## Mr Duisenberg's opening statement at the European Parliament on 18 January 1999
Introductory statement by the President of the European Central Bank, Dr Willem F. Duis before the European Parliament's Sub-Committee on Monetary Affairs in Brussels on 18/1/9
On 1 January 1999 a new chapter in European economic history was opened. After year intense and thorough preparation, the launch of the single currency in Europe was acco successfully. Today, just a little more than two weeks after this historic event, privilege for me to be here at the European Parliament for another exchange of views w committee. I should like to begin my statement by reviewing the changeover to the including money market developments during the first two weeks of the single currency. then go on to summarise the assessment by the Governing Council of the European Central (ECB) of the economic environment in which the new currency has been launched and which shaped our initial decisions about monetary policy. Moreover, I shall comment on some challenges that lie ahead. Finally, I shall touch briefly upon some issues rela communication policy of the European Central Bank, after which I shall, as usual, stand answer any questions you might have.
## A. Transition to the euro
The transition of the banking and finance community from the national currencies to th only three and half days after the publication of the conversion rates was, indeed, a smooth migration of all electronic systems and procedures was a sign of the qualit preparatory work carried out over recent months and years. In our view, the workforce directly involved in the changeover in the global financial markets - including all maj centres outside the euro area - was probably higher than the 50,000 reported by the medi
Within the Eurosystem, which comprises the ECB and the 11 participating national centra (NCBs), preparations had been ongoing for some time. The first plan of action f changeover weekend had already been approved by the EMI Council in March 1998. After establishment of the ECB, the Governing Council examined reports on the changeover at f its meetings. During the changeover weekend several thousand staff members were at work call at the ECB and the NCBs.
The major concern of the Governing Council was to avoid a breakdown in the transition euro - at the ECB, at any NCB or within any of the systems of the 'core infrastruc financial markets in the euro area. For this reason, the ECB made recommendations to institutions and securities settlement systems and set up a procedure for mo developments within and outside the European System of Central Banks (ESCB) during weekend. Moreover, the decision-making bodies of the ECB stood ready to conve extraordinary meetings via teleconference and to adopt, if needed, contingency measur latter was not necessary. The monitoring of conversion activities conducted by the ESCB the changeover weekend revealed no incident that might have impaired the smooth st Monetary Union.
As to the involvement of the Eurosystem in the changeover activities, I should like t that I had the honour of attending the meeting of the ECOFIN Council on 31 December during which the conversion rates were irrevocably fixed. I delivered personally to th Council the Opinion of the ECB on the proposed conversion rates. On the morning o December, the Eurosystem had contributed to the computation of the conversion rates. La the Governing Council had, with the participation of the national central bank governo
countries not adopting the euro at the start of Stage Three, a meeting by mea teleconference to approve its legal Opinion. The Eurosystem also contributed dissemination of the conversion rates in a prompt and secure manner to the banking and community, as requested by market operators in order to enable them to start their c activities as soon as possible in the early afternoon of 31 December.
In addition, on 31 December 1998 the euro central rates for the Danish krone and th drachma in ERM II were agreed by written procedure between the relevant parties. The central rates are in line with the previous ones, after allowing for minor deviati rounding. Moreover, the ECB, Danmarks Nationalbank and the Bank of Greece established common accord and announced, on the same day, the compulsory intervention rates for Danish krone and the Greek drachma. Fluctuations of the two currencies during the fi weeks of the year remained subdued.
## B. Market developments in the first two weeks of January
With a view to ensuring a smooth transition to the euro, the Governing Council to important decisions already on 22 December 1998, in order to give guidance to the mar the monetary conditions at the outset of Monetary Union. First, it was decided to provision of liquidity via the first tender operation, which was carried out in the fi fixed rate of 3%. The Governing Council also agreed that the interest rate for the lending facility would be set at 4.50% and the interest rate for the deposit faci Together, these two rates form the so -called 'corridor' for movements in short-term rates.
However, the Governing Council considered the possibility that market participants ma some time to accustom themselves to the new environment for monetary policy. To this was decided to use a relatively narrow corridor of interest rates for the standing fac Eurosystem in the first three weeks of Stage Three as an automatic device to red maximum range of fluctuations in the overnight interest rate. Accordingly, the Go Council temporarily introduced an exceptionally narrow corridor of only 50 basis points interest rate for the marginal lending facility at 3.25% and the interest rate for the at 2.75%. This measure will be terminated on 21 January 1999.
Indeed, this guidance given to the markets proved to be justified, since market deve over the first days showed that the formation of the single European money market wou happen overnight.
- There were signs that short-term market rates in the different countries were not fu and, in particular, that the spreads between the highest and lowest rates were lar normal in an integrated money market.
