The euro and the Eurosystem - some issues of interest for the Swedish public
Speech delivered by Eugenio Domingo Solans, Member of the Governing Council and the Executive Board of the European Central Bank, at Swedbank, Stockholm, 26 February 2001.
I should like to begin by thanking Swedbank for inviting me to speak here in Stockholm precisely at the time of the Swedish Presidency of the European Union (EU). I appreciate having the opportunity to share my views on several issues related to the responsibilities of the European Central Bank (ECB) with experts of this "pre-in" country, our jargon for countries belonging to the EU, but "not" - or perhaps I should say - "not yet" belonging to the euro area.
"One market, one money"
Why should I rather say "not yet"? This leads to the issue of the possible future participation of Sweden in the euro area. This is, of course, a matter to be decided by the Swedish people, whenever and however they deem it appropriate. Having said this, and without prejudice to it, allow me to express some views concerning this point.
Money performs three functions: those of a means of payment, a unit of account and a store of value. In general terms, I do not see any advantage in keeping as a means of payment, unit of account or store of value a currency different from that of the rest of the partners of a single market, provided that the quality, i.e. the stability, of the common currency is similar to that of the national currency. On the contrary, in terms of efficiency, I see advantages resulting from sharing the same currency and, therefore, the same monetary policy, the same exchange rate and the same payment systems with the partners. Having a common means of payment, unit of account and store of value in a single market makes this single market work in a more integrated and smooth way. Not only the economic players involved in international business activities, but also the general public benefit from a higher degree of integration.
The aim of the Maastricht Treaty is clearly to establish a monetary union comprising all EU Member States. Jacques Delors expressed the rationale underlying this idea with only four words: "one market, one money". The euro implies an improvement of the single market. Frankly speaking, I find it difficult to understand why a country which has decided to join the European Union and the single market and is really able to comply with the Maastricht convergence criteria should opt to stay out of the euro area.
Certainly, joining the euro area and accepting the euro as a new common currency implies a higher degree of economic integration and, indirectly, political commitment. But this additional step is not more relevant in terms of integration than joining the single market and the European Union. The fact is that Sweden has already taken the big step (joining the Union and the single market), and taking the next step (joining the euro area) would, in my opinion, entail far more advantages than possible drawbacks. Allow me to develop the main arguments to support this judgement from several different perspectives.
Before taking their final decision on joining the euro area or not, the Swedish people must be well informed about the true implications of this decisive step and must, therefore, have proper information about the real extent of the advantages and drawbacks usually mentioned when forming part of the euro area is under consideration. This speech is my contribution to this end.
Single market and single payment area
An efficient and smooth single market is one which functions as a true single payment area. A prerequisite for a real single payment area is, of course, using the same currency, making the currency borders disappear. Having a single currency is a necessary condition for a single payment area, although it alone is not enough for the latter to be efficient. Efficiency and smoothness require common means or instruments of payment (e.g. the same banknotes and coins), common systems (e.g. TARGET and Euro I) and common procedures and standards.
The Eurosystem is firmly committed to turning the euro area as a whole into a true single payment area. The introduction of euro banknotes and coins as of 1 January 2002 will be the main step in this direction, allowing people to pay cash transactions in euro. The cash changeover will generalise the use of the euro as unit of account among the people of the euro area, as well as its use as store of value.
Another area of necessary improvement is that of the cross-border retail payments. The Eurosystem closely monitors the developments in this area and, if necessary, further action will have to be taken to ensure the smooth functioning of retail payment systems in the euro area.
All these developments (cross-border gross payment systems, cross-border retail payment procedures, the cash changeover) have or will have spillover effects on EU pre-in countries. Whether or not Sweden joins the euro area, the development of a single payment area based on the euro is affecting Sweden and will also do so in the future, although certainly in a different way and to a different extent.
Single market, single currency and common financial structure
The financial structure can be defined as the whole setting of financial markets, financial instruments and financial institutions at a given point in time. The introduction of the euro in January 1999 has affected the financial structure of the euro area meaningfully and positively.
Euro area economic players benefit especially from the existence of a larger, deeper, more integrated, transparent and liquid financial markets or, in other words, they benefit from the existence of less imperfect financial markets. This benefit spills over to the rest of the globalised financial world, also having positive effects on Swedish economic agents, although to a lesser extent than euro area economic agents.
