## Mr. Duisenberg looks at the international role of the euro and the ESCB's monetary poli
Statement by the President of the European Central Bank, Dr. Willem F. Duisenberg, Frankfurt European Banking Congress in Frankfurt am Main on 20/11/98.
I very much welcome the opportunity today to share some thoughts with you on the issue international role of the euro and the monetary policy strategy of the European System Banks (ESCB). In order to remain within the tight time frame and leave room for discu shall try to be as concise as possible, and I shall therefore focus on the three questi to me directly.
## 1. Is a significant international role for the euro a desirable goal?
Some observers have asserted that one of the main motives behind Economic and Monet Union in Europe is the creation of a major international role for the euro, and that f a role would be an important objective for the European Central Bank (ECB). Both assert incorrect. The purpose of the introduction of the euro is to promote economic integr economic welfare in the Member States, and the objective of the ESCB - and of the ECB a of this system - is to maintain price stability within the euro area. The ESCB will ta stance towards an international role of the euro. It will neither hinder nor deliberat the development of this role, but will rather leave this to market forces.
The ESCB will, however, contribute indirectly to the international recognition of th achieving its objective of maintaining price stability within the euro area. A successf policy is a necessary condition, but not the only prerequisite for the international re use of a currency. The reason is that the latter is a complex phenomenon. While there i international role for a currency, there are many uses for a currency in an internati On the official side, they include the use of a currency as an anchor for exchange rat means of storing foreign exchange reserves, and as a vehicle for foreign exchange inte On the private side, they include the use as a quotation and vehicle currency for in trade, as a currency of denomination for financial assets, and as a substitute c circulation abroad. The significance of all these roles depends on the decisions of a l of economic agents - including governments, central banks, institutional and private corporations, and traders - which the central bank can only influence to a limited exten
While it is difficult and not always meaningful to make predictions about the international role of the euro, it seems safe to assert that it will be significant areas.
First, there are what one might call the 'static' effects stemming from the changeov conversion of existing financial assets and liabilities into euro. That alone will al euro an internationally recognised role, since the euro area currencies, in genera Deutsche Mark, in particular, have played a significant role as anchor, reserve, inve vehicle currencies in the past.
Second, and potentially even more important, there will be 'dynamic' effects stemming fr assets and liabilities acquired or issued in euro. Here, the creation of a large and li capital market will be the most important element in fostering such a development. F term instruments, there will be a broad and liquid European money market with a co overnight rate and very similar short-term interest rates for comparable instrument longer end of the maturity spectrum, market integration will be jump-started by
denomination of outstanding government debt in euro on 1 January 1999. The elimination currency fragmentation in the European bond markets will also lead to the developm uniform market standards and the creation of a large and liquid market for portfolio in
## 2. How will the euro's international role influence the ECB's monetary policy?
Having an international currency has significant advantages for businesses and consu may, however, sometimes complicate the conduct of monetary policy. In the ESCB's monet policy strategy, developments in monetary aggregates play a prominent role, and developments will be analysed very carefully. If a significant part of the money stoc circulate outside the euro area and if its development were to deviate from that circul the euro area, this could be a source of instability in money demand.
But this is only one of the challenges which the ESCB will be facing in analysing deve in monetary aggregates. Other challenges are related to changes in money demand as a r the introduction of the euro itself. Together, these changes represent a structural br obviously difficult to predict how demand for money will evolve around such a break.
The ESCB has taken these difficulties into account in its monetary policy strategy in t it will announce only a reference value for a monetary aggregate, and not a target v means that, although monetary developments will be used as the main indicator of po inflationary or disinflationary pressures, the ESCB will not react in an almost mechani correct deviations from the reference value in the short term. Secondly, the ESCB will solely on the analysis of monetary aggregates, but will complement this analysis with based assessment of the outlook for future price developments.
On the one hand, the chosen strategy will, in my view, ensure as great a degree of con possible in relation to the existing strategies of national central banks in the euro other hand, due consideration has simultaneously been given to the unique situation c the transition to Monetary Union, in which a possibly growing international role of t but one element.
3. What are the prospects for international policy co-ordination between central banks? Are target zone for the key currencies conceivable, or even desirable?
The ECB, acting on behalf of the ESCB, is already beginning to play a major role in int fora, such as those at the Bank for International Settlements (BIS), the OECD and in G10 context, and I expect this role to grow considerably in significance once the operational. In all fora, the ECB's role will be to contribute to the international pol from the perspective that price stability in the euro area is its prime objective. At the ECB will seek to make the best contribution it can to stable international develo particular, the introduction of the euro will reduce the number of major currency bl global financial system. In principle, this should simplify the exchange of views on issues at the global level. Each of the main partners - the United States, the euro are will be in a position to speak for a comparatively large economic area and will be vulnerable to possible consequences of instability. They may thus have a greater incent on a share of the responsibility for helping to maintain a stable global environment.
On the question of exchange rates and target zones, I would like to state clearly monetary strategy, the ESCB does not have an exchange rate target. Nor do the United St Japan. An exchange rate target for an area as large and relatively closed as that of t could easily conflict with the maintenance of price stability and could, therefor
sustainable. According to our monetary policy strategy, the exchange rate of the euro w an outcome, rather than the objective, both of the economic, monetary and other policie in the euro area, and of cyclical developments in the euro area and abroad. It will be m one of the indicators of monetary policy and as a source of potential changes in the pr the euro area. However, the exchange rate will play a far smaller role in the euro area played in the Member States in the past.
In line with the ESCB's approach to the euro exchange rate, the Ministers of Finance, ultimately responsible for the exchange rate policy of the euro, have agreed to issu exchange rate orientations only in exceptional circumstances, such as in the case of persistent misalignments of the euro. This is apparently not the case at this juncture. any indication that such misalignments will be unavoidable in the future. In particul that our strategy does not include any exchange rate target vis-à-vis the US dollar doe that the euro/dollar rate will be unstable or volatile, or that the ESCB is against rea exchange rates. The pursuit of stability-oriented monetary and budgetary policies on bot the Atlantic would put in place one of the major prerequisites for a reasonably stable exchange rate. At the current juncture, the policy framework in both regions seems to for the adoption of such policies. Absolute stability is, of course, impossible to g would not even be desirable, if the United States and the euro area were to go through cycles which are not fully synchronised.