## Mr Duisenberg discusses the arrival of the euro
Speech by the President of the European Central Bank, Dr Willem F. Duisenberg, t American European Community Association at the Netherlands Bank in Amsterdam on 14/1/99
The euro has arrived! This was a very happy occasion. Although it has yet to appea tangible form of new banknotes and coins, there is no doubt that the new currency is s an important role, both in the euro area and beyond. After years of intensive prepar successful economic convergence, a single monetary policy for the entire euro area de by the Governing Council of the European Central Bank (ECB) is now being implemented by Eurosystem, which is made up of the ECB and the eleven national central banks (NCBs) o participating Member States.
## The changeover weekend
The technical and logistical challenges posed by the changeover to the euro over the we the New Year's Day public holiday have been successfully met. During the changeover wee the Eurosystem monitored the conversion activities at the ECB, at the participating NCB certain private institutions which - in the view of the Eurosystem - represent the c financial infrastructure in the euro area. Regular contacts were also maintained with and non-EU central banks and the European Commission.
This monitoring activity during the changeover weekend was justified by the concern tha to the extraordinary concentration of operational risks within all the institutions o and financial industry, events could occur immediately prior to the launch of Stage EMU which might either impinge on the orderly conditions in the monetary system or c risks for financial stability at the very start of Monetary Union. The decision-making the ECB stood ready to gather for extraordinary meetings via teleconference, if necessa
During the changeover weekend, no incidents that could have impaired the smooth start o Three were reported to the Eurosystem. The successful navigation of the changeover we was the result of considerable and thorough preparation by a very large set of public institutions, including the ECB and the NCBs. Indeed, the introduction of the euro m culmination of a great deal of successful preparatory work over a period of many years. been reflected in the positive and confident way in which financial markets have rec euro in the first two weeks of Monetary Union.
Although some minor problems of a technical nature could not be avoided, overall the TA payments system has functioned well and contributed substantially to the integration o money market. A number of 'teething troubles' have been experienced as participants commercial banks and central banks - adapt to the new system and environment. Neverthe during these early days of Monetary Union, TARGET has handled more cross-border paymen than were anticipated, thereby demonstrating its processing capacity. With regard to operations, on 4 January the Eurosystem announced its first main refinancing operatio was successfully completed on the following day.
## The role of monetary policy
A successful monetary policy must always be forward-looking, acting to contain threats stability before they become entrenched. Therefore, today I should also like to look to Monetary Union is a unique and significant achievement. It promises a credible and environment of price stability for almost 300 million people. This stable environme foundation for sustainable economic growth, better employment prospects and improvemen the standard of living throughout the euro area. Price stability is a necessary co improved economic performance in all these areas. I am confident that the single m policy will make the greatest possible contribution in this regard. The stability-orien policy strategy announced by the Governing Council last year, and which is now gu monetary policy decisions, was designed with this goal in mind.
Nevertheless, monetary policy alone - however well designed and implemented - cannot solve Europe's economic problems. Appropriate fiscal policies and structural reforms implemen national governments are vital and considerable progress is required in these areas. continued wage moderation in both the public and private sectors would contribute to the unacceptably high level of unemployment in many parts of the euro area.
Unemployment in the euro area is largely structural in origin. Implementing an inf monetary policy will not solve this problem, but rather exacerbate it over the medium inflation distorts investment and saving decisions, raises the risk premium in long-te rates and undermines the allocative efficiency of the price mechanism. Only effective policies that improve the flexibility and efficiency of labour and goods markets c unemployment in a successful and lasting manner. I appreciate that these structural re not always easy to implement, not least because the benefits they yield occur mainl medium to long term. However, they are unavoidable. In those euro area countries th taken up the challenge of structural reform, unemployment has fallen significantly. O area countries should and must take note: structural reform throughout the euro fundamental to the success of Monetary Union and to improving Europe's econom performance.
