Европейская денежная система
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
However, the success of the euro is not only in the hands of central
bankers and policy-makers. An important area in which the private sector
has an instrumental role in meeting the challenge of pushing the boundaries
is in the development of the European financial markets. In order for the
euro to be a success, it is important for the euro area financial markets
to become wider, deeper and more diversified. The introduction of the euro
has provided further input into this process; the elimination of exchange
rate risks has removed one of the main barriers to financial market
integration in Europe.
In most European countries, the financial markets have,
traditionally, been rather shallow, with few participants and a narrow
range of financial instruments on offer. A high degree of segmentation and
a lack of cross-border competition have implied relatively low trading
volumes, high transaction costs and a reluctance to implement innovative
financial instruments. This segmentation has been a function of exchange
rate borders, tradition, differing practices and, of course, national
regulations and tax regimes.
Following the elimination of the barriers implied by different
currencies, it is now up to the European Commission and the relevant
national authorities to further the integration process in the areas of
regulation and taxation. Meanwhile, it is up to market participants to take
advantage of the business opportunities implied by the increased scope for
The introduction of the euro brought about an almost immediate
integration of the national money markets into a euro area-wide money
market. This was made possible thanks to the establishment of pan-European
payment systems, such as the TARGET system set up by the Eurosystem, which
enables banks to access liquidity throughout the euro area in real time.
The cross-border integration of bond markets in the euro area is
progressing at a slower pace, as is also true of equities and derivatives
markets. This notwithstanding, we are also experiencing important
developments in these segments of the financial markets. These developments
are partly due to the general trends towards globalisation and
technological refinement and partly related to the introduction of the
euro. As a result of the introduction of the euro, market participants
increasingly perceive similar instruments traded in the different national
markets to be close substitutes. This holds true, in particular, for bonds
issued by the euro area governments, where the establishment of common
benchmarks, the narrowing of yield spreads and increased market liquidity
seem to indicate that a high degree of cross-border substitutability has
already been achieved.
The fact that euro area financial instruments are increasingly
considered to be close substitutes increases the competitive pressures on
national markets to attract issuers and investors wishing to benefit from
increased cross-border competition and lower transaction costs. In this
context, we have recently experienced several initiatives aimed at creating
capital markets across national borders, such as the plans to establish
common trading platforms linking the European stock exchanges. Similar
initiatives have also been taken to establish links between national
securities settlement systems, which would facilitate the cross-border
mobilisation of securities. In the longer run, such developments will make
it possible for investors to manage their investment portfolios more
The Eurosystem welcomes such initiatives aimed at improving the cross-
border integration of financial markets in the euro area, and globally,
since they may result in a wider range of financial instruments on offer,
and at a lower cost, than is currently the case in the national markets.
This could lead to a virtuous circle in which the increased issuance of
instruments denominated in euro will draw the attention of international
investors to the euro area capital markets, in turn making the euro an
increasingly attractive currency for private as well as public issuers.
In fact, the experience of the first few months of the life of the
euro seems to indicate that such a positive development may already be
under way. In the first quarter of 1999, bonds denominated in euro
accounted for around 50% of the bonds issued internationally. This share is
considerably higher than the traditional aggregate share for bonds
denominated in the constituent currencies, which had been in the range of
20% to 30% in recent years. We have also seen a considerable increase in
the average size of bond issues denominated in euro, as compared with those
of bonds denominated in the former currencies, which may indicate that the
trade in euro-denominated issues is likely to become increasingly liquid.
Despite the recent developments in the euro area capital markets,
euro area companies are still mainly dependent on financing through the
banking system. Hence, there is still plenty of scope for further
development in the area of corporate financing. For example, the amount of
private bonds traded in the euro area is still very low compared with the
United States. The market capitalisation of equities is considerably lower
in most euro area countries as compared with the United States and the
United Kingdom. Likewise, the venture capital business in the euro area is
still in its infancy compared with the relatively mature venture capital
markets in the United States and the United Kingdom. Personally, I am
convinced that the introduction of the euro will also be helpful to the
development of these segments of the financial markets.
In this context, I should like to say a few words on how the
introduction of the euro may underpin the reshaping of the European banking
sector. The increased scope for securitisation will put pressure on the
European banking sector to move away from traditional retail banking
activities in favour of more advanced financial services. The European
banking industry is still segmented into relatively small national markets.
