The euro and the global economy
Speech delivered by Dr. Sirkka Hämäläinen,Member of the Executive Board of the European Central Bank,12th Wirtschaftssymposium,"Global Business - Redefining the Challenge",5 October 2001European Business School, Oestrich-Winkel
Ladies and Gentlemen,
Let me first express my pleasure and gratitude at having been given this opportunity to speak at this twelfth Wirtschaftssymposium on the new challenges for global business, and in particular for corporate governance. The single monetary policy, the euro and the European Central Bank have, in the few years since they were launched, fundamentally changed the environment in which governments, financial institutions and private sector companies operate, in the euro area in particular, but also in other parts of the world.
Before discussing the implications and consequences of the single currency for the governance of private sector companies, I should like to touch upon corporate governance issues at the European Central Bank and within the Eurosystem.
The Eurosystem comprises the European Central Bank and the 12 national central banks (or NCBs) of the Member States which have adopted a single currency – the euro – and a single monetary policy. It is a very special institution, not fully comparable with any other domestic or international institution. This special nature brings with it a huge challenge, not only in terms of the ability of the Eurosystem to create a favourable environment for the governments of the 12 Member States and for private sector companies in the euro area, but also in terms of the Eurosystem's own internal governance.
The Organisation for Economic Co-operation and Development clarified the concept of "corporate governance" when developing – in conjunction with national governments, other relevant international organisations and the private sector – a set of corporate governance standards and guidelines:
"The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance."
The Eurosystem is the result of the political decision-making of 15 sovereign European Union Member States. Twelve of these have so far transferred their national autonomy in the area of monetary policy to the supranational institution, the ECB, whilst simultaneously preserving their autonomy in the field of fiscal or other policies. The provisions of the Maastricht Treaty, as subsequently amended, were formulated by the political system. By approving these provisions, the national parliaments of the EU Member States democratically defined the principles, tasks and objectives, and institutional set-up of the Eurosystem.
The main objectives and tasks of the ECB
The legal mandate of the ECB – and its Governing Council – as stipulated in the Maastricht Treaty is very clear and simple: the core assignment is to maintain price stability in the euro area. The Treaty grants the ECB and its Governing Council full independence. The ECB's – or the Eurosystem's – task of accomplishing this narrow, commonly agreed objective is based on the understanding that monetary policy supports growth and employment by guaranteeing price stability and that, in the medium and long run, there is no trade-off between inflation and output.
Further tasks of the ECB, which has its seat in Frankfurt, and the NCBs of the 12 euro area Member States are the conduct of foreign exchange operations, the holding and management of official foreign reserves of the Member States and the promotion of the smooth operation of payment systems. The Eurosystem is also entrusted with the task of contributing to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.
The decision-making process: principles and procedures
The Governing Council, which consists of the six ECB Executive Board members and the 12 national central bank governors, is the highest decision-making body of the Eurosystem. It makes decisions on monetary policy and monetary policy infrastructure in the euro area, as well as on other tasks entrusted to the Eurosystem. The Executive Board is responsible for the preparation and implementation of these decisions. The two bodies are supported by expert committees composed of members from the NCBs and the ECB.
The contract between those who govern the Eurosystem and the ultimate stakeholders, i.e. the people of the Member States or, more specifically, their elected representatives, is marked by a deep-rooted independence. Given that the benefits of appropriate monetary policy decisions predominantly materialise in the medium and longer term, short-term-oriented political interference has been ruled out. Together with the narrowly defined mandate the independence enhances the institution's credibility and reduces market volatility.
The independence means that the ECB and the euro area NCBs, as well as any member of their decision-making bodies, are prohibited from taking or seeking instructions from any external body. Furthermore, neither governments nor Community institutions are allowed to try to exert pressure on the Eurosystem.
Internally, the Eurosystem is organised in such a way as to minimise the risk of influence from the outside. The three key features of this organisation are the collegial decision-making procedure, the majority principle and the "one person, one vote" principle.