## The stability-oriented monetary policy strategy
The Treaty on European Union assigned the ESCB the primary objective of maintaining p stability in the euro area. You may rest assured that the Governing Council of the ECB committed to fulfilling this mandate. In order to meet this commitment, the Governing has adopted a stability-oriented monetary policy strategy consisting of three main eleme
First, in order to give clear guidance in relation to expectations of future price deve Governing Council has announced a quantitative definition of its primary objective. price stability also serves the principles of transparency and accountability. It cla Treaty's mandate is interpreted by the Governing Council and gives the public clear concerning its assessment of the success of the single monetary policy.
Price stability has therefore been defined as a year-on-year increase in the Harmonise Consumer Prices (HICP) for the euro area of below 2%. Needless to say, deflation - th persistent fall in the price level - would not be consistent with price stability. The inflation in the most recent available data, measured on this harmonised basis, is con the definition of price stability. The Eurosystem has therefore enjoyed the good f assume monetary sovereignty in the euro area in an environment of price stability, owi
successful process of disinflation and convergence achieved by national central banks d last decade.
Price stability is to be maintained over the medium term. This reflects the need for policy to be forward-looking and to have a medium-term orientation. It recognises the monetary policy is not able to control all short-term movements in the price level.
To maintain price stability according to this published definition, the Governing strategy relies on two pillars. First, a prominent role has been assigned to money, in of the monetary origins of inflation over the longer term. This prominent role is refl announcement of a quantitative reference value for the growth of a broad monetary agg namely M3. The first reference value has been set at an annual rate of 4 ½%. The refere for M3 is consistent with the maintenance of price stability over the medium term allowing for sustainable output growth and taking account of the trend decline in the circulation of M3.
Monetary policy will not react to deviations of monetary growth from the reference va 'mechanistic' way. In the first instance, such deviations will be thoroughly analyse signals that they offer with regard to the prospects for price developments. If the dev to a threat to price stability, monetary policy will react in a manner appropriate to threat, rather than attempting to eliminate the deviation of monetary growth from the value in the short term.
The second pillar of the monetary policy strategy is a broadly-based assessment of th for price developments and the risks to price stability in the euro area as a whole. Th Council of the ECB recognises that it is important, in parallel with the assessment o growth in relation to the reference value, to look at a wide range of other economic an indicators, including economic forecasts. This systematic analysis of all other information about economic and financial conditions will ensure that the Governing Co as well informed as possible when taking monetary policy decisions.
## Recent developments in monetary policy
A moment ago, I emphasised the importance of the formal introduction of the euro on Year's Day. However, co-operation among European national central banks has been close long time and, among the NCBs of the countries participating in Stage Three, has increasingly so in recent years and months. The co-ordinated interest rate cut at the b December last year is an illustration of this co-operation. This co-ordinated interes was thoroughly discussed by the members of the Governing Council of the ECB. De jure decision to change interest rates had to be taken by the national central banks but Monetary Union existed in all but name prior to its formal implementation on 1 January
At its first December meeting, the Governing Council made a thorough assessment of the monetary data and other economic indicators, noting in particular the decline in confidence in the euro area arising, in part, from the deteriorating external enviro deterioration in the international economy has its origins, to a large extent, in t Russian financial crises. Following its appraisal of both pillars of the monetary pol the Governing Council concluded that key central bank interest rates of 3% would best s maintenance of price stability in the euro area over the medium term. National centr adjusted their interest rates accordingly.
This co-ordinated interest rate move allowed the ECB to announce that the new level of rates would prevail 'for the foreseeable future'. In other words, in the absence disturbances to the economy or the emergence of new and unanticipated threats to price this level of interest rates should be appropriate to fulfil the primary objective o price stability over the medium term. This announcement helped to resolve some uncertai time when the practical, technical and logistical tasks necessitated by the changeove were uppermost in our minds and in those of market participants.