The fact is that we have a single money market in the euro area today, especially where the unsecured deposit and the derivatives markets are concerned. There is also a clear trend towards the integration of the government bond markets and fast growth in the euro-denominated private bond market. The alliances between or integration of stock exchanges should also foster the integration of the infrastructure in the field of stock markets.
The integration of financial markets increases the range of borrowing and investment possibilities available to economic agents, thus contributing to the allocation of savings to the most productive investments and, in general terms, increasing the efficiency of our economies.
Financial integration also fosters technological and financial innovation. This results in the development of new financial instruments. More specialised and sophisticated financial instruments are the appropriate response to the changing financial needs of the economic agents.
More integrated and transparent euro area financial markets foster competition among banks, increasing the need for restructuring and consolidation. In fact, banks all over Europe are merging or building alliances on an unprecedented scale, drastically changing the national banking environment and beginning to create international firms and networks.
I do not intend to suggest that all these developments affecting European financial markets, financial instruments and financial institutions have been caused by the introduction of the euro. What I am convinced of, however, is that the euro is acting as a catalyst, as a quantum leap, in this process. In fact, the euro is a key factor among several others (market globalisation, technological innovation) explaining the huge changes which are taking place in the European financial area.
Allow me to conclude this part of my speech by admitting that, although great progress has been made in the integration of financial markets and in the restructuring of financial institutions within the euro area, there still remains much to be done. As experts in chemistry know, a catalyst by itself cannot provoke a meaningful reaction if other elements or substances are missing or insufficient. In some areas, such as retail banking or stock markets, the financial markets in the euro area are still segmented. In spite of the catalystic effect of the euro, too many different regulations remain in areas such as accounting, taxation, commercial law, prudential supervision, etc. Furthermore, too many clearing and settlement systems exist and too many national practices persist. All these limitations and inadequacies are not in accordance with the idea of a single market and should therefore be removed and overcome. There is no need for uniformity or centralisation in these areas: I am only referring to the minimum level of harmonisation needed to allow the single market to function smoothly and efficiently.
Single market and international role of the euro
The euro is already an international currency, with the US dollar and the Japanese yen, and certainly not against them. There is enough room for the three currencies in the world economy.
Indeed, the euro fulfils the two necessary conditions for a currency to become an international currency: quality and quantity. Quality, in this context, implies stability, credibility, low risk. Quantity, in this context, should be related to the large size factor, to the large "habitat" of the euro in demographic, economic and financial terms. Without a certain critical mass, a currency cannot have international relevance, however high its degree of stability. I do not have any doubts about the high quality level of the Swedish krona. What would make a difference in the event of Sweden deciding to join the euro area is that its currency would, in addition, have the necessary critical mass to become an international currency.
Is it important for an economy to have an international currency? The answer is "yes". Having an international currency means that the own currency is widely accepted in the world economy as unit of account, means of payment and store of value. Therefore, people can travel around the currency area and, in some cases, even around the world knowing that their currency will be accepted without having to pay any exchange fees. Companies are in a position to charge their foreign customers in their own currency and to be charged in it by their foreign suppliers. International trade bills can be charged or paid in the own currency. Funds in the own currency, i.e. without exchange rate risks, can be raised or invested at better terms and conditions in international financial markets. Company subsidiaries and branches around the world can develop their internal accounts in the same currency used in their domestic markets. The circulation of banknotes outside the currency area increases the income obtained from seniorage. And so on and so forth.
It would be exaggerated to say, at the present stage, that the euro as an international currency has already developed to the extent of being able to offer all the advantages that I have just mentioned. Let us simply agree on the fact that the euro is moving in that direction and that it is increasingly being used in the world economy as unit of account, means of payment and store of value. Several articles published in the Monthly Bulletin of the ECB prove that this is the case and I would prefer not to bore you with specific facts and figures.
An important future step in the development of the euro as an international currency will be the cash changeover to euro banknotes and coins, which is due to start on 1 January 2002. This challenging logistical operation will be a milestone in the history of the euro and the Eurosystem and will have a positive and significant influence on the use of the euro as an international currency.
