The size or habitat of an economy does not only depend on demographic
or economic factors; it also has to do with the financial base or dimension
of the area. In considering the financial dimension of the euro area, the
first relevant feature to observe is the low level of capitalisation of the
stock markets in comparison with the United States and Japan. Compared with
a stock market capitalisation of EUR 3,655 billion in the euro area in
1998, the United States presents a figure almost four times this amount
(EUR 13,025 billion). Japan ranks third, with EUR 2,091 billion. There
would be a marked difference if one were to include all 15 countries of the
European Union, since the stock exchange capitalisation would increase to
EUR 6,081 billion.
Although these figures could give the impression that the euro area
has a relatively small financial dimension relative to its economic
dimension, this is not the case. The lower degree of development of the
capital markets is offset by a higher degree of banking assets. This means
that the financial base of real economic activity in Europe is founded on
bank intermediation, which is also a feature of the Japanese economy. For
example, private domestic credit in the euro area amounts to 92.4% of GDP,
while in the United States it is only 68.9%. Conversely, fixed domestic
income represents 34.2% of GDP in the euro area compared with 66.1% of GDP
in the United States (statistics from the International Monetary Fund and
the Bank for International Settlements as at the end of 1997, taken from
the Monthly Bulletin of the European Central Bank). We therefore have two
distinct models of private financing which clearly have to be taken into
account when assessing Europe's financial dimension compared with the
United States or Japan.
THE ROLE OF THE EURO AND THE EUROSYSTEM IN THE PROCESS OF
EUROPEAN INTEGRATION
The euro as a catalyst for European integration
The euro, the Eurosystem's monetary policy and, in general, the activity of the ECB and the Eurosystem will play a key role in the integration of European financial markets and all markets in general. We can say that the euro will act as a catalyst for European economic integration.
Monetary and financial integration
The integration of the European money markets relies, of course, on the existence of a single system for refinancing the banks in the euro area, that is to say on the common monetary policy. However, it also relies technically on a system of instantaneous data transfer and on the new common payment system, TARGET, enabling real-time gross settlement. Thanks to the smooth operation of the information, communication and payment systems, a common monetary policy is realistic and the integration of the markets can take place. Such integration will, in turn, involve greater liquidity and further development of the financial markets.
A specific channel through which the monetary policy of the ECB and
the TARGET system can have a direct impact on the development of the
financial markets of the euro area is the requirement to have guarantees or
collateral for operations with the ECB. This requirement for adequate
collateral can stimulate the process of loan securitisation, especially in
the case of the banking institutions of certain financial systems. The
underlying assets can be used across borders, which means that a banking
institution in a country belonging to the European System of Central Banks
(ESCB) can receive funds from its national central bank by pledging assets
located in other countries, which is also relevant from the perspective of
the integration of the financial markets of the area.
The trend towards further integration of the European financial
markets, accompanied by increased use of the euro as a vehicle for
international investment, should logically follow a process which would
start in the short-term money market, subsequently be expanded into the
longer-term money market and finally extend to the public and private bond
and equity markets. In the short term there must be a tendency for the
differentials in money market interest rates to be eliminated, as the
functioning of the market improves, while in the long-term securities
markets - both public and private, of course - interest rates will always
include a risk premium linked to the degree of solvency of the country
(deficit and public debt, commitments on pensions), or to the credit risk
of the private issuer, and to the liquidity of the securities.
Economic integration Monetary and financial integration stemming from the euro and the activity of the Eurosystem will affect the operation of the European single market in a positive way. The European market, with a single currency, will tend to be more transparent, more competitive, more efficient and will function more smoothly. This is the reason why joining the European Union, as a general rule, leads to joining the euro area, once certain economic conditions (the so-called convergence criteria) are fulfilled.
The case of Denmark, as you will know better than I, constitutes an
accepted exception to the general rule, formalised in Protocol No. 8 on
Denmark of the Treaty on European Union signed in Maastricht on 7 February
1992, and in the so-called "Decision concerning certain problems raised by
Denmark on the Treaty on European Union" of 11 and 12 December 1992, which
contains the notification from Denmark that it would not participate in the
third stage of the European Economic and Monetary Union.
