Other benefits of a monetary union in Europe were emphasised less in the early stages of the discussion, partly due to the fact that at that time the Bretton Woods system was already providing a high degree of exchange rate stability.
The first concrete proposal for an economic and monetary union in
Europe was presented in 1970 in the so-called Werner Report, named after
the then Prime Minister of Luxembourg, Pierre Werner. However, this
proposal was never implemented. In the aftermath of the break-up of the
Bretton Woods system and the shock of the first oil crisis in 1973, the
European economies entered a period of stagnation with high inflation,
persisting unemployment and instability in exchange rates and interest
rates. The European countries applied very different policy responses to
the unfavourable economic developments, and policy co-ordination
deteriorated. In this environment, it was not realistic to establish a
monetary union.
The experience of this volatile period showed that large exchange
rate fluctuations between the European currencies led to a disruption of
trade flows and an unfavourable investment climate, thereby hampering the
aims of achieving growth, employment, economic stability and enhanced
integration. Therefore, the benefits of eliminating intra-EU exchange rate
volatility became an increasingly powerful argument when the issue of
establishing an economic and monetary union was revisited in the so-called
Delors Report in 1989.
The Delors Report contained a detailed plan for the establishment of
Economic and Monetary Union and eventually became the basis for the
drafting of the Maastricht Treaty. This time, the time schedule for
establishing the Economic and Monetary Union took into account the need to
first achieve a high degree of nominal convergence for the participating
countries.
The fact that the plan for the introduction of the single currency was then pursued and implemented in such a determined and consistent manner implied, in itself, a boost for the overall process of integration. The momentum of the process of integration is no longer crucially dependent on political decisions. By contrast, the integration of the European economies has become an irreversible and self-sustained process, which is proceeding automatically in all areas of political, economic, social and cultural life. The euro can thus be seen as a catalyst for further co-ordination and integration in other policy areas. This is one way in which the introduction of the euro has definitely helped to push the boundaries in the process of European integration.
Another way to push the boundaries in the European integration
process relates to the geographical extent of the euro area and the
European Union. Here, I sincerely hope that the four EU countries which
have not yet adopted the euro will soon be able to join the Monetary Union.
At the same time, I hope the process to enlarge the European Union with the
applicant countries will progress successfully. An enlargement of the euro
area and of the European Union would further strengthen the role of Europe
in a global perspective and should be for the benefit of all participating
countries. However, it is clear that countries aiming to join the Economic
Monetary Union would have to fulfil the same degree of nominal convergence
as was required from the participating countries when the Economic and
Monetary Union was established. This is essential in order to avoid
tensions to emerge in the euro area, which could eventually compromise
macro-economic stability.
2. Pushing the boundaries of stability-oriented economic policies
Economic and Monetary Union in Europe also provides an opportunity to push the boundaries in areas of economic policy. The convergence process prior to the establishment of Economic and Monetary Union was helpful in order to achieve a broad consensus among policy makers on the virtues of stability-oriented policies, i.e. policies directed towards price stability, fiscal discipline and structural reform geared at promoting growth and employment. The convergence process also helped policy makers to focus their efforts on the formulation of stability-oriented economic policies in the participating countries and it also facilitated the acceptance of these policies among the general public.
In the new environment of Economic and Monetary Union, monetary policy can no longer be applied as a means of accommodating economic developments in an individual Member State. Such nation-specific developments would have to be countered by fiscal and structural policies, while the best way in which the single monetary policy can contribute to improved conditions for growth and employment is by ensuring price stability in the euro area as a whole. In this respect, the formulation of the Maastricht Treaty is instrumental, since it guarantees the Eurosystem's firm commitment to price stability; it clearly specifies that price stability is the primary objective of the single monetary policy.
The Eurosystem has put a lot of effort into establishing a monetary policy framework that will ensure that it can fulfil its primary objective of price stability as efficiently as possible. There are several aspects to this framework.