Following the second Governing Council meeting in December, I was therefore able to ann that the interest rate on the first main refinancing operation of the Eurosystem would Moreover, the interest rates for the deposit and marginal lending facilities - which, circumstances, would constitute the upper and lower bounds for overnight market interes were set at 2% and 4.5% respectively. As a transitional measure to help the financi adjust to the new institutional environment resulting from the transition to Stage T 4 January until 21 January a narrower band of 2.75% to 3.25% has been set for the rat deposit and marginal lending facilities.
During the first few days of Stage Three we observed a relatively large recourse institutions to these facilities. This was to be expected, given the relatively n between the Eurosystem's marginal lending facility and the overnight money market Although the narrow corridor is intended to facilitate the transition by market partic new regime, over a longer period of time such a measure would hamper the development efficiently functioning euro area money market. We therefore intend to terminate the tr measure of the narrow band next week, in line with our pre-announced schedule.
## Assessment of the current economic situation
At the meeting of the Governing Council of the ECB on 7 January it was confirmed that rate would apply to the Eurosystem's next two main refinancing operations. This level on the Governing Council's current assessment of the economic situation, viewed fro perspective of the stability-oriented monetary policy strategy.
First, monetary growth in recent months has been broadly in line with the quantitative value. This, together with further analysis of the monetary data, signals that developments are consistent with the maintenance of price stability over the medium t course, monetary growth relative to the reference value should always be interpret medium-term context. Short-run deviations from the reference value are inevitable and being monitored and assessed carefully, would not automatically signal an immediate t price stability. Nevertheless, it is reassuring that the three-month moving average of growth rates of M3 up to November 1998 stood at 4.7%, very close to the reference va 4½%.
Second, as regards the broadly-based assessment of the outlook for price developme number of indicators have recently proved noteworthy. Following the co-ordinated inter cut at the beginning of December, long-term interest rates have also fallen, sugge financial markets viewed the cut favourably and considered it to be consistent with th maintenance of price stability over the medium term. The indicators emerging from t economy are mixed. Overall, real GDP growth in the euro area weakened in the third qua last year as compared with the first half. While business confidence, orders and utilisation have developed less favourably in recent months, the latest data for employ sales and consumer confidence suggest more favourable trends.
Against this background, the annual rate of increase in the HICP for the euro area slow in November, falling to 0.9% as compared with 1.0% in the previous two months. This red in the rate of increase of the HICP resulted from further moderation of food price inc continued falls in energy prices. On balance, the general environment continued to sug there is no significant upward or downward pressure on the price level.
Of course, the Governing Council is fully aware that potential risks to price stability the one hand, the external environment could again deteriorate if the financial crises Russia were to spread or deepen further. On the other, fiscal indiscipline by governments failing to respect the Stability and Growth Pact or inflationary wage se could threaten the 2% upper bound of the Eurosystem's published definition of price s The Governing Council is monitoring all these developments very closely and will rea prompt and pre-emptive manner to ensure that neither inflationary nor deflationary press hold.
## The international role of the euro and the ECB
Changes in the external environment - that is, in the economic condition and perform countries outside the euro area - may affect the outlook for price developments within area, and thereby the conduct of the single monetary policy. The effects of financia external demand and business confidence are a notable recent example. However, relationship works in both directions. The introduction of the euro has created a sing area of a size and importance and with a population broadly similar to the United S event of this magnitude is likely to have major implications for the rest of the world the international financial system. In the remainder of my speech, I shall consider so implications.
In its monetary policy strategy, the Eurosystem deliberately does not specify a targ exchange rate of the euro against the US dollar or the Japanese yen. Although it wi stand ready to exchange views with other central banks concerning the development of ex rates, there are no explicit or implicit target zones for the euro exchange rate aga currencies. The euro area is a large, relatively closed economy, similar in this re United States. Pursuing a target for the euro exchange rate could easily jeopar maintenance of price stability. The level of interest rates required to sustain an e target may, in some cases, not be that which best serves the maintenance of price sta the medium term. I might add that it may also conflict with the achievement of other policy objectives. It could be very painful if it were necessary to raise interest rate in order to defend the exchange rate of the euro. Finally, it should be acknowledged we are living in a world with high capital mobility. Exchange rate arrangements that implemented thirty years ago may no longer be feasible. The required amount of f exchange reserves could simply be too large.
