The euro: a currency bridging peoples and cultures

Presentation by Tommaso Padoa-Schioppa Member of the Executive Board of the European Central Bank Istanbul, 7 May 1999

I should like, first of all, to thank the Central Bank of the Republic of Turkey for the invitation to attend the meeting of the Central Bank Governors' Club ^[1] in Istanbul . When I received the invitation, I immediately felt obliged to accept it. Seen from Frankfurt , the 14 countries in your club are the south-eastern neighbours of the European Union (EU), with which the EU has had privileged trade relations for decades. Indeed, in the case of Turkey these date back to the signature of the "Ankara Agreement" in 1964, which marked the start of Turkey 's association with the European Community.

Your Governors' Club represents an area which has naturally close ties to the EU, and the ongoing accession process for the enlargement of the EU will bring the EU even closer to you. Other joint efforts to enhance the dialogue between the EU and your countries - for instance the establishment of a Euro-Mediterranean Conference (known as the "Barcelona process"), of a European Conference and of "agreements of partnership and co-operation" with Russia and other members of the CIS States - will enhance the quality of contacts between the EU and other countries in the area.

In my view, the recent tragic events in the Balkans have made it even more urgent for the EU to have a more intense dialogue with our south-eastern neighbours. I am convinced that it will be our joint responsibility to re-establish the prospect of political stability and economic growth in that area of Europe .

An Open Europe

To our neighbours I should like to say that the EU is not building "Fortress Europe", an impregnable stronghold. Even in symbolic terms, when the design of our first series of banknotes was selected, the European Central Bank (ECB) chose to convey to European citizens the message that Europe owes a particular debt to the patrimony of ideas and values of the rest of the world, and in particular to those regions which are geographically the closest to us.

As you know, the features which will be printed on the new euro banknotes are a satellite picture of Europe - including some of the neighbouring regions - together with designs of bridges and windows of different styles of European architecture, representing the main periods of our common tradition. The choice by the ECB of these architectonic elements for our first series of banknotes is not accidental, as the windows symbolise the openness of the EU to the external world and the bridges stand for the circulation of people and ideas within and beyond our territory.

I should also like to add that Europe is uniting itself in full awareness of its historically attested strengths and weaknesses. Europe has inherited a splendid cultural tradition from the past and, in an invaluable symbiosis with other cultures, has greatly contributed to the progress of mankind. However, over the centuries Europe has also been an area of deep conflicts and sometimes fierce rivalries, exporting instability to the neighbouring regions.

The process of European unification - which this January took a major step forward with the launch of the euro - originates from the intention of the people of Europe to create a stable basis for peace on our continent. Europe wishes to be a source of stability for its neighbours, thus contributing to a broader process of peaceful understanding among the world's regions.

To sum up, I should in no way wish to give the impression that the euro area is speaking from a position of "intellectual arrogance". In the monetary field, as in others, Europe has had some good and other not so good experiences. The countries of the euro area today share a culture of monetary stability; they respect common rules of market-oriented governance of the economy and fiscal soundness. For these reasons they enjoy a high degree of respect and credibility in the international financial markets.

However, the path to the single currency was a long and often difficult process spanning over 30 years. The first policy statements in favour of the creation of a single currency were solemnly approved by our Heads of State or Government in 1969 and they gave rise to the Werner Plan in 1971. However, after the collapse of the Bretton Woods system in 1971 and the oil shocks in 1973 and 1978, Europe struggled to find a common way out of excessive foreign exchange rate volatility, which was ultimately due to the divergence of its Member States' economic policies, strong inflationary pressures and general conditions of disorder, in some Member States more so than in others.

The Eurosystem

One important issue which I will repeatedly stress during my presentation is that the Monetary Union in Europe is not the simple evolution from looser experiences of monetary integration (the European "snake" first and the European Monetary System later) into a stronger monetary agreement.

The 11 countries participating in the euro area today have one currency and therefore only one central bank system, called the Eurosystem, which comprises the ECB - based in Frankfurt - and the 11 national central banks of these countries. Monetary policy decisions are taken by the Governing Council - which is composed of the six members of the Executive Board and the 11 national central bank governors.- These decisions are taken by a simple majority vote, following the principle of "one person, one vote".

The Eurosystem has a clear policy mission, which is enshrined in Article 105 of the Treaty establishing the European Community: the primary objective is to maintain price stability. To this end, the Treaty has given the Eurosystem an unprecedented high degree of independence.

The ancillary mission of the Eurosystem, also stated in Article 105 of the Treaty, is to support the general economic policies in the European Union, with a view to contributing to the achievement of the main objectives of the EU^[2]. This ancillary mission shall be pursued without prejudice to the primary objective of price stability.