The collegiality principle for the Executive Board and the Governing Council underpins their independence, since a group can shield itself better than a single person from various kinds of pressures and influences, whatever their nature. Collegial bodies adopt decisions on the basis of the majority principle and not by unanimity: this majority principle protects the decision-making bodies from being dependent on the whims of any individual member. The "one person, one vote" principle in monetary policy-related decisions reinforces the crucial institutional structure in which all Governing Council members, including the 12 euro area NCB governors, are present in a personal capacity as independent experts and not as representatives of their respective countries or central banks.
Independence and accountability are two sides of the same coin. In any democratic society where an important public function has been entrusted to an independent institution, "the people", or elected representatives on their behalf, are entitled to scrutinise the actions undertaken in the performance of that function. This gives legitimacy to those decisions.
At the European Union level, the "contract" of the ECB with the euro area governments places great emphasis on regular appearances of ECB officials before the European Parliament, that is, before the directly elected representatives of the European citizens. Of special importance are the quarterly testimonies of the President of the ECB in front of the Economic and Monetary Affairs Committee of the European Parliament. On these occasions, the ECB's policy decisions are explained and the questions of the Members of the European Parliament are answered. This dialogue between the President or other members of the Executive Board of the ECB and the European Parliament is very comprehensive and, for that reason, usually catches the attention of the media.
Independence does not mean that central bankers and politicians should not have contacts with each other. On the contrary, it is very enriching to exchange views and discuss important topics with peers from slightly different "business areas". To that end, the President of the ECB regularly participates in the Eurogroup and the Ecofin meetings. By the same token, the President of the Ecofin group and a member of the European Commission have a right to attend the meetings of the Governing Council of the ECB.
The relationship of the European Central Bank with its national "shareholders", the 12 euro area NCBs is very special. In practice, these 12 NCBs operationally carry out the decisions taken at the ECB concerning the single monetary policy and its implementation. But in their national contexts, NCBs also perform other so-called non-Eurosystem tasks. If these tasks are deemed to interfere with the single monetary policy, the Governing Council can prohibit their conduct.
The focus and contents of the decisions
When we started conducting a single monetary policy at the beginning of 1999, many ECB watchers were doubtful as to our decision-making. The main points of criticism presented were, first, that the Governing Council is too big to make decisions in an efficient and timely manner and, second, that national interests are likely to lead to widely diverging views and difficult decision-making. These concerns were ill-founded in view of the earlier efficient teamwork of the 15 NCB governors within the European Monetary Institute, the predecessor of the ECB. Both concerns have also been proven ill-founded in the period since the single monetary policy was introduced. The discussions in the Governing Council are analytical, constructive and clearly from a euro area perspective.
In public discussion, we still often see speculation that the decisions taken are likely to have been difficult to reach and that a tendency to seek consensus has caused inertia and an excessively slow responsiveness of the ECB. Allow me to convince you that this perception is mistaken. The decision-making has been efficient. The public discussion seems to confuse our deliberate and thoroughly discussed "steady hand" policy with the decision-making process itself. The ECB approach is clearly medium-term-oriented and based on the understanding that monetary policy aimed at medium-term price stability with its rather long transmission lags should not, as a rule, react in an activist way to short-term cyclical movements and external factors.
At the same time, when I say that segmented, nationalistic approaches are not present in the monetary policy decision-making of the Governing Council, I also want to convince you that the decision-making of the ECB is focused on its own constituency and keeping the euro house in order. This is based on a clear understanding that worldwide economic stability is best served when domestic stability in every monetary policy area is ensured. Of course, international and external shocks have an influence on domestic economic developments and the ultimate goal of price stability and they should be taken into account accordingly. Demands to extend the scope of responsibility of the ECB beyond euro area price stability must clearly be rejected.
For global stability and balance, it is important to have a broad consensus on the philosophy behind and overall goals of economic policies in different policy areas. As to monetary policy, such a broad consensus on the virtues of price stability has indeed emerged over the last decade or so. In aggregate, these domestic goals would best contribute to redressing global imbalances. Monetary policy decision-makers should ignore lobbying by those to whom they are not accountable, while at the same time taking into account all domestic and international factors, which could jeopardise their internal policy objectives.
