euro seminars - transcripts

 "The EURO -Success or Failure"

ANA HARBOUR GRAND HOTEL, SYDNEY

MR GEORGES PINEAU, EUROPEAN CENTRAL BANK

THURSDAY 15 AUGUST 2002

Mr Pineau's powerpoint presentation

Mr GEORGES PINEAU - Thank you very much. It is a pleasure to be here in Sydney for the first time. The first impression I got of the city was about two or three years ago when I saw Mission Impossible 2. Let us hope that the workings of the ECB and the arguments I will try to portray about the workings of the ECB don't turn out to be Mission Impossible 3.

I will address four areas. Firstly, I will show that ECB has been not been working in isolation or in some sort of institutional vacuum but that its operation is closely related to the working of institutions of national authority in the EU. Second, I will address monetary policy, focusing on principles and objectives. I will spare you the strategy and instruments, which are rather technical matters.

Third, I will deal a little bit with exchange rate policy. Here again, I will stress institutional aspects, in particular the work in the G7. Then I will conclude with some remarks and data on the international role of the Euro, because I think it is one of the most tangible manifestations of the impact of the Euro on the world economy and global financial markets.

First, the policy framework. I think that in a country like Australia, with a federal structure, it is easier to get people to understand how our institutional arrangements and policy frameworks work in the EU.

You may consider that the Federal level, which exists in Australia, as far as the EU is concerned, is presented by supranational institutions like the ECB or the Commission and at the State level, you have the member countries and the national authorities. I think it is good to keep this framework or this structure in mind when one talks about monetary policy and fiscal policy in the Euro area.

To be more specific, monetary policy is conducted by the ECB while fiscal policies are still conducted by national authorities. Of course, there is a need for coordination of national fiscal policies because these policies impact on long-term interest rates and on the aggregate demand in the Euro area and they are relevant to determining our policy mix in the Euro area.

With regard to other policies, like structural policies, labour market policies, these also are the exclusive responsibility of the national authorities in the Euro area. There you have a degree of coordination which is less than for fiscal policy because the view is that you might get convergence towards best practices through competition among member countries and national authorities. Again, you can take a reference or an example in Australia. A few years ago there was competition among states in Australia when it came to tax policies. The view is that if countries in the Euro area are better at implementing labour market reforms, these practices will be prescribed for the whole area.

I now move to monetary policy. Here a better reference would be, rather than the Reserve Bank of Australia, the Federal reserve system to the extent that there is a bank of Australia has no branches. There were branches a few years ago, but they have closed them down. If you look at the US, you have at the centre of the federal reserve system the Board in Washington. The equivalent of the Board in the Euro area is the ECB. The equivalent of the district banks in the US would be the national central banks.

By the same token, if you take large or economic areas like the US, Australia and Canada, then even if you have a federal structure and some competencies being carried out at a state level, you have a single monetary policy. You have the principle of indivisibility of responsibility by a Central Bank because you need a single uniform monetary policy for the whole area. You cannot divide up monetary policy. You need monetary conditions absolutely uniform throughout the area.

The second principle is independence. There are two factors to consider here. The first one is that it is important for the Central Bank to be independent in order to be immune from local or national pressures. In Australia or the US, these could be local companies. In the EU it would be national pressures by Member States.

The second factor is also the experience in Australia or other countries with inflation targeting. It shows that an independent Central Bank is in a better position to deliver price stability. There are some nuances in terms of independence. It should look at the degree of independence, be it in Australia or the UK. The Central Bank is operationally independent because it doesn't set the inflation objective. The ECB is responsible also for defining the inflation objective.

The third factor is coordination. The fact is that we have monetary union without political union. The ECB has no counterpart in terms of the finance minister for the whole area, the Euro area, and this makes it difficult to have ex-ante coordination. Of course there is regular policy dialogue between the ECB and the finance ministers of the Euro area in the context of the Euro Group. The Euro Group is a group of the 12 finance ministers plus a representative of the European Commission plus the President of the ECB.

The last point is the unity of objectives. For monetary policy and interest rate policy there is only one objective, which is price stability. Of course the exchange rate is not an objective, because otherwise there could be inconsistency between the objective of price stability and the objective of interest rate stability.

And now to the mandate and the responsibility of the ECB .. If you look at the ECB's mandate, it is closer to the mandate of Central Banks which are targeting inflation in Australia and the UK. The primary mandate is price stability. It is different from the mandate of the Fed, which has a mandate of entering price stability while at the same time promoting the highest level of employment and growth. I think the mandate of the ECB is in line with the latest developments which tend to attribute greater importance to the clarity of the transparency of the mandate of the Central Bank.

