The use of the euro as a unit of account (its third general function) is closely linked to its use for the other two main functions. The use of a currency as a unit of account is, in a way, the basis for its use as a store of value or as a medium of exchange. The value stored in euro, or the payments made in euro, will tend to be recorded in euro. Therefore, we can conclude that the euro is playing an ever larger role as a unit of account for all the financial assets linked to the use of the euro as an investment and financing currency, and has a much less relevant role as a standard for pricing goods and services, owing to the widespread use of the US dollar as a payment and vehicle currency in international trade. The convenience of using a single standard for pricing commodities in the international markets, allowing traders to make direct comparisons between prices, makes it difficult for the euro to acquire a significant role in this respect. We can conclude that the development of the euro as a unit of account will follow the pace at which the issuers or suppliers of assets, goods or services priced or quoted in euro obtain a predominant position in the international markets.
The official use of the euro
The euro also has official uses as reserve, intervention and pegging currency, all three functions being strongly interrelated in most cases.
With regard to its official use, the euro is currently the second most international currency after the US dollar, this being a legacy of the former euro area national currencies.
Compared with the former euro area national currencies, there has
been a technical decline in the share of the euro as a reserve (and,
therefore, as an intervention) currency, mainly owing to the fact that such
former national currencies became domestic assets within the euro area.
However, there are good reasons to expect an increase in international
public use of the euro as a reserve and intervention currency, inasmuch as
the public authorities understand that it is worthwhile to allocate their
foreign reserves among the main international currencies and to give the
euro a relevant share in accordance with its internal and external
stability and the economic and financial importance of the euro area.
In connection with the use of the euro as a pegging currency,
approximately 30 countries outside the euro area currently have exchange
rate regimes involving the euro to a greater or lesser extent. These
exchange rate regimes are: currency boards (Bosnia-Herzegovina, Bulgaria,
Estonia); currencies pegged to the euro (Cyprus, FYROM [the Former Yugoslav
Republic of Macedonia] and 14 African countries in which the CFA franc is
the legal tender); currencies pegged to a basket of currencies including
the euro, in some cases with a fluctuation band (Hungary, Iceland, Poland,
Turkey, etc.); systems of managed floating in which the euro is used
informally as the reference currency (Czech Republic, Slovak Republic and
Slovenia); and, last but not least, European Union currencies pegged to the
euro through a co-operative arrangement, namely ERM II. As you well know,
Denmark and Greece joined ERM II on 1 January 1999 with a ±2.25%
fluctuation band for the Danish krone and a ±15% fluctuation band for the
Greek drachma. Although the euro remains in second position after the US
dollar in terms of its official use, the role of the euro will increase in
the future, without a doubt.
The position of the Eurosystem concerning the international role of the euro
As a general conclusion stemming from the previous analysis of the
use of the euro in the world economy, we can affirm that the euro is the
second most widely used currency, behind the US dollar and ahead of the
Japanese yen. The private use of the euro as an investment and financing
currency and its official use as a reserve, intervention and pegging
currency are increasing rapidly, while it is developing at a slower pace as
a payment currency in the exchange of goods and services. The use of the
euro as a unit of account is linked to its use as store of value and a
medium of exchange.
Taking the current situation as a starting point, the Eurosystem's
position concerning the future international role of the euro is crystal
clear: 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 by us. The development
of the euro as an international currency will be a market-driven process, a
free process, which will take place, without a doubt.
Factors determining the importance of the euro in the world economy
We understand that the euro fulfils the necessary conditions to become a leading international currency with the US dollar and not against it. There is enough room for both currencies in the world economy.
The necessary conditions for a currency to become an international currency are based on two broad factors: low risk and large size. The low risk factor is related to the confidence inspired by the currency and its central bank, which in turn mainly depends on the internal and external stability of the currency. The low risk factor tends to lead to diversification among international currencies, since diversification is a means to reduce the overall risk; it acts, so to speak, as a centrifugal force. By contrast, the large size factor relates to the relative demographic economic and financial importance of the area which supports the currency; in other words, the "habitat" of the currency. The large size factor generally tends to lead to centralisation around one or several key international currencies. It can be seen as a centripetal force, as a virtuous circle, which will tend to lead to an increasing use of the euro as an international currency. Let us consider these two factors in more detail.
