The culmination of European Monetary Union
Eugenio Domingo Solans, Member of the Governing Council and of the Executive Board of the European Central Bank (ECB), speech delivered at the conference held in the Club Siglo XXI, Madrid, 24 January 2002.
Before saying what I have come here to say, I would like to thank the Club Siglo XXI for once again inviting me to speak and Ángel Rojo for agreeing to introduce me.
Ángel Rojo is the one Spaniard who, from a technical viewpoint, has done more than anyone to bring the euro into being and to make it our money. Like other leading economists such as Sardá Dexeus, Fuentes Quintana, Velarde Fuertes, Varela Parache and Álvarez Rendueles, he has put a lot of time and effort into helping to bring order to Spanish economic policy. As Governor of the Banco de España, Vice-President of the European Monetary Institute (EMI) – the forerunner of the European Central Bank (ECB) – and member of the Governing Council of the ECB, he has played a key role in the construction and consolidation of European Monetary Union and in the integration of the Spanish economy. This he has achieved through his efforts, intelligence, impartiality and sound judgement. I would also like to emphasise that since becoming Professor of Economic Theory, Ángel Rojo has also done more than anyone else – time and other constraints permitting – to promote the study of macro-economics in our universities, thereby making a decisive contribution to the advancement of social sciences in Spain.
The introduction of the euro banknotes and coins
This European Monetary Union, which Professor Rojo so decisively helped to build, has now reached its culmination with the introduction of banknotes and coins denominated in euro and the simultaneous withdrawal of cash denominated in national currencies.
If banknotes and coins are to be put into circulation, they first have to be produced, which in itself was an unprecedented challenge. For banknotes alone (the responsibility of the Eurosystem), we assembled and co-ordinated a total production capacity of some one billion banknotes per month, or 33 million per day, 1,400,000 per hour, 23,000 per minute, or approximately 400 per second. Work continued throughout the night and on bank holidays, because certain printing works sometimes operated in four shifts. At this rate of production we could, if necessary, print all the euro banknotes to be put into circulation in Spain in only two months or in only two days what will be put into circulation in Luxembourg.
In total, more than 51 billion coins have been minted and around 16 billion banknotes printed, including central reserves. Banknotes have been printed at 14 different printing works throughout the European Union (one, Giesecke & Devrient, operates from two different sites in Leipzig and Munich), using different production techniques and raw materials from over 40 providers, including nine paper manufacturers and various other companies. In the case of Spain, I must say that the role played by the Fábrica Nacional de Moneda y Timbre (FNMT) and its paper factory in Burgos, managed by Gonzalo Ferre, was decisive in the success of the operation. The banknotes incorporate state-of-the-art lithographic and calcographic printing techniques and security features, had to be available within a fixed timeframe and be identical both in the eyes of the public and when read by machine sensors, given that they will circulate throughout the euro area irrespective of where they were originally issued. The underlying legal and administrative complexities of such an operation were also not inconsiderable.
In short, for the Eurosystem – and in particular the European Central Bank (ECB) as co-ordinator and controller of the undertaking – the production of euro banknotes has represented a challenge on a scale and of a complexity which no other central bank in the world to date has had to face.
Following the production of the euro banknotes and coins, the second phase of the operation has involved putting the new currency into circulation and withdrawing national banknotes and coins, a highly topical subject which I will now address in greater detail.
Without wishing to appear overconfident, which is not something I like to do, the operation is proving to be a success and, naturally, a success for all Europeans. Of course there have been incidents and complaints. That is only to be expected in an operation that has mobilised the 300 million inhabitants of the euro area and many more outside it, in which professionals from very different sectors have been involved and which has required the co-ordination of operations in the 12 countries of Monetary Union as well as in some outside it. A few defective coins, a few poor quality counterfeits which, I might add, cannot even really be classified as such, a few longer than usual queues in banks and shops, an unfounded fear that certain coins were detrimental to health and little else. In view of the size, scope and complexity of the operation, all this can be considered the exception which proves the rule, which in turn proves the success of the operation. I repeat: a success for everyone.