When it comes to the price stability objective, we have a quantitative definition of price stability. It is an increase in the relevance of the consumer price index of below 2%. Your difference is that if you compare it with inflation practices, we do not have a definition in terms of range, such as in Australia where the range is between 2-3%. We have a definition in terms of a ceiling. I will come back to this later to show how this objective was met.

The other important element is the medium term. The ECB is committed to meeting price stability over the medium term in recognition of the fact that monetary policy can influence prices upwards only with lags and these lags are rather long and variable. So it is not possible for the ECB to make sure that this objective is met at any point in time.

The last point in this respect is the fact that this price stability definition is necessary in terms of transparency. It is also necessary in terms of accountability. Accountability has to be seen as the counterpart of the independence of the Central Bank and the ECB is accountable to the European Parliament and the President of the ECB. Four times a year there are formal hearings before the European Parliament in order to explain the past performance of the ECB and to provide information about the cost and the stance of the ECB. It is also important to have this definition of price stability in order to anchor market expectations.

I will be rather quick on the issue of this strategy, because it becomes a bit technical. The main difference between the ECB and other central banks like the Fed, and the Reserve Bank of Australia or the Bank of England, is the fact is that we attach great importance to monetary growth - that is, monetary aggregation in specifically M3. We have another set of relevant indicators that we monitor closely such as aggregates of the new market conditions, interest rates, financial markets indicators. The structure of this approach allows us to present an organised broad set of data information which is relevant to decision-making regarding interest rate developments.

I will say little on monetary policy instruments and procedures because it is rather technical and the operational framework is rather close to those of other central banks. I would like to insist on the fact that the ECB shares more stability in this area with the UAB - that is, the board of the finance ministers of the EU area. They have the President of the ECB and the President of the Euro Group facilitate in the meetings of the G7 as regular consultations with the US and Japanese authorities on developments of the three major currencies. So they are in the area of consultations. There is stability when it comes to communication in the market. That is, from time to time you have joint statements by the finance ministers and the president of the ECB. In 2000, the ECB intervened in the market for the first time in the concept of the bank, followed by a second intervention. On these occasions, decisions to enter the market were taken by the ECB alone. That is, the decision to carry out market declarations rests with the ECB.

I will make a quick reference to the working of the Euro. If you look at the euro, you will see that there was a decline in value in the first two years from $1.80 to $0.82. Then the Euro traded within range for most of 2000 and this year there has been a recovery. Basically, the Euro has recouped half of its lost ground. The currency moved to its peak in January 1999 and its lowest point in October 2000.

Internationally, the data shows first that the Euro has become the second most important international currency behind the dollar but well ahead of the Japanese yen. This is particularly the case if you are in financial markets both at a currency and in western currency, both bonds and stocks included. The Euro, when it comes to investing trade and pricing commodities, doesn't play a major role. That is, it is difficult for users of the US dollar in those markets to move away from the dollar and use the Euro. Another element is that the Euro doesn't play a role different from the one of terms in the currency which existed between the UN benchmark when it comes to the official rates of central banks. It is around 13%, which is a rather low level compared with the dialogue. This may change and so over time will depend on the emergence of the Central Bank.

The last point is that the Euro is a currency. It has been one of the third countries to manage the trade. Therefore you see that more than 50 countries in central Europe and eastern Europe and Africa have to do it one way or another. It can have an impact. This shows that when compared with the rest of the currencies, the use of the Euro has increased particularly in the international market. This reflects the development of domestic central markets in the Euro area.

I will say a few words in conclusion. If you look back you see that the rest of my doubts about the ability of the ECB and other institutions or national authorities involved in policy making in the Euro area to make this policy framework really functional. Since 1989, the Euro area has faced several shocks. The first one was the Asia reaction to the Asian crisis and the developments of the financial crisis in Russia and Brazil. Then we had the shock combined with the decline of the Euro. Last year we had September 11 and the terrorist attacks in the US.

At the time the ECB did a swap with the Fed to provide liquidity to the markets and to make sure that they avoided destruction. This showed that the ECB and the Central Bank had developed closed working relationships with its counterparts, chiefly the Fed and the Bank of Japan, and also in terms of policy responsiveness, the fact that we have changed interest rates quite often, as mentioned here. It shows that we have been able in the period to weather rather difficult or demanding conditions. There is no reason why we shouldn't be able to face future challenges. Thank you very much.

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