Three courses for a dinner speech
Eugenio Domingo Solans, Member of the Governing Council and the Executive Board of the European Central Bank, Speech given at the Annual Gala Dinner of the Association of International Savings Banks, in London on 25 June 1999
Thank you for inviting me to attend this Annual Gala Dinner as guest of honour.
Without a doubt, I shall try to make good use of this opportunity to address the banking community here in London. Considering both your organisation and my institution, the Association of International Savings Banks in London and the European Central Bank (ECB), we can find a large selection of tasty ingredients - savings, international banking, the euro, London, etc. - that I intend to combine to create a delicious dinner speech. Do not worry: I shall not speak for more than one and a half hours.
First course: "savings"
Although I am aware that savings banks today do not only concentrate on savings, but have also managed to develop all kinds of banking activities, allow me to discuss the importance of savings for the European economies as the first course of my speech. The ultimate goal of our institutions - savings banks and central banks - is to provide good services to the public in order to fulfil their needs and to improve their living standards. We should never forget that. The key idea on how to accomplish this aim is to increase productivity. To increase productivity we need more investment in human capital, research, machinery and new technology. To finance this investment we require savings and channels for allocating these savings to the best possible users.
We, savings banks and central banks, have a shared responsibility to promote savings and allocate them via the market to the best investment projects. Of course, central banks cannot generate savings. We are liquidity providers, not savings providers. We should not confuse savings with liquidity; they are different economic concepts. Savings refer to a real variable (production less consumption), whereas liquidity refers to money. The right bridge between the two concepts has a wonderful name: stability, which is, precisely, the main responsibility of the ECB.
By promoting stability, central banks avoid any misalignment between liquidity and savings. The art of central banking consists in, among other things, providing the banking system with the correct amount of liquidity given the level of savings or, in other words, trying to keep the market rates and the so-called natural rates of interest as close as possible, in Wicksell's wording. In so doing, central banks promote stability and, at the same time, foster savings, because stability is the best environment to make savings worthwhile, as they maintain their value.
The art of savings banking consists in, among other things, channelling the demand for savings to the best investment opportunities in accordance with market rules.
In conclusion, savings banks and central banks, you and the ECB, are allies in paving a road which has many milestones: stability, savings, the channelling of savings, markets, efficient investment, increasing productivity and, last but not least, improving living standards. In order to reach the end of the road, we need to avoid "leaks" in the circuit of savings. Low interest rates should not be understood as an invitation to invest abroad but rather as a low-cost opportunity to promote business in Europe. In order to achieve this goal, governments should provide the best conditions for promoting business activity in Europe.
Main course: "stability"
The title of the main course of my dinner speech could be "stability above all else". Stability is the touchstone with which to measure the success of the euro and the ECB. With an inflation rate of 1.1%, far below the conventional limit of 2%, there can be no doubt about the success of our currency and the ECB. I do not need to remind you of the advantages and positive consequences of stability in terms of economic efficiency, economic growth and social justice. I should also like to add that it is a real success to be keeping the inflation rate below 2% with such historically low interest rates (2.5%). This is what I would call achieving and maintaining price stability at low cost. These are the credentials of the euro.
On the other hand, the success of a currency and a central bank, the success of the euro and the ECB, cannot be measured through the evolution of its exchange rate.
As with any other feeling, concern is of a subjective nature. I do not mind acknowledging that my personal feelings are of no concern when it comes to the evolution of the exchange rate of the euro vis-à-vis other currencies, for many reasons. Our economy is a rather closed one; therefore the effect of exchange rate fluctuation is much less relevant than it was for our former national currencies. If someone should ask me what is the value of a euro, my answer would be that one euro is worth one euro. The depreciation of the euro does not pose any risk of inflation in the euro area. It is not the consequence of economic imbalances in the euro area economy; on the contrary, the economic fundamentals of the euro area are sound: low inflation, an external current account surplus, lower fiscal deficits and progress towards flexibility and a market-oriented economy.
What really matters to European citizens is that the euro is a currency firmly based on internal price stability, in a better position to maintain its purchasing power than other currencies in the world (such as the US dollar or the pound sterling) and, therefore, with clear potential for a stronger external value because, in the medium term, internal stability and external value are linked.
Dessert: "sweets: London, United Kingdom"
Finally the dessert of my dinner speech relates to London and the United Kingdom. As you can imagine, the institutional position of the ECB - and therefore my own official position - concerning the United Kingdom joining the euro area is one of strict neutrality. This is an issue which has to be decided by the British people, whenever and in whatever way they deem appropriate.
Without prejudice to the ECB or to my own neutrality, allow me to say, nevertheless, that there is no doubt that a currency such as the euro, which is bound to play an important role in the international economy, needs a sound economic and financial basis. The euro would, therefore, benefit from having in its domain "habitat" an economy as important as that of Britain, with a financial centre as important as London, the financial hub of Europe.
Let me add that I am also convinced that in the age of economic and financial globalisation, the United Kingdom and London would also benefit from joining what is - for the time being - the second largest economic and monetary area in the world.
I should like to conclude by expressing my opinion on only one of the arguments against the United Kingdom joining the euro area. I am referring to the demagogic, misleading and even dangerous argument that the depreciation of the euro may be understood as a failure of the ECB and the new currency. Euro sceptics should find other reasons to justify the option of isolation. But why have I even described it as dangerous? Because the issue at stake is not only the euro or the ECB, it is the whole Single Market project and the European Union in general. The future of the ECB and the euro are inevitably linked to the future of the European project.