Special constraints and challenges
The Maastricht Treaty specifies certain constraints and principles which the Eurosystem should take into account when choosing the tools and ways to pursue its objectives. Thus, the Eurosystem "shall act in accordance with the principles of an open market economy with free competition, favouring an efficient allocation of resources".
These principles of market economy, free competition and efficiency need to be and have been adopted in many different ways, both internally and externally.
The most important aspect is connected with communication and transparency. Like most central banks all over the world, the Eurosystem also places great emphasis on communication vis-à-vis politicians, the markets and the general public. Numerous initiatives have been taken to promote understanding of its monetary policy. Let me just mention as examples the regular press conferences given by the President, the Monthly Bulletin and many other publications, speeches and interviews, and the ECB's website, a major communication channel providing a wide variety of information.
I admit though that we have not always been very successful in our communication policy, despite our ambitious intentions. The task of communication is a special challenge in a pan-European context. This is because differing cultures, languages, traditions and motives affect how different counterparties interpret the messages, and because the "transmission mechanism" of the communication is affected by new characteristics of the media channels, in particular the speed of delivery and the high degree of competition. We are communicating in an environment composed of 12 sovereign nations and the members of the Governing Council address many different audiences with different needs. For a high degree of credibility, it is important that policy messages are carefully drafted and perceived to be mutually consistent; the variety of audiences and needs, however, complicates this task considerably.
The free market principles stipulated by the Treaty are clearly reflected in the operational framework of the Eurosystem. The implementation of monetary policy via open market operations, as well as the tender procedure, the counterparty policy or the collateral policy connected with it, are areas where market orientation and efficiency have been and are given special attention. And in the same way, the efficiency and market orientation principles need to be continuously followed in the internal management and operations of the ECB. To mention but a few examples, I can refer here to strict procurement, expenditure and insider trading rules, and the Code of Conduct of the ECB.
The Eurosystem's performance: its contribution to the corporate governance of global private actors
As I already mentioned at the beginning of my presentation, the launching of the single monetary policy, the euro and the Eurosystem has fundamentally changed the environment for euro area governments and private sector companies. The introduction of the euro – a crucial step in the European integration process – has produced unprecedented stability inside the euro area, created a strong monetary policy player on the global scene, and provided a strong impetus to the fiscal and structural improvements in the euro area economies.
The stability effects which the euro's arrival has brought and which have improved competitivenes and growth potential cover four types of stability: exchange rate stability, price stability, financial stability and fiscal stability.
First, the exchange rate stability is directly related to the Single Market for goods and services, as well as development of financial markets in the European Union. The single currency has completely removed exchange rate risks for exporters and importers, debtors and creditors across the 12 countries of the euro area and has thus eliminated the costs of hedging exchange rate risks vis-à-vis other euro area countries. Cross-border trade, investment and financial transactions are fostered and, in particular, small and medium-sized companies are encouraged to enter the euro area-wide markets. These developments improve competition, resource allocation and the investment climate and thus contribute to higher long-term potential growth in the euro area.
The internal "exchange rate" stability aspect has often been overshadowed by the disproportionate interest in the floating of the US dollar/euro exchange rate. The dollar/euro exchange rate movements have, in fact, been fully in line with the dollar's historical fluctuations vis-à-vis the European currencies prior to the introduction of the euro. More importantly, the weight of the fluctuating part in exchange rate "baskets" is, in all Member States, now much smaller than in the past.
Second, as to price stability, most analysts and commentators agree that the monetary policy decisions of the ECB have been appropriate and timely. We have achieved low inflation and low inflation expectations and thus interest rates have been low without any drastic changes. For me, this shows that there is confidence in the efficiency of the monetary policy in the euro area. The ECB has made its decisions on the basis of its primary goal, price stability. This was also the case with the latest 50 basis point rate cut following the terrorist attacks in the United States. The Governing Council assessed the events likely to weigh adversely on confidence in the euro area and revised downwards its short-term expectations for domestic growth and inflationary risks in the euro area.