- The counterparties of the Eurosystem made very high use of the marginal lending fac 3.25% (EUR 27.5 billion on Monday, 4 January), since this rate was only slightly hig the prevailing market conditions for overnight borrowing in the euro area. The o EONIA rate for effective market transactions was 3.20% and credit institutions ma preferred to pay a slightly higher rate instead of entering into market transaction banks across the border.
- The counterparties also deposited large amounts overnight with the Eurosystem (EUR billion), as they may not have been willing or able to lend them to other counterparties.
In the meantime, this situation has been overcome. The spread between the highest lowest rates reported to the ECB by banks of the EONIA (Euro Overnight Index Average) has narrowed from 21 basis points on 4 January to below 10 basis points. Moreover, th the marginal lending facility and the deposit facility has been significantly reduced normal level.
A further confirmation of the increasing integration of money markets in the euro ar growing use of payment and securities settlement systems. On 5 January 1999 the value o border transactions settled through TARGET had already exceeded EUR 310 billion. Inclu domestic real-time gross settlement (RTGS) transactions, which themselves accounted least another EUR 660 billion, the total value of transactions settled was therefore 1,000 billion. This amount corresponds to about 17% of last year's GDP of the euro are meantime, the total volume of transactions has increased further. Moreover, the extensi the so-called correspondent central banking model (CCBM) - a mechanism which permits ba to make cross-border use of eligible assets as collateral in monetary policy opera payment systems- suggests that market integration is proceeding well.
The TARGET system, the cross-border payment system of the ESCB, has contribute substantially to the integration of the euro money market and has made possible the con of the treasury management of institutions with different activity centres throughou TARGET has processed more cross-border payments than anticipated in these early day Monetary Union and, in so doing, has amply demonstrated its processing capacities. Gi extensive use of the system, the ECB recently decided to extend the operating hours TARGET system by one hour to 7 p.m. for a limited period ending on 31 January 1999. should alleviate some of the time pressure on commercial banks when familiarising them with the TARGET rules. Similarly, the Governing Council decided that, during this tr period, the deposit facility of the Eurosystem would be available until one hour after of TARGET.
I should also like to mention the results of the two first main refinancing operations EUR 75 allocated at a fixed rate of 3% to the banking system under the first operation, amount for the second operation was, under the same conditions, EUR 48 billion. In addi 13 January 1999 the ECB allocated EUR 45 billion in three tranches with maturities of and 105 days through its first longer-term financing operation, at marginal single respectively, 3.13 %, 3.10 % and 3.08 %. We have provided sufficient liquidity to all institutions, on aggregate, to neutralise their monetary reserve deficit relatively so first reserve maintenance period.
## C. Current economic developments and prospects
The Governing Council's decisions on the initial level of interest rates for the announced on 22 December 1998, have been made with a view to the objective of maintai price stability. The decisions were taken on the basis of a thorough assessment of the financial and economic situation in the euro area and against the background of the oriented monetary policy strategy. As you will be aware, the Governing Council has anno quantitative definition of price stability, measured on the basis of a year-on-year in Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. The monet policy strategy further consists of two key elements: first, a reference value of 4 1/2 growth in the broad monetary aggregate M3; and, second, a broadly based assessment o outlook for price developments and the risks to price stability. The views of the Council on the monetary and financial situation, the economic conjuncture and prospe
price developments in the euro area which underpinned its decisions on the appropriate policy stance to be adopted were set out at a press conference at the time of the annou addition, a more detailed assessment of the economic situation underlying the Gov Council's monetary policy decisions will be released in the ECB's first Monthly Bullet published tomorrow. This will include a commentary on the economic situation in the eur Let me briefly summarise the main features of our assessment of the current economic s and outlook.
As regards monetary developments, which are monitored on the basis of a three-month mo average of the 12-month growth rate of M3 (in order to minimise distortions from monthly figures), the Governing Council set the first reference value at 4 1/2%. The la month moving average of annual growth in M3 was around 4.7%, which is very close to reference value and compatible with the maintenance of price stability.
A broader assessment of economic and financial developments supported the available mon data in signalling the absence of significant upward or downward pressures on prices. indicators suggested that market participants expect the current climate of price continue in the medium to longer term. In this context, it may be observed that at t Stage Three nominal short-term and long-term interest rates in the euro area have reac which are very low by historical standards and that real interest rates are also signif their long-term averages. The real long-term interest rate is currently at a level o which is approximately 1 percentage point below the level prevailing at the end of 1997.