However, the Danish krone was in fact pegged to the Deutsche Mark
from 1982 until the end of 1998. Furthermore, since 1 January 1999 it has
been participating in ERM II with a rather narrow fluctuation band of
±2.25%, and effectively has had an almost fixed exchange rate vis-а-vis the
euro. Therefore, the Danish monetary policy, through this exchange rate
strategy, is the monetary policy of the Eurosystem. In other words, Denmark
follows "the rules of the game" almost entirely, or as the Governor of
Danmarks Nationalbank, Ms Bodil Nyboe Andersen, often says, "The Danish
krone shadows the euro".
In this connection, and before the question and answer session begins, let me conclude by addressing the following key questions to you, on the understanding that this is a rhetorical way to express my ideas and that I do not necessarily expect any of you to answer them.
If Denmark already is following "the rules of the game", why, then,
should you not make use of the advantages of belonging to the Eurosystem?
Why, then, should you not participate in the decisions concerning the
monetary policy which, in actual fact, applies to Denmark?
______________________
(1) For a more detailed analysis, see the article entitled "The
international role of the euro", in the August 1999 edition of the ECB's
Monthly Bulletin, pp. 31-35.
***
European Economic and Monetary Union - principles and perspectives
-#"+ !-+ 1999DRAFT SYLLABUS FOR THE CLASummary of a presentation by Ms
Sirkka Hдmдlдinen,
Member of the Executive Board of the European Central Bank,
The Tore Browaldh lecture 1999,
School of Economics and Commercial Law, Gцteborg University,
Gothenburg, 25 February 1999
The European integration process started shortly after the Second
World War and was, at the time, strongly motivated by political factors.
The aim was to eliminate the risk that wars and crises would once more
plague the continent. The first concrete result was the establishment, in
1952, of the European Coal and Steel Community between six countries
(Belgium, France, Germany, Italy, Luxembourg and the Netherlands). This was
followed by the adoption of the Treaty of Rome in 1957, laying the
foundations for the European Economic Community.
The first concrete proposal for a Monetary Union was presented in the
so-called Werner Report in 1970. The Report was intended to pave the way
for the establishment of a Monetary Union in the early 1980s. However, the
proposals of the Werner Report were never implemented - being overtaken by
world events. After the break-up of the Bretton Woods system and the shock
of the first oil crisis in 1973, most western European economies were
contaminated by the economic sickness popularly labelled "Eurosclerosis",
characterised by high inflation and persisting unemployment. At that time,
the European economies were protected by regulations and financial markets
were still poorly developed. In this environment, it was concluded that a
Monetary Union would not be possible and the project was postponed.
The idea of establishing Monetary Union was revived only in 1988 and a detailed proposal was presented the following year in the Delors Report, after the launch (in 1985) of the Single Market programme on the free movement of goods, services, capital and labour. Because of the single market, the Report could be more explicit and credible with regard to how best to achieve closer economic ties between the EU economies before the introduction of a single currency. Moreover, the Report was supported by a detailed description of an institutional set-up geared towards ensuring stability-oriented economic policies.
Notwithstanding the thorough work invested in the Delors Report,
almost 10 years of convergence and technical preparations were required in
order to ensure the successful implementation of the euro on 1 January
1999. And the project is still not over: the euro coins and banknotes will
be introduced only in 2002 - 13 years after the presentation of the Delors
Report and 32 years after the presentation of the Werner Report.
Achieving a credible currency
Today, almost two months after the introduction of the euro, we can
say that the technical changeover to the euro was successful. Now, the
Eurosystem (i.e. the ECB and the 11 national central banks of the
participating Member States) must focus on ensuring the long-term success
of the new currency. The credibility of a currency is built up by several
factors, the basis of which is the central bank's commitment to price
stability. Here, the Eurosystem is in the fortunate position of being
assigned, through the Maastricht Treaty, the unambiguous primary objective
of maintaining price stability in the euro area. Another fundamental
building block of credibility is ensuring that monetary policy decisions
are independent of political pressures. This building block was also laid
down in the Maastricht Treaty, which ensures that the ECB and the
participating national central banks enjoy a very high degree of
independence, possibly more than any other central bank in the world.
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