Things have worked out well because of good preparation: advance planning, communication, co-ordination and thorough follow-up and control have all been vital. The operation has been a success because many professionals – whether in banks, retail outlets, companies operating cash-transporting vehicles, factories producing banknote-accepting machines, newspaper offices, national and EU authorities, national central banks and the ECB itself – have made a special effort in terms of organisation, logistics and other technical and financial aspects. Although, logistically speaking, the planning was sound and had the assistance of those sectors directly involved, if it had not been for the effort of the professionals working in banks, department stores, small retail outlets and cash transporting companies, it would have not been possible. The personal commitment of some has gone as far as assuming that the whole operation depended on them, which, at the end of the day, has ended up being the case. On behalf of the Eurosystem, I should like to express my gratitude to all those involved for their dedication and professionalism. Thank you for making the success of the operation depend, with regard to specific factors, places and moments, on the responsibility of certain individuals. Thank you for "humanising" the arrival of the euro banknotes and coins.
Now, please let me savour recent events a little longer. If I had to identify the key to the successful introduction of the euro banknotes and coins I would say it lay in the following: meeting production objectives in terms of quantity, time and quality; beginning the frontloading of banknotes and coins to professionals well in advance; by contrast, not approving the frontloading of banknotes to the general public in spite of the recommendation of the European Parliament and the specific legitimate interests of certain groups, thereby avoiding confusion among consumers and further burdens on credit institutions, bringing order to the entire operation. Frontloading a means of payment – in this case banknotes – is not the same as frontloading what is essentially a means to round up payments in order to pay an exact price, i.e. coins.
I will now continue to list the key successes of the operation: negotiating, with the European Banking Federation, the European Association of Savings Banks and other representatives of credit institutions, a debit model acceptable to all parties; supplying, as early as the spring of 2000, manufacturers of banknote-accepting machines with euro banknotes so that they can fine tune sensors, with the inherent risk that in spite of the obviously considerable security measures, there would be ample time for a professional counterfeit to be produced with the help of a disloyal employee; providing retailers with euro starter kits so that they could practise using the new banknotes and coins; preparing for the changeover to the euro outside the countries of Monetary Union by frontloading euro via banking institutions and 26 central banks mainly in eastern Europe, the Mediterranean and Africa.
Also vital to the successful introduction of the euro banknotes and coins has been the Eurosystem's sound co-ordination with ECOFIN and the Eurogroup (here I should mention Rodrigo Rato), with the European Commission (Pedro Solbes), with Europol (Jürgen Storbeck) and, naturally, with the national authorities. Striking the right balance between the operation's centralisation and decentralisation was, apart from a legal obligation, a logistical success.
Co-ordination within the Eurosystem, i.e. between the national central banks and the ECB, has also been effective, although this has been easier and more predictable. In particular, the idea to create CashCo, the operation's internal follow-up, control and, if necessary, crisis committee, proved to be successful. In referring to the role of the national central banks, allow me to digress and mention, for obvious reasons, the Banco de España, and in particular the work of its Governor, Jaime Caruana, and the Director General responsible for banknotes, Javier Aríztegui, who have most ably taken over the reins from Angel Rojo and Gonzalo Gil respectively, and continued their excellent work.
I believe that the information provided by the national authorities and the Eurosystem has also been sufficient. In this context it is worth mentioning the success of the slogan "the euro. Our money", the work of the agency Publicis, which reached a worldwide audience through television and newspaper advertisements, web pages, starter kits containing information for professional cashiers and the media, and the 200 million leaflets written in a total of 38 official European languages, regional languages of European countries and other languages. The media's constructive criticism and eagerness to inform, often assuming the role of teacher explaining the whole operation, also deserves a mention, as does the eager participation of consumer associations.
All of this, and I would like to think that there is something else besides, has helped the European public to understand the importance of the changeover of the national banknotes and coins to the euro, to accept the new currency, familiarise themselves with it so it has become a part of their everyday lives and, in many cases, even get excited and enthusiastic about it. The reception given to the euro banknotes and coins has clearly exceeded the nostalgia surrounding the withdrawal of the national banknotes and coins.
Two aspects of the actual changeover to the euro deserve further comment. The first is to explain that an initial greater than expected public demand for the euro, together with the limited capacity of cash transportation companies to quickly withdraw national currencies – remember that they had had up to four months to carry out the inverse operation of frontloading euro banknotes and coins – meant that the total amount of banknotes circulating outside the central banks during the first days of the changeover exceeded forecasts. To use a water metaphor, we might say that the bathtub of fiduciary circulation became fuller than expected because the flow rate from the euro tap could be increased, if required by the public, faster than the national currencies could be drained. This was because it had been possible to prepare the euro supply tap in four months (frontloading of euro from September to December 2001), but obviously not the drainage pipe.
