## Mr Duisenberg outlines the benefits of European Monetary Union, growth and stability fo Europe
Speech by the President of the European Central Bank, Dr W F Duisenberg, at the Global Eco conference organised by the Economic Strategy Institute in Washington, D C on 27 April 1999.
## Introduction
Following almost a decade of meticulous preparation and economic convergence, 1 January saw the start of Stage Three of Economic and Monetary Union (EMU), with the introduction euro and a single monetary policy for the euro area. This area constitutes an economic r roughly equals the United States in terms of both its economic strength and its d macroeconomic openness. The euro area has a population of 292 million, which is slightly la that of the United States, at 270 million, and a somewhat smaller GDP of EUR 5,800 compared with the EUR 7,600 billion of the United States. As will be clear from these fig euro area economy is of a formidable magnitude, and indeed is one of the largest economie world, with a purchasing power matched only by that of the United States. It is my convic EMU has the potential to stimulate further the growth of the euro area economy and to inc prosperity of its participants. At the same time, a successful EMU is also in the interest States and the world economy in general, creating opportunities for trade, direct and investment.
Before I address the benefits of EMU and the stability-oriented policies that have to be i to ensure that these benefits are achieved, let me briefly mention the main instituti involved in the formulation and implementation of the single monetary policy. Monetary p determined by the Governing Council of the European Central Bank (ECB), which consists o eleven governors of the national central banks (NCBs) of the participating Member States an members of the Executive Board of the ECB. The implementation of the single monetary policy responsibility of the Eurosystem, which is comprised of the ECB and the eleven NCBs o participating Member States. The Executive Board of the ECB is a separate decision-making b role is to ensure that the tasks conferred upon the European System of Central Banks (ES implemented, either through its own activities or through the NCBs.
## Economic growth - the benefits of EMU
I should now like to address the benefits of EMU and why I believe that the introduction and the single monetary policy can result in higher economic growth in the euro area and contribute positively to the development of the world economy. Of course, the degree to wh benefits are achieved depends not only on the monetary policy of the Eurosystem but even mor accompanying stability-oriented fiscal policies and appropriate labour market policies.
The most important contribution that the Eurosystem's monetary policy can make to maximisi benefits of EMU is to fulfil its primary objective of maintaining price stability, as laid d called Maastricht Treaty; the Treaty on European Union. As has long been argued by central and is increasingly accepted by academic economists, inflation and deflation are economic socially costly. EMU is a tool with which to consolidate the progress made towards price s recent years and to firmly anchor expectations in line with price stability, thereby est framework necessary to fully exploit the opportunities of Monetary Union. The Eurosystem full independence in determining the appropriate level of interest rates so as to satisf objective of price stability. Moreover, the members of the Governing Council of the ECB ha terms of office and may only be dismissed on grounds of serious misconduct or inability to their duties. These provisions imply that the concept of monetary stability benefits from e protection.
A further important benefit of EMU is that it has removed the risk of serious real exchange misalignments within the euro area. This contributes to economic growth and helps to avoid a misallocation of resources. In fact, it enables the European Single Market to function smoothl thereby makes it possible to reap all the rewards, to the benefit of producers and consumers.
Furthermore, the start of Stage Three of EMU has also eliminated short-term intra-EU exchange r volatility and exchange rate risks, and has thereby encouraged trade and investment.
In addition, the benefits of economic integration afforded by the development of the Single Ma are enhanced by the elimination of the transaction costs of exchanging different currencies, a result of the introduction of the euro. While they are difficult to measure, they effectively additional layer of protection for domestic producers. The single currency makes prices across euro area directly comparable, which should increase competition and hence efficiency and econom growth in the area.
A number of further positive effects on economic growth flow from the elimination of separ currencies in the euro area countries. One benefit is the potential for the reduction of risk pr into real interest rates, which, in turn, will stimulate productive investment. Another benefit facilitating the development of deep and integrated capital markets, the single currency should reduce long-term rates via the elimination of an illiquidity premium. In addition, a wider and capital market in the euro area will improve intermediation between savers and investors.
