"The impact of the creation of the euro on financial markets and the International monetary system"

Transcription

1 SPEECH/97/102 Yves-Thibault de Silguy Membre de la Commission, responsable des affaires économiques, monétaires et financières "The impact of the creation of the euro on financial markets and the International monetary system" Check Against Delivery Seul le texte prononcé fait foi Es gilt das gesprochene wort Institute of International Finance Washington, Tuesday, 29 April 1997

2 Mr Chairman, Ladies and Gentlemen, First of all, I would like to thank Mr Charles Dallara for giving me the opportunity to address you. Your institute's reputation extends well beyond the frontiers of the United States. I therefore especially appreciate the honour of speaking to you today. European economic and monetary union is irreversible. Over the last two years, a transitional scenario has been defined. The details for monetary union to function smoothly have been adopted. The determination of European Heads of State and Government to create the euro in line with the timetable and conditions in the Maastricht Treaty is rock solid. It has never wavered. It is that same determination which has ensured the impressive progress made towards the convergence of Member States economies. inflation and interest rates are at historically low levels; public deficits have been halved since 1993, falling from 6.2% to a forecast 2.9% in There is therefore no longer any doubt about the arrival of the euro. But we need to think about the consequences, both for Europe and its partners. I will attempt to tackle this difficult task by considering two key questions: - what position will the euro occupy on the world financial scene? - what impact will its creation have on the international monetary system? I. What position will the euro occupy on the world financial scene? The creation of a European currency is a development, not a revolution. As your compatriot, Mark Twain, once wrote in his habitual caustic manner, "radicals invent new ideas and conservatives adopt them once they have served their time". While the creation of a single currency in Europe is certainly not an idea that has served its time, it is not a totally new one either. One of my predecessors in the position I currently hold in the Commission, Robert Marjolin, wrote a memorandum on this topic all of 35 years ago. The introduction of the euro is the finishing touch to the long process creating a single market in Europe. It is a logical consequence of the foundation of the European Community in Its creation will affect international economic and financial relations. The euro is likely to take on a major role as an invoicing currency, a reserve currency and a currency used for the diversification of international portfolios. Of course, it will initially be used mainly by European Union countries and by countries with which we have close trading links. Its development is likely to be much more gradual in the rest of the world, where the dollar will continue to play a major role. 2

3 Experience shows that changes affecting the international use of a currency are gradual. Let us consider, first of all, the likely prospects for the euro as an international invoicing currency. [A. Use of the euro as an invoicing currency] Once all 15 Member States are participating in economic and monetary union, the weight of the euro area will be roughly comparable to, or even slightly greater than, that of the United States. The European Union currently accounts for 38% of the GDP of the OECD countries, compared with 32% for the United States. If intra-community trade is excluded, it accounts for some 21% of world trade, as against 20% for the United States. The euro will be linked to a vast market of 370 million consumers. It will be introduced in sound public finances in line with the conditions in the Maastricht Treaty. The stability and growth pact, including the medium term objective of a balanced budget, will ensure sustainable sound public finances. The euro will be based on a vast and highly liquid financial market. Finally, it will be administered by an independent European central bank, with the principal objective, of price stability. It will be a stable currency, as stable as the German mark currently is. The euro will be a sound and therefore an attractive currency. Assuming that it has the same internationalization ratio as the German currency, 30% of world exports could soon be denominated in euros. Who will use it? Firstly, its use will become general in intra-community trade. Such trade currently accounts for some 60% of Member States' total foreign trade. European exporters and importers will also naturally tend to use it as a transaction currency since it will offer them an immediate advantage: the euro will eliminate the costs inherent in managing exchange risk. But use of the euro should also extend increasingly beyond Europe's frontiers: in Africa first of all, since it will replace the French franc as the reference currency of the CFA area. It will also be used increasingly in central and eastern European countries since many of them anchor their currencies to the German mark. 3

4 Their trade with the european Union is increasing as they prepare for membership. The euro will also probably be quickly used as an invoicing currency by Mediterranean countries given their close links with the European Union and the prospect of a European/Mediterranean free-trade area being established by The euro's development is likely to be more gradual and moderate on energy raw material markets. In addition to its use as an invoicing currency, the euro will also become a reserve currency. [B. Use of the euro as a reserve currency] The creation of the European currency is part of a steadily increasing diversification of official foreign-exchange assets since the early 1970s. In 1973, 76% of central banks' reserves consisted of dollars, compared with 61% today. The share taken by European currencies (the pound sterling, the German mark, the French franc and the Dutch guilder) has risen from 14% to 20% over the same period. The euro should account for a greater share of central banks' reserves than that currently taken by European currencies. Its future position will be closely linked to its intrinsic stability. It will develop in line with its use as an instrument of intervention on foreign-exchange markets and as an invoicing currency in international trade. According to figures provided at a recent IMF symposium, world reserves were estimated at the end of 1996 to amount to $ billion. European central banks, hold some 30% of that total. Viewed overall, the European Union holds six times more reserves than the United States and twice more than Japan. Economic and monetary union should mean a fall in the total volume of foreignexchange reserves of the European System of Central Banks. Central bank holdings of currencies of countries participating in EMU - approximately a third of their total foreign-exchange assets - will automatically be converted into euros. The quantity of reserves needed is also likely to diminish, since there will be no further need for intervention to stabilize the currencies of the countries participating in economic and monetary union. Does it follow from this that there will be surplus dollars in European central bank coffers? This is a difficult question. Current estimates of the quantity of surplus dollars vary very sharply, from zero to $ 200 billion. The European Central Bank may very well consider it appropriate to hold substantial reserves in order to establish its credibility on the markets. 4