Within the Eurosystem's monetary policy strategy, the euro exchange rate is the out current and expected economic policies and developments in both the euro area and els and of the market participants' perception of these policies and developments. Suppor Eurosystem's approach, the Ministers of Finance, who are assigned ultimate responsibi the exchange rate of the euro by the Maastricht Treaty, have agreed not to issue 'general orientations' for the exchange rate policy to the Eurosystem other than i exceptional circumstances, such as when there is a substantial and persistent misalignm euro against other currencies.
However, the absence of a target for the exchange rate of the euro against major int currencies does not imply that the ECB ignores or is indifferent to the exchange rate vis-à-vis the US dollar or the Japanese yen. The exchange rate will be monitored as o indicators of monetary policy, within the broadly-based assessment of the outlook f developments that constitutes one pillar of the overall strategy. Nor does the absence rate targets suggest that these rates will necessarily be unstable or volatile. On the pursuit of stability-oriented monetary and fiscal policies puts in place one of prerequisites for stable euro exchange rates. The Eurosystem's stability-oriented monet strategy is a significant contribution in this regard. Absolute stability of the excha course, impossible to guarantee. It would not even be desirable if, for example, the Un and the euro area were to go through business cycles that were not fully synchronis possibility cannot be ruled out, as even recent history has shown.
We are aware that the emergence of an international role for the euro may sometimes com the conduct of monetary policy if a significant proportion of the money stock is c outside the euro area. Nevertheless, the Eurosystem will accept the international role as it develops as a result of market forces. To the extent that the Eurosystem is s meeting its mandate and maintaining price stability, it will also automatically foster t euro as an international currency. The pace at which the euro will emerge as an int currency is hard to predict. If history is taken as a guide, it will be a gradual pr possible that, in today's more dynamic and flexible financial markets, the euro could prominent role more rapidly than past experience might suggest.
Finally, I should like to discuss briefly the role of the ECB in international co-oper representative of a monetary union comparable in size and importance to the United State the central bank managing a currency that is likely to play a large and increasing i role, the ECB will inevitably play an important role in the international financial ECB will embrace the implied responsibility, but at the same time it will have to be m realistic in its actions on the international stage. Its role will develop over time, experience of those national central banks that have played an important international past.
At the end of last year, the ECB was accorded observer status at the International Mone (IMF). Full membership of the IMF is restricted to individual nations. Nevertheless, th status will allow the ECB to participate fully in the relevant work and assessment by t economic policies in the euro area and beyond. The ECB also participates in the work of the G-10, the Bank for International Settlements and the OECD. It enjoys good bilateral with other central banks throughout the world.
The ECB stands ready to participate fully in, and contribute to, international policy It will, of course, offer expertise and exchange views, when and where appropriate. Ho general, the best contribution the ECB can make to a stable international monetary including stable exchange rates and well-functioning international capital markets, is price stability within the euro area. Fulfilling the mandate assigned to the ESCB by th European Union will help the ECB to meet its international responsibilities.
## Concluding remarks
The euro has arrived. The Governing Council of the ECB has taken up the reins of mo sovereignty in the euro area and a truly single monetary policy has been in place for For those of us who have been involved in the long and at times arduous preparati
Monetary Union, this is an occasion which provides a sense of satisfaction. However, a outlined in this speech, in many ways the real work of the ECB is only just beginn stability-oriented monetary policy strategy is in place. I am confident that this fra enable the Governing Council to fulfil the Treaty mandate of maintaining price stabilit this mandate will ensure that the single monetary policy makes its best possible cont improving the standard of living in the euro area and helping to ensure the stabil international financial system.