Allow me to conclude this part of my speech by stating the official position of the ECB regarding the international role of the euro. Owing to the fact that internationalisation involves other players, we shall not adopt a belligerent stance in order to force the use of the euro upon the world economy. We are convinced that the use of the euro as an international currency will come about anyway. It will happen spontaneously, slowly but inexorably, without any impulses other than those based on free will and the decisions of market participants, without any logic other than that of the market. In other words, the internationalisation of the euro is not a policy objective of the Eurosystem; it will neither be fostered nor hindered. The development of the euro as an international currency will be a market-driven process, a free process, which will take place inevitably.
Single market and common exchange rate
Having a common currency, of course, implies having a fixed exchange rate vis-à-vis the currencies of the other single market partners as an inherent element of a monetary union. With a single monetary policy and common economic policy standards, having a fixed exchange rate is not an odd or negative feature. On the contrary, it is a positive element which facilitates economic relationships with the rest of the area. Many countries not belonging to an economic union or to a single market have developed schemes which imply exchange rate co-ordination, to a larger or lesser extent, in order to facilitate their economic relationships, such as exchange rate pegging arrangements or currency boards. Incidentally, this is the case of many accession countries of central and eastern Europe
What seems difficult to maintain in the long-run is belonging to a single market, being really able to comply with all the nominal convergence criteria which allow participation in a monetary union developed inside the single market, but leaving the currency floating freely against the common currency of the single market. This, of course, holds true of Sweden, which does not fulfil one of the convergence criteria as a substitute for a formal opt-out clause. In this respect, I must say that I find the Danish solution more convenient from an economic point of view: Denmark negotiated a formal opt-out clause regarding Monetary Union, but follows a fixed exchange rate policy vis-à-vis the euro within the exchange rate mechanism (ERM II).
To think that it is advantageous within a single market to keep the possibility of adjusting the exchange rate without any additional measure in order to be competitive is simply not true. Competitiveness depends upon real sector economic factors, such as investment, technical innovation, wage developments, taxation, the educational level and many other aspects, and, certainly, competitiveness cannot be increased through a mere exchange rate devaluation. Unfortunately, things are not so simple, not so easy.
Single market and single monetary policy
Having a common currency implies having a common monetary policy. I do not see any advantage in keeping a different monetary policy from that of the partners of the single market, provided that the common monetary policy is directed towards the same objective, i.e. internal stability.
This leads to the "one-size-fits-all" issue of the ECB's monetary policy. This is, in turn, related to the approach followed by that monetary policy, the basic philosophy which characterises it. Allow me to repeat on this occasion what I have already said in other fora on this subject.
The main feature of the ECB's monetary policy approach is its lack of activism. This lack of activism implies that the ECB's monetary policy does not intend to be counter-cyclical, nor does it intend to react to short-term changes in economic conditions nor to fine-tune economic developments. On the contrary, the ECB's monetary policy intends to provide general monetary conditions with a medium-term perspective, valid for the whole geographical euro area and oriented towards the achievement of our primary objective of maintaining price stability. By doing so, we create the best monetary framework for a stable currency, for a balanced economy in macroeconomic terms and also for economic growth and job creation. Not being counter-cyclical does not imply that the ECB's monetary policy cannot help smooth out economic cycles: indeed, it can extend the wavelength of the economic waves. The ECB's monetary policy is not intended for active fine-tuning, neither in terms of time nor in terms of space. Not being active in terms of space allows the ECB's monetary policy to meet the monetary requirements of the whole area. Furthermore, no monetary policy can be discriminating in its regional effects. Not being active also allows an appropriate degree of interaction with other Community or national economic policies. Framework rather than action, chassis and shock absorber rather than an engine, fresh open air rather than an oxygen tank, traditional cooking rather than a microwave oven: these are a few metaphors I use to explain the lack of activism of the ECB's monetary policy, as opposed to an active monetary policy.
The relevant question here is whether the ECB follows this monetary policy approach because it thinks that it is the best one, or just because it is the only one possible at the euro area level. I am inclined to believe that the ECB's monetary policy approach is not merely the only one possible for the euro area; it is also the best among other alternatives, regardless of whether they are feasible or not. Monetary policy (in general terms, not only in the euro area) has limitations, irrespective of the size of the area it applies to, and these limitations do not decrease significantly in smaller areas. Let us recall some of the limitations of any monetary policy: no ability to fine-tune the economy; the need to adopt a medium-term perspective; no long-lasting possibility of exploiting a trade-off between stability, on the one hand, and economic growth and job creation, on the other; asymmetry, i.e. more effectiveness when limiting nominal demand and, therefore, bringing down inflation, than when trying to expand real demand to enhance economic growth.