The introduction of the euro is likely to add momentum to cross-border
integration in the European banking sector. Although a considerable
consolidation of the European banking sector has taken place over the last
decade, this consolidation has so far been almost exclusively based on
mergers and acquisitions within national borders. It is only recently that
we have also started to see such deals taking place across national
I welcome this trend towards an expansion beyond national borders
with open arms, since the establishment of truly pan-European - and global
- banking groups will be instrumental in efforts to enhance competition in
the provision of financial services.
5. The Eurosystem and the equity markets
I should like to conclude my presentation today by briefly discussing
about the euro area equity markets as seen from the perspective of the
Eurosystem. It is clear that the Eurosystem has no direct control or
influence over the development of equity markets. However, the Eurosystem
acknowledges the importance of well-functioning and efficient equity
markets for the economy as a means of mobilising savings into productive
investment. Hence, efficient equity markets with transparent price
formation, high market liquidity and low transaction costs are of great
value in the capital formation process.
The existence of efficient equity markets should also reduce the risk
of the emergence of asset price bubbles, which is desirable from a monetary
policy perspective. Prior to the emergence of asset price bubbles in some
industrialised countries in the early 1990s, few central banks paid much
attention to the development of prices of equities or other assets in their
monetary policy formulation.
However, the effects of the bubble economies in the early 1990s,
notably in Japan, the United Kingdom and Scandinavia, led to an intense
debate among economists on how monetary policy could have responded better
to the situation. Some research was carried out in order to establish price
indexes that would incorporate asset prices and which could be used as
target variables or indicators within the monetary policy framework.
However, no central bank is explicitly making use of such asset price-
weighted indexes in monetary policy formulation. Nevertheless, this
development in the early 1990s made most central banks aware of the fact
that large swings in asset prices can have important effects the price
formation in the economy through its implications on real economic
developments and, in particular, financial market stability.
However, in practice it is not easy to let monetary policy actions
respond to asset price developments. Central banks have only one tool for
the implementation of monetary policy - the short-term interest rate. They
can therefore not effectively try to achieve several objectives at the same
time. It is also difficult to judge how developments in asset prices
actually feed into consumer prices, thereby making it tricky to assess the
need for the appropriate monetary policy response to their changes. This
difficulty is exacerbated by the rather high volatility of certain asset
prices, such as equities, which could result in frequent changes in policy
interest rates if the central bank were to incorporate them mechanistically
into its reaction function.
In this respect, the present situation in the United States, as well
as in several European countries, is interesting: equity prices have risen
rapidly for an extended period but consumer prices remain very subdued and
there are, so far, no signs that there is going to be a spill-over from
asset price developments into consumer price inflation.
Against the background of the rather unclear relationship between
asset price developments and consumer price inflation, the development of
equity prices does not have a prominent role in the formulation of the
Eurosystem's monetary policy. This notwithstanding, the Eurosystem closely
monitors the prices of equities and other assets within its broadly based
assessment of economic developments in the euro area, which forms the
second pillar of its monetary policy strategy. The Eurosystem will
therefore remain vigilant in order to detect any influence from asset
prices, through their impact on real economic developments and financial
market stability, on the formation of consumer prices.
THE MONETARY POLICY OF THE EUROPEAN CENTRAL BANK
Speech by Eugenio Domingo Solans
Member of the Executive Board of the European Central Bank
during the "Working Breakfast" at the Permanent Seminar
on 4 December 1998 in Madrid
It was with immense pleasure that I accepted the invitation to take
part in this event, organised by Euroforum. In view of the prestigious
nature of Euroforum, the professional standing of its MESTER PROGRAM OF
MARKETING WEEK AT.DOCl[pic][?]\- -#President, Eduardo Bueno, Professor at
the Universidad Autуnoma de Madrid and consultant to the Banco de Espaсa
(there is a great deal of similarity between our respective professional
histories) and, above all, the value I have attached to his friendship over
the past thirty years, there was no question as to whether to agree to join
you for this working breakfast.
I have been asked to keep my presentation brief in order to allow as
much time as possible for discussion. Therefore I will try to put forward a
few ideas on the monetary policy of the European Central Bank (ECB) which I
can develop during subsequent discussions. During the discussion period
please feel free to raise any questions on other aspects of the ECB's
The three fundamental principles underlying the monetary policy
As in the case of any other central bank, the ECB's monetary policy
is based on three fundamental principles: setting the objectives to be
achieved, establishing the most appropriate strategy for accomplishing
these objectives and, finally, selecting the best instruments for
implementing its chosen strategy.