First, the Eurosystem has adopted a quantitative definition of the
primary objective - the Governing Council of the ECB has defined price
stability as a year-on-year increase of the Harmonised Index of Consumer
Prices (HICP) for the euro area of below 2%. This is a medium-term
objective. In the short run, many factors beyond the scope of monetary
policy also affect price movements.
Second, the Eurosystem has made public the strategy to be used for
the implementation of the single monetary policy. This strategy is based on
two key elements, whereby money has been assigned a prominent role, as
signalled by the announcement of a Z- -#"+ !-+
1999SEATSCASE.DOCh[?]€б@[?]Rreference rate of 4Ѕ% for the 12-month growth
of the euro area monetary aggregate M3. The other element consists of a
broadly based assessment of the outlook for price developments and the
risks to price stability in the euro area on the basis of a wide range of
economic and financial indicators.
Third, the Eurosystem puts significant emphasis on the need to
carefully explain its policy actions in terms of its monetary policy
strategy. Therefore, the Eurosystem has established various channels for
the communication with market participants and the general public. The most
important communication channels are the ECB's Monthly Bulletin, its press
releases and the press conferences following the meetings of the Governing
Council, the President's appearances in the European Parliament and the
speeches given by the members of the Governing Council.
Fourth, the Eurosystem's monetary policy is implemented in a marketed- oriented manner. The Eurosystem's key policy instrument is its weekly tender for two-week repo operations, the so-called main refinancing operations. The features of the monetary policy operations are decided by the decision-making bodies of the ECB, but the operations are conducted in a decentralised manner by the NCBs.
The experience gained from the first five months of operations has shown that the Eurosystem's procedures for decision-making and operational implementation works very well. There are therefore no operational reasons to call into question the ability of the Eurosystem to fulfil its mandate to ensure price stability in the euro area. However, stable macroeconomic policies cannot be achieved by monetary policy alone. It is also necessary for governments to pursue fiscal and structural policies consistent with such macroeconomic stability.
In order to ensure fiscal discipline in the participating countries,
the EU Council agreed in June 1997 to establish the so-called Stability and
Growth Pact. This Pact sets an upper limit of 3% of GDP for the fiscal
deficits of the countries participating in the euro area. Furthermore, the
Pact specifies as an objective that Member States are to bring government
budgets close to balance or even into surplus in the medium term. Only if
this objective is met will sufficient room for manoeuvre be created to
enable fiscal policy to react to cyclical developments without risking a
loss of credibility.
As regards structural policies, the policy framework is, so far, less
well developed. This is worrying given that the need for structural reform
is urgent in many areas in order to be able to effectively promote greater
growth potential and higher employment. I appreciate that these problems
are generally acknowledged, and some action has been taken in recent years.
For example, it is encouraging that the European Employment Pact adopted at
the EU Summit in Cologne last weekend explicitly recognises the need to
pursue comprehensive structural labour market reform.
Nevertheless, experience from several countries shows that it usually
takes a long time for the full effects of structural reforms to be seen.
Therefore, it is worrisome that structural reforms, in particular as
regards labour markets as well as those to limit expenditure on social
security and pension systems, are long overdue in several Member States.
Clearly, the establishment of Economic and Monetary Union does not
mean that the efforts undertaken during the convergence process can be
relaxed. On the contrary, the need for policy co-ordination among the
participating countries is now even more pressing. We have already seen
examples of negative market reactions to any perceived slippage in fiscal
discipline or postponement of structural reform. Personally, I think that
these swift market reactions, although sometimes exaggerated, may be
helpful in promoting a continued stability-oriented policy thinking in
Europe. Any move towards less responsible policies would come up against
intense peer pressure from other countries.
In this context, I would once more like to underline how important it is that a consensus has emerged among European policy-makers on the virtues of price stability, fiscal discipline and market-oriented structural reform. In this way, we have already pushed the boundary significantly towards a macroeconomic environment conducive to growth and employment, although much still needs to be done in the years to come.
4. Pushing the boundaries in the development of financial markets
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