5 Some commentators have confidently asserted that the reserve markets will be flooded with surplus dollars. This is hardly a rational expectation! Central banks have just as much common sense as the markets. Who can seriously think that they are unaware of the impact of their transactions on foreign-exchange markets? If there indeed turns out to be a dollar surplus in European central bank coffers, that surplus will be absorbed in an orderly and gradual fashion so as to prevent any disruption of the markets. Finally, what impact will the introduction of the euro creation have on private portfolios? [C. Use of the euro as a private portfolio diversification currency] This is difficult to assess since the euro's position will depend primarily on the markets' judgment of its quality. However, a process of diversification of international portfolios is already under way. Between 1981 and 1995, European currencies' share of the world private portfolio rose from 13% to 37%. Over the same period, the European currencies' share of international bond portfolios also virtually doubled to its present level of 37%. One of Queen Victoria's Prime Ministers, Benjamin Disraeli, once said there were three kinds of lies: "lies, damned lies and statistics". I will therefore be careful not to put a figure on the scale of the use of the euro in financial markets. I would simply make two comments: 1. Firstly, once established, the bond market in euros will be one of the largest in the world. All new public debt issues by the countries participating in economic and monetary union will be denominated in euros as from 1 January Many Member States, including France, have already declared their intention of converting all their stock of debt into euros at that moment. In any case, all stocks of public debt will be converted into euros by Secondly, it is probable that the costs associated with the use of the euro - such as the cost of hedging exchange risk - will be just as low as those associated with the use of the dollar. How will financial operators react? There could well be a gradual reallocation of portfolios in favour of the euro. But it is impossible now to estimate the scale of this effect. There are factors working in opposing directions : for example, investors holding a number of European currencies could decide that they have too many euros after the currency change and could therefore try to diversify their portfolios by buying dollars or yen. 5

6 It is probable, however, that the euro will be used more by financial operators than is currently the case for European currencies. Its vast and liquid market will offer a highly attractive opportunity for diversification. This new demand will also be matched by an additional supply of euro-denominated products, which financial institutions are already preparing to in the future European currency. No one can therefore honestly say today that the euro will necessarily appreciate against the dollar. A currency's exchange rate against another currency depends on many factors. Ultimately, the euro's exchange rate will be set by the markets according to their assessment of the relative fundamentals but also on the basis of the balance between supply of, and demand for, euros. I would now like to turn to the second question, in many ways linked to the first: II. What impact will the euro's creation have on the international monetary system? The international monetary system is undergoing radical changes. In particular the trend is towards a more multipolar system. However, the creation of the euro is undeniably a major event whose impact cannot be predicted with any certainty. I will therefore restrict my comments to two areas: - the future exchange-rate policy of the euro area will be directed towards achieving greater stability; - the creation of the euro presents an opportunity to resume multilateral macroeconomic and monetary dialogue on a balanced basis. First of all: A. What will be the guiding principles underlying the exchange-rate policy of the euro area? The reduced degree of openness of the euro area and its diminished sensitivity to exchange-rate fluctuations are sometimes cited as reasons for the European Central Bank to disregard the euro's exchange rate. While such a policy would indeed be possible, it would not be in keeping with Europe's long tradition of openness and international cooperation. And it is certainly not in Europe's interests to contribute to the emergence of prolonged misalignments which could impede international trade. Experience shows that misalignments feed protectionism and undermine direct investment. 6

7 Clearly, therefore, the European Central Bank and national governments will closely monitor changes in the euro's exchange rate. Excessive fluctuations would affect the Central Bank's objective of price stability, or undermine the competitiveness of European companies. Europe's aim in building an area of stability and growth is certainly not to export instability to the international monetary system. The euro's adoption should help to make the international monetary system more stable. It can pave the way for a resumption of macroeconomic and monetary cooperation, which has fallen into abeyance somewhat since the Plaza and Louvre agreements. [B. Towards a renewal of international monetary cooperation] The creation of the euro is likely to reinforce the development of the international monetary system into a multipolar system. Experience shows that under such a system, the arrangements for cooperation between the major monetary centres are a key factor contributing to overall stability. The international monetary system will be better balanced. It will therefore also be more symmetrical: the potential gains to be derived from coordination will not only be greater but will also be more uniformly shared between participants. Cooperation will come about automatically because it will be in the interests of all. Under a multipolar system, discussion is a positive sum game. One question has still to be settled before 1 January 1999: what will be the framework for this coordination? Should the G7 finance format be modified? Should a G3 be created? It will be essential, for the euro area to be able to speak with one voice. This will be the case for monetary policy since it will be represented by the President of the European Central Bank. But the arrangements for its political representation - that is at ministerial level - have still to be defined. The United States, Japan, Canada and the other countries justifiably expect to deal with a single spokesman for the economic policy conducted by the euro area. These questions will require detailed discussion, both within the Community and with its partners. The creation of the euro therefore offers Europe and the United States a unique opportunity to contribute jointly to the stabilization of the international monetary system. On an economic level, the reduction of monetary uncertainties will tend to stimulate world trade and investment and therefore growth. In the political sphere, this reinforced cooperation will give a new impetus to transatlantic relations. 7

8 In conclusion, I would point out that time is short; there are just 611 days left before the euro is created. The time remaining must therefore be used for preparation since those who are ready first will also be those who will derive the greatest benefit. Thank you for your attention. 8