Increases in consumer prices, as measured by 12-monthchanges in the HICP, have been ar 1% since autumn 1998, falling to 0.9% in November. The rate of increase in service pr remained unchanged at around 2%, but increases in goods prices are much lower, at reflecting downward influences on both food and industrial consumer goods prices. prices have also continued to contribute to moderate price developments, falling by 4. 12 months to November. In addition, modest developments in unit labour costs are a fur factor underpinning the current low rate of consumer price increases.
The preliminary data released by EUROSTAT for the third quarter of 1998 showed euro a wide real GDP growth at 2.4%, thus reflecting some deceleration compared with the first the year, when output growth averaged 3%. Growth has increasingly been driven by dom demand rather than net exports in the course of 1998. Private consumption, in partic been robust, supported by growth in employment. However, unemployment in the euro a remains very high (at 13.8 million) and is declining only gradually. In the short t growth is expected to slow somewhat as a consequence of a weaker global environment addition to the lower real GDP growth figure in the third quarter, further eviden economic slowdown has been provided by survey data, most notably on order books industrial confidence, which have weakened significantly since the spring of 1998. I production growth also slowed during the course of last year. By contrast, consumer co was quite resilient, providing some support to domestic demand. There is consid uncertainty about the impact of external developments on the euro area, not least b recent events in Brasil, but the slowdown is currently expected to be temporary. The cu levels of short and long-term interest rates in the euro area should contribute t confidence and domestic demand.
Overall, the Governing Council felt that the risks to price stability appear to b However, there is a potential downside risk to the global situation, which could lea inflation via a more pronounced growth slowdown in the euro area and weaker import
producer prices. On the other hand, higher-than-expected wage increases and/or a relax the fiscal stance could lead to higher price increases. The ECB will continue to mon developments closely.
## D. Challenges ahead
Looking ahead, the introduction of the euro and a stability-oriented monetary pol contribute significantly to the creation of the conditions necessary for improved g employment prospects. However, important challenges remain, two of which I should li mention in particular:
- In order to achieve a sustained and substantial reduction in unemployment, it necessary to press ahead with structural reforms to labour and product markets. A already mentioned, the rate of unemployment in the euro area has remained very hi 10.8%, despite real GDP growth of around 3% in the first half of 1998. Monetary poli play its part by continuing to pursue its objective of maintaining price stability, to keep inflationary expectations and risk premia in long-term interest rates l benefits from price stability have already been seen in the decline in long-term in to below 4% by the end of last year. Moreover, as I have already mentioned, real l interest rates have also declined substantially. However, while this should foster and employment growth, it cannot by itself reduce structural unemployment.
- Fiscal imbalances, reflected in both current deficit and debt levels in relation to a major challenge. A sound and sustainable policy framework is characterised by policies which are consistent with the Stability and Growth Pact. Compared with the in fiscal consolidation achieved in previous years, only a small reduction in the wide budget deficit is estimated to have occurred in 1998: to 2.3% from 2.5% in Moreover, the decline was the result of favourable cyclical developments togethe savings in interest payments. After adjusting for the cyclical effects of stronger 'structural deficit' actually worsened somewhat in 1998. According to the Eur Commission, this is the first such deterioration since 1991. The ratio of euro ar government debt to GDP is estimated by the European Commission to have been 73.8% 1998, which is well above the reference level of 60%. Deficit ratios are still too debt levels on a rapidly declining path. Fiscal plans should thus be aimed at ensu compliance with the Stability and Growth Pact, which includes a commitment to achi fiscal positions 'close to balance or in surplus' in the medium term. This is also order to allow automatic stabilisers to work without exceeding the 3% deficit ceili prosperous times.
## E. Communication policy of the Eurosystem
Coming now to the last part of my statement, I should like to touch briefly upon some related to the ECB's communication policy that have been taken recently. As you mig aware, the ECB published, on 5 January 1999, a consolidated opening financial statemen Eurosystem, and subsequently, on 12 January, the first weekly financial statement, cont assets and liabilities held by the ECB and the national central banks of the euro ar third parties. With a view to providing regular information, in particular on monet operations and changes in foreign reserves, the ECB will continue to publish a weekly statement every Tuesday, accompanied by an explanatory note, in all official EU language
As already indicated, the ECB will release the first edition of its Monthly Bulletin t will contain an assessment of the current economic situation underlying the ECB's mo
policy decisions and also tables and charts covering a wide range of statistics r monetary policy. In addition, the ECB will continue to release current monetary statist services.
I should like to conclude by emphasising that these publications, together with the re conferences following the meetings of the Governing Council of the ECB and the nume speeches given by the members of the Executive Board, demonstrate the importance whic attach to explaining the ECB's monetary policy in a clear and transparent manner.