Fiduciary circulation is one of the independent factors which absorbs liquidity from the banking system by obliging credit institutions to acquire the banknotes and coins requested by the public from the central bank. In order to avoid liquidity-related tensions in the system generated by the increase in fiduciary circulation, the Eurosystem, on 4 and 10 January, auctioned 25 billion euro at 3.30% and 40 billion euro at 3.18% respectively – i.e. only five and three base points above the minimum rate – in separate extraordinary fine-tuning operations in the form of quick tenders. These fine-tuning operations did not mean, as could have been interpreted, that more banknotes were being brought into circulation because the Eurosystem had run short but, as you will have understood, quite the opposite. It is precisely excess banknote circulation – a liability item on the central bank's balance sheet – which has the negative effect of generating an increase in the liquidity needs of the banking system. Even if to the non-expert it may seem paradoxical, it is the increase in banknotes in circulation and not their shortage which reduces the liquidity of the banking system and obliges the central bank to provide additional liquidity to banks. This was the situation behind the scenes and at no time did it affect either the changeover itself or, of course, the European public.
The second aspect worth mentioning in relation to the changeover which may indeed have affected the public slightly in certain areas, but which is nevertheless correcting itself, is the difference between the faster-than-expected speed with which the euro has replaced the national currencies and the rate, in keeping with forecasts, at which it is technically possible to adapt the sensors of banknote and coin-accepting machines to the euro. In the interest of the sectors affected, the rate of adaptation of machines is now reaching its peak, but let us not forget that we are talking about around ten million machines, not including those which only operate using electronic cash. Today, throughout the euro area, approximately 85% of banknote and coin-accepting machines have already been adapted. I therefore understand that, although the amount of national coins in circulation may at this stage be small, we should not expect any major incidents. Those who have suggested that the acceptance period for national currencies should have been shorter, or that it should be shortened, would do well to remember this method of cash payment; nor should they forget that although most of the changeover has already taken place, there are still minor exceptions that good planning needs to take into account.
The geographical culmination of European Monetary Union
The circulation of euro banknotes and coins represents the functional culmination of European Monetary Union. All that now remains is to complete the operation from a geographical perspective through the integration of the remaining European Union countries as well as future members.
Nothing in Europe is being carried out against the wishes of its citizens, and the position of the Eurosystem with respect to the integration of new countries in Monetary Union can naturally only be one of total respect for such wishes. However, in my view, being in the European Union but not in European Monetary Union is incongruous, whatever the reason for this may be: incapacity to meet or rejection of the nominal convergence criteria set out in the Treaty of Maastricht (Greece until 2000, Sweden and the candidate countries as soon as they join the European Union) or the signing of an "opt in" or "opt out" clause (the United Kingdom and Denmark respectively). If the prerequisite of nominal convergence is fulfilled, being in the same market but not using the same currency can lead to distortions and imbalances owing to variations in exchange rates of national currencies with respect to the euro, thereby affecting nominal competitiveness. If the rate of exchange of the national currency is pegged to the euro, as is the case of the Danish krone, the situation is comparable to that of someone who is prepared to fulfil the obligations imposed on the members of a club without belonging to it or enjoying the rights of membership. Whichever way you look at them, none of these positions makes good sense.
In view of the future accession of new countries to the European Union, it is worth remembering that the Treaty unequivocally establishes the need to sustainably and lastingly fulfil the convergence criteria laid down by the Treaty of Maastricht in order to partake in Monetary Union. The ideas of sustainability and durability of convergence are clearly described in Article 109j(1) of the Treaty, as well as in Protocol Number 6, Article 1, of the same Treaty, in this instance in relation to inflation.
With the acceptance of and even the excitement surrounding the euro, the citizens of Europe have sent a clear message to those of us with political or institutional responsibilities within the European Union. This message can be summarised in two words, which just so happen match exactly the slogan of the Spanish Presidency of the European Union: "más Europa" ("more Europe"). Without losing their regional or national roots, without giving up what is fundamental in each community and without harming the individual identity of each individual citizen, Europeans have told us that they want to carry on developing together, that they want to continue with their integration, that they have understood that for the sake of Europe it is worth forsaking what is unessential for each nation, even if what is unessential is something as important as the national currency, monetary sovereignty, in other words nothing short of relinquishing the power to issue money.