Third, the financial stability of the euro area has been enhanced by the single currency; the latest developments have provided indisputable proof of this. When the terrorist attacks in the United States triggered threats to the short-term functioning of the global financial market, the mere existence of the single currency and the consequent integration and deepening of the euro area financial markets contributed to financial stability in Europe. In addition, in the days following the attacks, the ECB – the monetary authority of the 12 countries – was able to react quickly and efficiently and succeeded in stabilising the markets and creating confidence in their functioning. The ECB's decision to immediately provide extra liquidity in euro, and in co-operation with the US Federal Reserve System and the euro area national central banks, in dollars, contributed to the rapid return to normal of the euro area markets.
In a longer term context, the launch of the single currency and the establishment of a strong monetary policy player on the global scene have contributed to the efforts to enhance co-operation in the regulation and supervision of financial market institutions, as well as in the oversight of payment and settlement systems, both at the European and the global level.
The fourth stability-related aspect in the euro area is the discipline of fiscal policies. The macroeconomic policies pursued in the euro area at present are, on the whole, more conducive to price stability, fiscal prudence and structural changes than at any time in the 1970s, 1980s or early 1990s. The convergence criteria to the third stage of Economic and Monetary Union have already been important in ensuring a stable environment. They have also set a kind of standard beyond the euro area, above all in the EU Member States which have not yet adopted the euro, but also in the 12 candidate countries actively negotiating for membership of the European Union. In addition, the institutional set-up and different permanent procedures within the European Union aim to promote further the stability-oriented policies. The multilateral surveillance and the Stability and Growth Pact are important tools here. The fact that the developments of all Member States' public finances are continuously scrutinised in detail by the Ecofin Council implies peer pressure and shared responsibility. Increasing competition together with this shared responsibility has also strengthened the incentives to improve the efficiency and viability of public sector, labour market and pension system structures.
All of these four elements of stability connected with the single currency are instrumental in improving the environment for financial institutions and private sector companies. They encourage investment activity and improve potential growth of the euro economies.
A specific structural element, which is important for corporations and their financing and therefore also for higher potential growth, is the integration and deepening of financial markets. Financial market deepening improves the financing conditions in general, and those for young, dynamic firms in particular. This is an area where the introduction of the single currency has triggered rapid developments, but where further political decisions are urgently needed.
The euro has only removed one of the barriers between the nationally segmented markets. The barriers related to different legal environments, different technical infrastructures and the use of differing standards and procedures also need to be removed. Important initiatives have been taken by the governments, the European Commission and private agents to speed up progress in these fields, but much more progress is still needed.
The introduction of the euro is a long-term project – most of its effects are of a structural nature and they will only be seen after decades. A final milestone in the launching phase of the single currency will be the introduction of the common euro banknotes and coins in less than three months' time. After that, the full replacement of national denominations of the euro by the single currency will lead to full price transparency and substantially lower transaction costs across national borders. These benefits are likely to promote further the Single Market for goods and services and to strengthen competition in the euro area.
As to the international role of the euro, from the very beginning it became the second most widely used currency at the international level. At the end of last year, its share of the overall stock of international debt securities was about one-quarter, its share of international bank assets slightly more than one-fifth and its share of reserve currencies held by the International Monetary Fund member countries over one-tenth. There has been a clear growing trend in the international use of the euro since the beginning of 1999 and this trend is expected to continue. In global business, the euro will gradually become more and more important as a financing, investment, pricing, quotation and trade vehicle currency.
The first – and admittedly the most important and exciting – step in the process to unify European economies through a single currency and monetary policy will come to an end when common euro banknotes and coins are put into circulation at the beginning of next year. Further important steps with interesting new challenges do, however, lie ahead of us. For the Eurosystem, two challenges are clearly of particular importance. The first challenge is connected with the future enlargement of the euro area and the consequent changes in the decision-making and corporate governance of the ECB. The second challenge is the harmonisation and consolidation of the regulatory and institutional framework for euro area financial markets and the ensuing consequences for the monetary policy transmission mechanism. We have every reason to expect that these challenges will be met successfully, as were the earlier, much bigger challenges.