If we bear all these features of monetary policy in mind, we will be more aware of its limitations and will therefore certainly be still prepared to expect a lot from it, but not more than it can give.
Eurosystem transparency and accountability - the monetary policy objective and strategy
Although clearly related, transparency and accountability are two different issues. Transparency refers to appropriate communications with market players, with economic agents and the public in general. When I say "appropriate" communications, I mean, above all, communications which explain, which clarify, the ECB's monetary policy decisions as well as other actions of the Eurosystem.
Accountability also implies the idea of "explaining", as does transparency, but accountability additionally and especially implies the idea of "justifying", and it also conveys the idea of being responsible for one's actions, before the European Parliament in the ECB's case.
Transparency is more related to an ex-ante or real-time explanation and has to be seen as an economic requirement. Accountability refers to an ex post justification and it relates to a political duty, namely democratic control of the central bank.
In monetary policy-related issues, transparency and accountability should rely on a well-defined and prioritised objective and a clearly specified strategy, i.e. a framework containing the relationships between variables relevant for monetary policy decisions. A clearly specified strategy provides the public with the decision-making criteria, allows policy-makers to adopt coherent decisions, allows markets, politicians and the public to assess those decisions and, to a certain extent, facilitates the preparation of the markets.
Well-defined and prioritised objectives and a clearly specified strategy have both been developed by the ECB and constitute a basic pillar of its transparency and accountability. As you know, the ECB has a quantitative definition of price stability (any increase in the Harmonised Index of Consumer Prices (HICP) of below 2% for the whole euro area, to be complied within a medium-term perspective) and its monetary policy strategy is based on two pillars: the first gives a prominent role to money, basically as signalled by the announcement of a reference value for the growth of a broad monetary aggregate, namely M3, and the second pillar consists of a broadly based assessment of the outlook for future price developments and the risks to price stability in the euro area as a whole.
Why has the ECB developed a new strategy with two pillars? Because we are dealing with a new currency, regulated by a new institution full of novelties, which takes monetary policy decisions for a new and large economic area. All these facts convey the idea of complexity and uncertainty. A monetary policy strategy able to cope with a high degree of complexity and uncertainty should unavoidably be all-encompassing and flexible, as is the ECB's strategy. To be effective, monetary policy strategies must mirror the complexities and uncertainties of the environment in which they are applied.
The ECB's monetary policy strategy is all-encompassing in the sense that it considers all possible relationships between variables that are of some relevance for monetary policy purposes in a comprehensive and detailed way, in accordance with present knowledge, taking into account more than one single paradigm. Being all-encompassing excludes shortcuts and quick and simple solutions. Being all-encompassing precludes paying attention only to the first and last steps of the complex chain which links the monetary policy objective with the instrument variable.
The ECB's monetary policy strategy is flexible in the sense that it is readily adaptable to changing and unpredictable conditions. This precludes any kind of mechanical approach, since anything mechanical implies routine and automatism, which are unable to deal with unpredictable changes.
The ECB's monetary policy strategy has been accused of opacity, of a lack of transparency. I do not think this is true. I think rather that one must not confuse opacity with discretion, transparency with automatism. I can accept that there is no automatism in the ECB's strategy, in the sense that monetary policy decisions do not feed back from a change in specific variables.
Certainly, the market players and the politicians would prefer a different kind of strategy, more simple and more automatic, i.e. more predictable and committing. It is irrelevant to consider whether such a strategy may have advantages in terms of transparency and accountability, because it implies an unacceptable sacrifice in terms of the effectiveness of the strategy, at least in the case of the euro area.
Politicians want central banks to be transparent and accountable. Market players want central banks to be transparent and fully predictable. I could not agree more, provided that both politicians and market players are also fully aware of the complexities of monetary policy-making. Everyone would agree that honesty is even more important than transparency, accountability and predictability, and that, honestly speaking, a monetary policy strategy should, above all, be effective, as is the ECB's monetary policy strategy.
Eurosystem transparency and accountability - external communications
Another relevant angle concerning transparency and accountability concerns proper communications with the public, with their elected representatives and with the market players.