The Eurosystem is the sole central bank of the euro area, as the national central banks no longer take independent monetary policy decisions, but are parts of the Eurosystem and execute the decisions made by the Eurosystem itself.

Monetary policy decisions taken by the Eurosystem are equally applicable across the entire euro area. The Eurosystem conducts monetary policy operations (mainly through weekly repurchase transactions) with all credit institutions in the 11 participating countries, at the same rates and under the same conditions. The banks are offered the same conditions (for instance, for the use of the standing facilities) and must comply with the same regulations (for instance, the obligation to comply with reserve requirements). Liquidity is allocated to them without any system of national quotas. The monetary policy framework has been built up with the express desire to create a level playing-field for all financial centres and national banking systems.

The Euro Financial Markets

Immediately after the launch of the euro in January 1999, the euro gained a broad financial basis, not least because all public debt in the euro area was redenominated in euro during the weekend of the transition from the old monetary regime to the new currency, creating a domestic market which is of around the same dimensions as that of fixed-term securities in the United States.

Fourth months after the start of EMU, the money market is already well integrated. This was one of the main sources of concern for the Eurosystem at the start of the year, as we were aware that creating an efficient single money market also depends upon the creation of a tight network of contractual agreements between market players across the euro area.

The data on the money market transactions of the 57 largest commercial banks in the euro area - which we process daily for the computation of the EONIA ^[3] - indicate that overnight rates across the euro area are homogeneous, with differences of only a few basis points, mainly justified by the different liquidity needs of the credit institutions. The turnover of the overnight transactions in the euro money market of the 57 EONIA banks is in the range of between EUR 30 billion and EUR 60 billion per day.

Another indicator of the smooth functioning of the money market is the reduced use which is now made of the two standing facilities offered by the Eurosystem to all our counterparts (to deposit excess liquidity or finance debit positions overnight). When the euro was launched, however, banks were forced to have very extensive recourse to these facilities, as they were not able to find counterparts in the broader market.

The integration of the money markets across the area is supported by TARGET, the real-time gross settlement system of the euro area, which processed, in terms of value, a daily average of EUR 913 billion in March, of which EUR 342 billion represented cross-border transactions. Other wholesale payment systems ^[4] operating across the euro area processed, on average, a further total EUR 422 billion per day in March.

With the removal of currency risk and its low interest rates, the euro is also a source of dynamism in Europe 's financial markets. This is particularly evident in bond markets world-wide, where 44% of all new bond securities in the world were issued in euro in the first quarter of 1999 (around the same percentage as for the US dollar) - a substantial improvement compared with the combined percentage of the former national currencies.

The euro was also one - although not the only - driving force behind recent alliances between exchange or derivative markets and the intense activity of mergers and acquisitions in the banking and financial industry.

Transition Issues

I am very aware of the fact that the unique features of the transition from the former national currencies to the euro (the immediate introduction of the euro on the financial markets and a three-year transition phase for the introduction of the euro banknotes and coins) have given rise to a number of questions in our neighbouring countries. I should like to comment briefly on some of these issues.

First , I should like to stress once again that, despite the circulation (at their par value) of the former national banknotes and coins for a transition period of three years, EMU is not a fixed exchange rate regime linking many currencies. The continued circulation of the banknotes of the former national currencies does not mean that these currencies still exist in the form of fully-fledged, independent national currencies. By means of directly applicable European law, the euro has become the only currency of the participating countries. The former national currencies remain for three years as mere "subdivisions" of the euro.

Second , bank deposits in the former national currencies are de jure equivalent to deposits in euro at the irrevocable conversion rates; if this has not yet occurred, they will be automatically converted into euro on 1 January 2002 .

Third , contracts and other liabilities - including international contracts - denominated in the former national currencies of the euro area can be executed in euro or in a former national currency during the transition phase, according to the wishes of the two parties concerned.

However; de facto, the euro is the only vehicle for foreign exchange transactions with the participating countries, as the foreign exchange markets no longer trade in the Deutsche Mark, French franc, Italian lira or Spanish peseta.

Contracts denominated in the former national currencies will be deemed to be in euro from January 2002 onwards, without any need for the parties to modify their legal terms.

Fourth , the new single currency of Europe is immediately available to the neighbouring countries as a vehicle to raise capital in the new, broad financial markets of the euro zone. Several neighbouring countries - including Turkey and several Central and Eastern European states - have already taken advantage of this opportunity.

Fifth , in the neighbouring countries the former national banknotes traditionally circulate as a popular means of storing value. ^[5] They will continue to circulate in the euro area for the first three years of Stage Three of EMU. They will continue to be the only legal tender for cash payments in the respective countries until 1 January 2002 , the deadline which will affect your citizens the most. Shortly afterwards (most probably before the end of the maximum period of six months set by the relevant EU Regulation) the national banknotes will cease to have legal tender status.