The stability of the currency and the credibility of the ECB
The first factor concerns low risk, credibility and stability. The stability of the euro is a priority for the ECB. Compared with the idea of stability, the strength of the euro is of lesser importance. This does not mean that the exchange rate of the euro does not constitute an element to be considered in the monetary policy strategy of the ECB. However, the basic factor that will determine the importance of the euro as a widely used currency in the world economy, in addition to the demographic, economic and financial dimensions of the euro area, is, without a doubt, the stability of the new currency, understood as a means to maintain the purchasing power of savings.
In the global economy the transmission of financial crises by means
of different mechanisms (devaluations of weak currencies, subsequent
increases in interest rates, etc.) is frequently mentioned. Less is said
about the spillover or transmission of positive economic circumstances,
such as stability. The Eurosystem will "export" stability to the rest of
the world economy, and not only in the case of those countries which decide
to tie their currencies, formally or otherwise, to the euro (through the
ERM II or other arrangements). In a global economy the euro area cannot be
an island of stability, but it can transmit its stability to the rest of
the world economy as the links between regions increase.
Stability is the basic requirement for a good currency. It is what we at the ECB want for the euro. We want a stable euro, not necessarily a strong euro. In the long term the euro will derive strength from its stability.
The stability of the euro is the basis for the confidence in and the
credibility of the ECB, without which a large international role for the
euro would be unthinkable. Stability is the proof of the effectiveness of
the institution. Yet in order to be credible it is not sufficient for the
ECB to maintain stability. Other parameters of its action must be
considered: accountability, transparency and communication, a Europe-wide
perspective.
The conditions for the credibility of the euro are certainly
demanding. However, the achievement of these conditions is the aim of all
those of us who have responsibilities in relation to the operation of the
Eurosystem.
The "habitat" of the euro
The second factor, which we have called the large size factor or the
habitat of the euro, is important because without a certain critical mass,
a currency cannot have international relevance, however high its degree of
stability. In addition to quality, quantity is required, as suggested by
the example of the reduced degree of international use of the Swiss franc
in relation to other stable currencies, such as the US dollar or the
Deutsche
Mark until 1998.
The figures relating to the population and the GDP of the euro area
illustrate this. With 292 million inhabitants, its population exceeds that
of the United States (270 million) and that of Japan (127 million). The GDP
of the euro area is, on the other hand, equal to 76% of the GDP of the
United States (EUR 5,774 billion compared with EUR 7,592 billion), though
it is higher than that of Japan (EUR 3,327 billion). The source of this
information, which refers to 1998, is Eurostat.
However, even more important than the current figures is the
potential for the future development of the euro area, in terms of
population and GDP, if and when the so-called "pre-ins" (Denmark, Greece,
Sweden and the United Kingdom) join the Eurosystem.
The entry of these countries would result in a monetary area of 376 million inhabitants, 39% larger than the United States and almost triple the size of Japan, with a GDP of EUR 7,495 billion, only slightly less than that of the United States and 125% higher than that of Japan.
All these facts and figures which demonstrate the demographic and economic importance of the European Union would be further strengthened by enlargement to Eastern Europe. Our continent has a historical, cultural and geographical identity - from the Iberian Peninsula to the Urals, with certain additional external territories - which, in the future, may also come to form an economic unit. However that is, for the moment, a distant prospect.
The degree of openness of an economic area is also a relevant factor
as regards the international role of its currency. In this respect the euro
area is more open than the United States or Japan, with a percentage of
external trade of around 25.8% of GDP, compared with 19.6% for the United
States and 17.9% in the case of Japan (data from Eurostat for 1997).
However, a euro area consisting of the 15 countries of the European Union
would be more closed, by the mere arithmetic fact that the transactions
with the present pre-ins would become domestic transactions, resulting in a
coefficient of openness of 19.4%, similar to that of the United States.
Clearly, the size and the degree of openness are parameters that move in
opposite directions: the larger the euro area, the smaller its degree of
openness to other countries.
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