While the Governing Council of the ECB is responsible for formulating
its monetary policy, both the Executive Board of the ECB and the national
central banks are involved in its application and therefore this
constitutes one of the tasks allotted to the European System of Central
Banks (ESCB) as a whole.
Objectives, strategies and instruments therefore form the three main
elements which enable us to establish the precise point within the range of
monetary policy possibilities which should constitute the ECB's policy: its
precise altitude, longitude and depth.
The ECB's monetary policy objectives
We did not have to think long and hard to define the ECB's monetary
policy objectives and, generally speaking, those of the ESCB. This had been
done for us by the Treaty on European Union in which, under Article 105, it
is stated that "the primary objective of the ESCB shall be to maintain
price stability" which, on a more practical level, the ECB has defined as a
year-on-year increase in the harmonised index of consumer prices (HICP) for
the euro area of below 2%, which it seeks to maintain in the medium term.
"Without prejudice to the objective of price stability", continues the
aforementioned Article 105 of the Treaty, "the ESCB shall support the
general economic policies in the Community with a view to contributing to
the achievement of the objectives of the Community as laid down in Article
If you refer to the aforementioned Article 2 of the so-called Treaty
of Maastricht, you will find that sustainable and non-inflationary growth,
together with a high level of employment and social protection, are among
The ECB, then, must prioritise those of its activities which promote
the objective of stability and, without prejudice to this approach, it will
contribute, indirectly and to the extent possible, to economic growth and
Is this approach in any way contradictory? Absolutely not. The best
contribution the ECB can make to promoting investment and thus to
generating economic growth and increased employment is precisely by
providing a framework for price stabilisation. The worst path that the ECB
could follow would be to implement a lax economic policy which claimed to
be directly creating jobs.
In fact, in the medium term price stability will encourage efficient
investment, sustainable growth and employment. This is because stability
prevents price distortions, that is to say any distortion of the mechanism
which guides decision-makers in the markets, and thus favours an improved
allocation of resources. When stability is achieved, prices are more
transparent, which promotes competition and therefore efficiency.
Moreover, if economic agents have positive expectations with regard
to stability, the risk premium element of long-term of interest rates will
fall, promoting investment and lasting consumption. In this respect, it
should be remembered that one of the clearest inflation forecast indicators
is an increasingly steep maturity-related asset yield curve.
Finally, stability promotes growth and employment insofar as it
allows resources to be channelled into productive activity. Inflation, on
the other hand, merely encourages speculative investment with the aim of
safeguarding funds against monetary deterioration.
As we saw earlier, the aims set out in Article 2 of the Maastricht
Treaty also include social safeguards. In this context, therefore, it can
be said that inflation is the most unjust of all taxes, because it attacks
personal income and assets while distorting certain public redistribution
mechanisms such as, for instance, progressive taxation scales.
In other words, stability is not just important for economic
efficiency but also for social justice, since it provides economic
conditions which benefit the weakest and most vulnerable members of
An appropriate ECB monetary policy is a necessary condition but will
not, in itself, enable us to achieve stability. National taxation policies
geared to satisfying the objectives of the Stability and Growth Pact,
together with several supply-side policies leaning towards liberalisation
and flexibility, are also necessary to enable us to avoid the persistent
need for measures to combat inflation.
We must avoid the temptation to reinterpret the Stability and Growth
Pact by introducing "golden rules" of dubious legality, based on the false
theoretical foundations of the so-called "ultra-rationality hypothesis"
which, in the past, claimed to justify increased taxation pressure and
which now calls for increased public spending in terms of investment. Let's
not beat about the bush: taxation policy has only one golden rule, which
consists in maintaining a long-term budgetary balance on the economic
In connection with the ECB's objectives, it should also be noted that
it is difficult or even impossible to meet two separate targets
simultaneously using only a single monetary policy. This applies when
dealing with the concept of fixing fluctuation bands for the rate of
exchange between the euro and the US dollar. In this case, the exchange
rate objective could conflict with the price stability concept and the ECB
would then fail in its primary objective. We must not forget, with regard
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