Regional Co-operation

When the transition phase has been completed, i.e. when the national banknotes and coins have been ultimately withdrawn from circulation, it will become even more evident that the launch of Stage Three of EMU is a most occurrence in the history of regional institutions.

EMU is not an international agreement to co-ordinate monetary policies. It is the establishment, for the EU, of the same monetary regime that normally exists for one nation: one currency and one central bank. Nevertheless, given the current state of integration in Europe , the euro is not yet the currency of a single state or nation, but rather that of a group of states whose integration is in progress. These countries retain their separate sovereignty in many important fields, while sharing it in many others: the ultimate form of this unique political construction - which combines different levels of government - has not yet been reached.

The experience of the single currency is, in my opinion, the culmination of a long progress of economic integration and, at the same time, the start of a new process of a deeper communality among EU citizens. I very often refer to the fact that the circulation of a joint currency within a territory is a symbol of confidence among its citizens, as people who do not trust one another would not ultimately consent to share the same fiduciary currency.

Let me underline two implications of the European experiences for the possible future development of international relations.

First, if the century-long coincidence between the geography of states and that of monies is no longer binding, this means that important components of sovereignty can be pooled and shared among nations in the pursuit of welfare and peace. This opens up new possibilities precisely at a time when growing economic interdependence and world-wide systemic risks call for an enhancement of co-operation among sovereign states and for new and more efficient ways to manage the global economy.

Second, the European Union is an example of a regional construction in which different nations co-operate through a common rule of law and common institutions. While continuous support of global arrangements through multilateral institutions is necessary, I firmly believe that a regional level of co-operation is becoming an indispensable complement. Over 180 independent countries in the world are just too many for one-tier global governance to be sufficiently effective. Moreover, interdependence is often regional, rather than global. At the regional level deeper forms of co-operation may be possible, because an effective pooling of sovereignty may be less difficult to achieve. Europe provides an outstanding example of all that, and the advent of the euro is only the last, albeit the most prominent, manifestation of a long process.

It is not for me to judge whether the countries represented in the Governors' Club have anything to draw from the European experience. What I can say is that we in Europe , like you in the Balkans, in the Bosphorus region, on the Black Sea and in Central Asia , have a recent past of bitter conflicts. It is our memory of this past that caused us to try to construct a peaceful and prosperous future.

The International Role of the Euro

At this point I should like to go on to make some comments on the international role of the euro.

It is not Eurosystem policy to "sell its own currency" to foreign monetary authorities, or to express views or recommendations to other monetary authorities on their foreign exchange rate orientations or their choices for the investment of reserves.

In fact, we take the view that the euro will gain ground in the international financial markets on the basis of its own intrinsic merits: a high degree of anti-inflationary credibility, the effective persistence of its internal stability, the setting-up of broad and deep financial markets, the strength of its economy and the position of Europe as the world's leading trade partner.

It might well be that markets are underestimating the intrinsic strength of the euro, as a reflection of the different conjunctural positions of the American and European economies, of the difficulty of estimating the real value of assets denominated in a new currency and also against the background of the current tragic events in the Balkans.

This is possibly the destiny of new currencies, since - as those who know the monetary history of Europe will be aware - something similar also happened to the newly born Deutsche Mark during the Korean crisis in 1950-51. History also tells us that, in the evolution of monetary events, inertia is often a factor which should not be underestimated: the pound sterling kept its role as the reference currency of the world markets for a long while in the first half of this century, after the US economy had exceeded the dimensions of that of the United Kingdom .

The euro has the potential to become a large and important reserve currency for institutions outside the euro area. This is all the more true for those regions of the world - such as your countries - which are closest to the EU, have developed important trade relations with its economies and are in the process of strengthening them with a number of agreements for enhanced co-operation. I sometimes speak of the euro as a currency whose natural use will extend beyond the euro area - and even the borders of the European Union -to a broader area which I can only describe as "the time zone of the euro".

In fact, the euro means that a new economic player is emerging, which has about the same importance as the United States and twice that of Japan . The euro area, or "Euroland" as it is often called in the media, is an area of almost 300 million people, producing 15% of world GDP. (The United States produces 20% and Japan 8%.) Accounting for 16% of world exports, the euro area is the largest trading partner in the world economy.

The birth of such a large economic power may give rise to anxiety, but should also generate hope. Anxiety, because it may convey the impression that a new colossus is taking shape, and that the European Union's south-eastern neighbours, in a period of persistent internal difficulties, risk marginalisation. Yet at the same time, hope, because European countries, notwithstanding their past conflicts, have achieved advanced forms of co-operation that may be of interest to others.

I am well aware of these mixed feelings. This is the reason why it gave me great pleasure to accept your invitation today and take advantage of the opportunity to convey to you a sincere message of openness and co-operation.