## Ensuring the benefits: stability-oriented policies
It should be emphasised, however, that the true benefits of EMU derive from the fact that i unique opportunity to shape a macroeconomic environment conducive to stability, growth and employment, and to foster structural change which is needed to maintain or restore medium to lo term dynamism in the European economies. It will be clear that this is not an easy process monetary policy alone cannot achieve this. The full benefits of the single currency will come o there is appropriate support from other stability-oriented policies, especially fiscal and labou policies, and if structural reforms are carried out in these areas. Thus, price stability is a but not a sufficient condition for grasping all the opportunities of EMU.
In this regard, it is of the utmost importance that the governments of the EU Member States con to implement sound and stability-oriented fiscal policies, by which I mean policies aiming a medium-term objective of a budgetary position close to balance or in surplus. As you will know, condition is stipulated by the Stability and Growth Pact, which ensures the lasting complian fiscal policies with the requirement of budgetary prudence. From the perspective of a central ban prime reason for the establishment of the Pact was that a lack of fiscal discipline would neg affect the ability of the Eurosystem to achieve its primary objective to maintain price stabilit sense, the Stability and Growth Pact is one of the most important safeguards that will ensure tha and fiscal stability remains the cornerstone of EMU.
Therefore, it should be clear that I regard it as crucial for governments to make further s improvements to their fiscal positions, as this would allow them to regain sufficient flexibilit budgets and, most importantly, could effectively contribute to supporting stability and growth euro area. In this regard, I should like to note that only moderate fiscal consolidation is envisaged for the medium term. A number of national stability programmes only aim to attain t necessary flexibility at a relatively late date. It is important that we see a commitment from makers either to ensuring the swift achievement of this aim or to going beyond the aims envisage these programmes once economic growth has picked up.
Let me turn now to the contribution that stability-oriented structural reforms, particularl labour markets, can play in reducing unemployment and in supporting the stability of the high level of European unemployment is quite rightly a source of deep concern and sho addressed at a fundamental level. Clearly, the approaches that are most likely to have a l are those that address the root causes of the problem, not just the symptoms. The root cau unemployment in the European Union are structural rigidities in the labour market as well a public transfer policies. This view is supported by a wide body of academic literature and key finding of the OECD Jobs Study. It is obvious that structural problems require s solutions. Implementing an inflationary monetary policy would not result in lasting redu unemployment, but would actually serve to exacerbate the problem over the medium term.
I recognise that structural reforms are not always easy to implement. The benefits are of in the medium term, while short-term costs for some groups may mean that reforms are vigo opposed by interest groups. Although there is a common objective of reducing unemployment, t no common programme of reforms that will work in all countries. While it is possible to le the experience of others, each Member State will wish to develop workable policies that r own particular circumstances. Although the path of structural reform is not always an easy the only way in which we can achieve the lasting reductions in unemployment that are so needed. Only structural reforms that aim to create stable labour markets in which there interaction between supply and demand will ensure that the benefits of EMU in terms of ec growth are achieved to the maximum extent possible.
## Conclusions
To conclude, Economic and Monetary Union provides a great opportunity to create and main large zone of price stability and economic prosperity in Europe. However, while price sta necessary condition for fully grasping the opportunities of EMU, it is not, in itself Stability-oriented polices regarding the development of national fiscal positions and the of labour markets are also of crucial importance. As I have explained, the benefits of EM come in a quasi-automatic way. While monetary policy will make its contribution by fol policies that maintain price stability, other economic policies must be implemented to ensu opportunities of the single currency are achieved. Monetary policy alone - however well des implemented - cannot solve Europe' s economic problems. Policy-makers in all areas mu determined to take proper account of the new environment of Stage Three of EMU and consequences when forming their policies.