a customs union, although not yet an economic union covering all spheres of the economy.
The global system of fixed exchange rates collapsed at the beginning of the 1970s, due to heterogeneous economic developments and the lack of international co-operation and co-ordination of economic policies. Sovereign states followed the principle of pursuing their own national interest, although they did participate in economic discussions and co-ordination efforts in different international forums. In an environment where international trade and especially movement of capital were being deregulated, an economic policy stance based on purely domestic conditions can not, however, be consistent with a system of fixed exchange rates. Despite the collapse of the base that the stability of the exchange rates constituted, the International Monetary Fund has, among many other forms of international co-operation, supported efforts to achieve freer trade, freer movement of capital and better co-ordination of economic policies at the international level.
The integration process in Europe has, instead, been on a constantly rising and strengthening trend. The originally mainly political goals have been united with the aims of improving international competitiveness and preventing so-called eurosclerosis. Integration has been gradual: when the economic climate has been favourable development has been faster, in bad times it has stalled and sometimes there have even been steps backwards, but the overall direction has always been clear. The achievement of political unanimity among the participating countries has required a large amount of work, long-term political commitment, as well as strong political leadership.
The deepening of integration in Europe increased further as a result of the economic experiences in the 1970s and 1980s. Upon the liberalisation of the movement of capital, the independent economic policies of sovereign national states, together with the fact that monetary policy was combining growth and employment targets, created economic disturbances and considerable interest rate and exchange rate fluctuations. On a global scale, and compared with the United States, all European countries are small and as such were exposed to speculative attacks. The uncertainty regarding the operational environment of companies and the fragmentation of financial markets considerably weakened the competitive situation of European producers. International competitiveness was further weakened by the growth of the public sector and increasing labour costs linked to the development of different social security systems. The problem of high unemployment in Europe stems from the policies pursued in these decades.
These experiences of the 1970s and 1980s increased the support for fixed exchange rates within the Community. Price stability was acknowledged as the primary objective of monetary policy and the independence of monetary policy was regarded as imperative to achieve this stability. It was also becoming clearer that tight fiscal policy is necessary in order to support the growth potential of the private sector.
Even three decades ago, the creation of a single currency and a single monetary policy was foreseen as a natural continuation of the birth of the Single Market, i.e. the freedom of movement of goods, services, labour and capital. The preparatory work for this process and reaching agreement on the details have demanded a considerable amount of patience and commitment. In particular, the preparations for launching the single currency have, in the participating countries, led to adjustments to the economy and economic policy and the adaptation of institutions.
The introduction of the single monetary policy at the beginning of last year and the changeover to the euro, of which the national currencies are now merely denominations, was a gigantic attitudinal, institutional and economic step. It will only be possible to assess its far-reaching political and psychological implications after several years or decades have passed.
More than a year has now elapsed since the introduction of the single monetary policy, and some conclusions can already be drawn.
11 EU countries have relinquished their national decision-making powers in the field of monetary policy for the benefit of federalist decision-making at the level of the euro area. Decisions are made on a one person, one vote basis by the governors of the countries' central banks together with the six members of the Executive Board of the ECB, and are aimed at securing price stability in the euro area as a whole. In the Governing Council of the ECB, the governors of national central banks do not represent their own country, but have to base their decisions on euro area-wide considerations.
National deviations from area-wide developments have to be addressed through national fiscal policy measures and by adapting the behaviour of different economic agents to the conditions set by the euro area or, alternatively, by real adjustment to economic growth and employment as a result of changes in the competitive situation of the economy. This is compensated by considerable price and interest rate stability, and the lower level of interest rates following the improvement in the credibility and effectiveness of monetary policy.
From the political point of view and in terms of the decision-making process, the adoption of the single currency - which so far exists only in the form of scriptural money and as a unit of account - has also been a major step towards deeper integration in other areas, such as fiscal policy, foreign policy and security policy. The majority vote used in decision-making on the single monetary policy could set an example for these areas, too.
The single currency has been a particularly big step for companies and financial markets. A liquid and efficient euro area money market has arisen, where for example a Finnish bank can in real time borrow money from a Portuguese bank or invest money in an Italian bank. Also, in terms of capital markets, i.e. bond and stock markets, a deep area-wide market has started strongly to develop. In the absence of exchange rate risk, cross-border borrowing and investing is possible. This development is especially positive for companies in small countries: the possibilities for growing companies to acquire venture capital have now already expanded considerably.
Securitisation and deepening of financial markets has, on the one hand, made possible the financing of even major mergers and acquisitions; on the other hand, combined with technological developments it fundamentally changes the status and tasks of banks. The disappearance of exchange rate risks and the tightening of competition as well as mergers both within a country and also increasingly between countries will affect corporate structures and enhance business life at an increasing pace.