With the introduction of the euro, we Europeans have decided to depoliticise our money through an independent Eurosystem and to denationalise our money through European Monetary Union. With the end of the operation, on 28 February at the latest, the euro will not only be the currency of all our payments and cash deposits but also our only unit of account. In other words, all prices and economic values will definitively be expressed in euro throughout the euro area, from Ireland to Greece and from Finland to Spain. This is something truly amazing, despite the little importance we give it. Only the immediacy of the event prevents us from having sufficient perspective to gauge the magnitude of what we have achieved.
Those who wonder whether Monetary Union can survive without full political union do not take into account the fact that depoliticisation and denationalisation cannot be bad for it but are actually very good for any currency whose main aim is stability and which ceases to be useful for other political and economic aims incompatible with stability, or which simply ceases to be useful for political purposes. Of course, given what we already have now, it is not a question of what the euro may one day become but the fact that it is already a stable, sound, strong and international currency, which will only go from strength to strength. The euro may not be high, but it certainly is strong.
The signal that Europeans have sent us by their acceptance of the euro is one which undoubtedly contains political, social and economic messages. I shall limit myself to what I understand about the economic issues. I simply think that, politically speaking, Europe is and will be whatever we Europeans want it to be.
Notwithstanding the fact that, politically speaking, much progress is being made in terms of European integration on a larger scale – European Federation, European Constitution, etc. – I would like to emphasise the importance of concrete, pragmatic achievements for the Union. We feel that there is a need for additional integration in a specific field (the monetary field, for example), we think how we can satisfy the need in functional terms (with a new single currency, for example) and we design the institution that can perform this function (the Eurosystem). Need-function-institution: this is the sequence which is proving to be successful in achieving the goal of "more Europe", and I repeat: notwithstanding more ambitious schemes.
From Monetary Union to European Economic and Monetary Union
Now is the perfect time to breathe life into the outstanding economic reforms that Europe needs. We are starting from an ideal breeding ground – the pro-European vitality of the general public as expressed through the introduction of the euro banknotes and coins. In the euro and Monetary Union we have the best catalyst with which to expedite any course of action. Finally we have a clear idea of the two directions in which to push reform: namely to complete the integration of our markets, making them more flexible, less controlled and more dynamic, while preserving the solidity of the social framework which characterises our socio-economic style. The way forward can be summed up in two words: integration and liberalisation, concepts as closely linked as the two sides of the same coin. In short, the culmination of Monetary Union should form the basis for the completion of Economic and Monetary Union.
The European socio-economic model – Economic and Monetary Union – which, following the culmination of Monetary Union, we are duty-bound to develop to the full, rests on four pillars: monetary stability; medium-term budgetary equilibrium; supply-related policies to facilitate competition, innovation and efficiency; and a social policy in line with European tradition.
Monetary stability is the main responsibility of the Eurosystem and can be achieved by simply following three basic rules set out in the Treaty of Maastricht: independence of central banks and bankers, a monetary policy primarily geared towards price stability, and a ban on central banks financing the public sector.
Medium-term budgetary equilibrium is a prerequisite if monetary policy is to achieve price stability without being too costly, in other words without nominal interest rates or a liquidity restriction which may discourage non-financial investment and the assumption of corporate risk, which would restrict demand and harm supply. Strict compliance with the Stability and Growth Pact is the European guarantee of budgetary stability in the medium term. Allow me to stress the word "strict" in the context of the Stability and Growth Pact, i.e. compliance without reinterpretation, without re-readings, without flexibility. Let me remind those who are most affected by this situation that there was enough time to realign the public budgets when the going was good in Europe.
Our one real economic matter pending is the supply policy or market policy. Stimulated by the euro, European markets have still to complete their harmonisation and integration in many areas, such as financial services, transport, energy, company mergers and acquisitions, patents and trademarks, competition laws, etc.