The Eurosystem has developed a meaningful set of communication tools, activities and procedures in order to be fully transparent and accountable. The Eurosystem communicates with the public, their elected representatives and the markets more actively than almost any other central bank in the world, certainly going beyond its legal requirements. The Eurosystem is fully aware that effective communications are a necessary condition for gaining the confidence of financial players and the general public, and the support of their elected representatives.
In particular, the national central banks of the Eurosystem are essential players in these external communication efforts. Should Sweden join the euro area, the Riksbank would continue to play the unsurpassable role it is presently playing in this area and would certainly enhance the whole Eurosystem's transparency and accountability.
I would need another full speech to describe to you the whole set of activities, procedures and tools developed by the Eurosystem in order to comply with its transparency and accountability requirements. Let me just mention them: public hearings before Parliament (in the specific case of the ECB, before the European Parliament) and other frequent contacts with their members; press conferences held by members of the Governing Council, particularly by its President; academic conferences; frequent regular and ad-hoc press releases; various publications, especially the Annual Report and the Monthly Bulletin, the latter including a wide range of euro area statistics, many of them elaborated by the Eurosystem itself, and also including the staff economic projections for the euro area on a biannual basis. And, finally, the websites of the ECB and the national central banks.
Without a doubt, you will miss the publication of the minutes of Governing Council meetings in this list of communication activities, tools and procedures. Certainly, regarding the ideas of accountability and transparency, the question of publishing the minutes of the meetings of the Governing Council often arises. The position of the ECB, in line with the Treaty on European Union, is that of preserving the confidentiality of the meetings and, therefore, of not publishing the minutes thereof. This stance prevents transmitting ambiguous signals to the public and the markets, which could lead to misunderstandings. It also avoids the temptation of toning down the opinions expressed by Governing Council members only to adjust the contents of the minutes to the message they wish to transmit. Confidentiality fosters the true expression of the real opinion of the Governing Council members and not the opinion that they would like the public to consider their own. At the same time, it protects the independence of the members who express an opinion and vote, which is particularly convenient for a supranational institution where there is always the risk of identifying personal opinions with national opinions. On the other hand, there could be dissension, but the dissenter could prefer not to have this reflected in his or her vote, which is an attitude to be respected. Furthermore, there is no strict necessity to always vote, if it is possible to infer the majority's opinion without doing so. Certainly, everything is debatable and subject to revision. However, after weighing the pros and cons, I believe that the possible advantages of publishing the minutes of the Governing Council meetings would not compensate the disadvantages stated earlier. What is important is to explain the final decision. The relevant words on this issue are "what" and "why" and not "how" or "who".
Transparency deals with the amount and the kind of information given and the timing of the communication. With regard to the amount and the type of information, the golden rule is not "the more, the better". Giving too much information in a disorderly way, diverting attention from the substance to irrelevant details or procedural issues, paying attention to the persons instead of the facts, are ways of being opaque.
With regard to the timing, the golden rule is "the sooner, the better", because the reactions of the markets start immediately after the decision is taken and announced. In this respect, I should like to underline that, in the case of the ECB's monetary policy decisions, detailed information about the Governing Council's reasoning is made available very shortly after the meetings, thus avoiding delays which are inherent in the publication of all forms of official minutes. In addition, on a regular basis, the President and the Vice-President hold a press conference right after the meeting, followed by the rapid publication of the transcripts of the questions and answers on the ECB's website. Furthermore, the Monthly Bulletin of the ECB contains an in-depth analysis of the ECB's monetary policy decisions.
Although the Eurosystem has not yet reached its cruising speed, the issuance of euro banknotes and coins being the main specific issue still pending, the take-off and the first part of the route covered by the new institution so far and the new currency have, without any doubt, been fully successful.
The ECB and the Eurosystem are under three years old. This is nothing if you compare it, for example, with the time of existence of the Riksbank, the oldest central bank in the world. Certainly, the Eurosystem needs more time to develop further and to consolidate all the characteristics of a full-fledged central bank.
I am convinced that the involvement of the Riksbank in this European Union undertaking would be as positive for the Eurosystem as the adoption of the single European currency would be for Sweden. As you can see, in my opinion, the right way to approach the issue of the entrance of Sweden into the euro area is to ask not only what the euro and the Eurosystem could do for Sweden, but also what Sweden, the Swedish economy and the Riksbank could do for the euro area economy, the euro and the Eurosystem.