In the corporate sector, the single monetary policy has triggered - again together with increasingly faster technological developments - a virtuous circle of dynamic integration that national or supranational decisions can no longer prevent - at most they can try to slow it down slightly. Electronic commerce has made and will continue to make regional or national restrictions or regulations impossible, by freeing economic agents and their operations from restrictions of time and place.
For individual citizens, the single currency will not become tangible until the beginning of 2002 when the national currencies will be abolished altogether and common area-wide banknotes and coins will be issued. This can be expected to strengthen considerably the "pan-Europeanism" that is already well established, especially in the many EU countries that operate with virtually no border or customs formalities. The introduction of a single currency unit will make it easier to compare prices and will thus contribute to lowering prices in an environment of increasing competition.
The key motivation behind European integration has been the firm belief that the welfare of individual households and individual citizens can be promoted better in a context of EU co-operation than in countries that stand alone and are independent. This has, however, also brought with it somewhat overoptimistic expectations that integration in itself would be the means of overcoming the still high unemployment in Europe. The reasons behind the high unemployment in Europe are, however, structural and caused by barriers to employment and acceptance of work. The lowering of these barriers is just as urgent and demanding a task within the EU as it is outside it.
Understandably, high unemployment also puts pressure on monetary policy. It is important to emphasise that monetary policy can support employment best by safeguarding the stability of prices and price expectations. Those who believe that monetary policy can cure high unemployment in Europe should be asked how they explain the fact that in the United States the unemployment rate is less that half of that of the euro area, but the key interest rate has been and still is almost twice as high as that of the euro area, while at the same time US fiscal policy is tight and the exchange rate has appreciated.
History is interesting, but it is dangerous only to look in the rear-view mirror. It is important to look ahead and to prepare for future challenges. However, it is not futile to analyse history: Keynes stated that the economist Alfred Marshall's special skill and contribution lay in the fact that he carried out research of what for him was the to study present , in the light of the past and for the purposes of the future. I believe that this also conveys an important message for the Turku School of Economics and Business Administration, which is celebrating its 50th anniversary this year. One cannot understand the present without knowing the past and when building the future past experiences and lessons are useful.
I started my speech by saying that neither the increase of international interdependencies and of the powers of market forces nor the technological developments that we have witnessed are new phenomena. I should like to clarify this by emphasising the fact that the ongoing development is, of course, considerably faster and more important than before. The recent rapid technological change has fundamentally altered the speed with whichthe interdependencies are forming between different parts of the world and both individual people's and companies' models and possibilities of operation. This development will accelerate further in the future and we shall see how new technology will change the existing corporate structures. A good example of this is the decreasing need for the services of banks or travel agencies: to an increasing extent people will handle their finances and travel bookings directly across borders on the Internet. I believe that changes to which we shall very soon have adapted go beyond most people's imagination.
In a world like this Europe faces two gigantic challenges based on its basic philosophy. First, it will have to expand its fields of co-operation, to deepen its integration and to build decision-making systems that enable efficient decision-making and ensure that Europe speaks in a single voice in international arenas. European countries are paying their share of international bills and are present in large numbers in the international co-ordination and decision-making arenas, but they are not heard because they do not speak with single voice. This is not in the interests of Europe. Money has no home country, and the important national identity is based much more on language and culture than on economy or politics.
The second major challenge in European integration is the enlargement of the EU that is necessary for the maintenance of peace and balance. The number and the history of the new EU candidate countries differ in many respects from the earlier rounds of enlargement, which is bound to bring new challenges into the process. The deepening of the EU and the enhancement of decision-making procedures are necessary preconditions for the success of the enlargement.
History provides one especially valuable lesson: the ongoing huge project that is bringing different peoples together is bound to be a long and difficult process. It requires plenty of energy and patience and comes with various doubts, disagreements and crises. However, the objectives of the integration, i.e. peace, the improvement of competitiveness and greater prosperity, as well as joint control over the domination of market forces in a world that is increasingly sensitive and prone to crises, are so important that efforts to foster this project should be intensified. As a longer-term vision, one should see European integration as a step towards improving global co-operation and securing peaceful and balanced development in the whole world.
I want to believe that the same kind of political consensus and commitment to co-operation and integration that has prevailed in the preceding 50 years or more can still be found in Europe. We need the patience and political leadership that have helped Europe, which was battered by war and torn apart by national conflicts, to turn into a union of peace and stable economic development from which a major part of Europe is already benefiting today.