In the case of the integration of financial services, three main categories of hurdles remain: those arising due to legislative barriers, those stemming from an insufficient co-ordination of the private sector and those resulting from the persistence of nationalist trends of a political or cultural nature. The conclusions of Lamfalussy's Committee of Wise Men (one of whose members was none other than Angel Rojo), the Giovannini Group or the working group recently established between the European Securities Regulators Committee and the ECB will enable measures to be adopted such as the 20 legislative proposals included in the Financial Services Action Plan approved by the Council of the European Union.
Nevertheless, it should be apparent that legal harmonisation is not sufficient and that this must be supported by private co-ordination initiatives, for example the initiative which led to the establishment of the EONIA and its swaps market in 1999. Co-operation between the national authorities responsible for prudential supervision and financial stability compatible with the existence of a single banking market must also be strengthened. A single banking market which – it must be said – does not suffer from the problems that, on occasions, some banking institutions have encountered in developing formulae for integration with other institutions in the area.
There are some more integrated European financial markets which are broader, more liquid and more sophisticated than national markets. This means that the needs of moneylenders and borrowers can be better satisfied and that signals can be sent through the pricing level to all economic agents, who may find them to be better references of profitability and risk.
Economic integration provokes two types of response from agents: the co-operative response, which we have already discussed, and the greater competence response, which authorities have to suitably channel by means of an appropriate regulatory framework, with a market or competition policy. The notion of a regulatory framework is opposed to one of intervention, interference or meddling. The competent authorities have to establish the rules of the game and assume a role as referee, but can neither play nor tell players how they must play. Once the regulatory framework has been established, the labour market, the financial market and the different sectorial markets have to be left to operate freely so that the signals that they send across the relative price system are not distorted and allow supply to meet demand efficiently, creativity and managerial innovation to be developed and resources to be allocated in the most productive way. The scope of economic freedom may be quite broad but its boundaries and the area within must be without impediment. Free competition does not mean an absence of rules but an absence of interference.
One particularly important regulatory framework is the one which concerns social policy. In this respect I would like to point out that price stability – as pursued by the ECB's monetary policy – is a requirement for social protection, inasmuch as it favours economic growth and the creation of employment, and prevents income and savings from losing purchasing power. In addition to generating distortions, inflation is, above all, unfair.
Social policy should not differ in its establishment and development from other rules which also establish the framework of the free market: whether you choose to establish a social framework which is as robust as you want or you allow budgetary resources, again, the boundaries should not constitute an obstacle and any protective action should be taken without hampering the functioning of the market, in the same way as a picture frame protects and enhances the picture without impeding its viewing. This is the only way of making economic efficiency compatible with social justice in Europe.
Of all the metaphors I know which speak of Europe, the one I like the most is the one about the swarm and the bees by Ortega. It is in the "Prólogo para franceses" in "The revolt of the masses", written in Holland in 1937 in difficult times. I cannot resist reading it:
«La unidad de Europa no es una fantasía, sino que es la realidad misma y la fantasía es precisamente lo otro: la creencia de que Francia, Alemania, Italia o España son realidades sustantivas e independientes.»
("European unity is not a fantasy, but reality itself. Fantasy is actually the opposing idea: the belief that France, Germany, Italy or Spain are substantive and independent realities").
It is strange how Ortega only cites the largest countries of the current Monetary Union and does not mention the United Kingdom. I shall continue the quote:
«Se comprende, sin embargo, que no todo el mundo perciba con evidencia la realidad de Europa, porque Europa no es una "cosa" sino un equilibrio (...). El equilibrio o la balanza de poderes es una realidad que consiste esencialmente en la existencia de una pluralidad. Si esta pluralidad se pierde, aquella unidad dinámica se desvanecería. Europa es, en efecto, enjambre: muchas abejas y un solo vuelo.»
("It is understandable, nonetheless, that not everyone might clearly perceive the reality of Europe, because Europe is not a physical object but an equilibrium (...). An equilibrium or balance of power is a reality whose very essence is in the existence of a plurality. If this plurality is lost, that dynamic unity would disappear. Europe is, in effect, a swarm: many bees but only one flight.")
Ortega finishes off the idea a few paragraphs later:
«La libertad y el pluralismo son dos cosas recíprocas y ambas constituyen la permanente entraña de Europa.»
("Freedom and plurality are two reciprocal things and both constitute the permanent core of Europe.")
After much consideration, tonight I could have spared myself, as well as you from listening to much of what I have said, but, after all, this is what I came here to tell you.