Willem F. Duisenberg
Ladies and Gentlemen,
Let me first thank the organisers of this Frankfurt European Banking Congress for
giving me the opportunity to address such a distinguished audience. Today I would
like to share with you a few thoughts about the process of EU accession from a
central banker's perspective, and review some of the issues that are of particular
relevance to the ECB.
Little more than ten years after the beginning of the transition to market economies
in Central and Eastern European countries, the successful model of European
integration is in the process of being extended. This testifies to the attractiveness
of the European Union as a sound framework providing both political stability
and economic progress. In a few weeks' time, on 1 January 2002, a new milestone
will be reached when the euro, our money, becomes truly tangible. The introduction
of the euro banknotes and coins indeed constitutes a historic event in the process
of European integration, and represents a key accomplishment in the already long
European experience. The changeover comes as we approach a situation in which
inflation should fall below 2% and price stability should be restored. In line with
our forward-looking strategy we have cut interest rates on the basis of reduced
risks to price stability. Recent data are in line with expectations and confirm our
decision of 8 November which took account of all relevant information.
As President of the ECB, I would like to confirm that the euro will indeed
eventually "go east". As many as 12 countries from central, eastern and southern
Europe and the Mediterranean are currently negotiating accession to the EU.
They have made remarkable progress, both in negotiations and in strengthening
their economies and policy-relevant institutions. However, the road towards EU
membership and, later, the adoption of the euro still poses a number of significant
challenges.
What are these challenges? Let me focus briefly on three economic areas in which
notable differences still prevail between accession countries and EU Member
States: first, real convergence, second, nominal convergence and, finally, the
structure and functioning of the financial sector.
By "real convergence", I mean the broad adjustment through structural reforms
and economic development of the economies towards structures prevailing in the
EU. This requires, inter alia, the completion of the market economy transition
agenda, further privatisation in some sectors, and the strengthening of the institutional
and legal framework. Real convergence is seen as facilitating economic
cohesion among Member States once they have joined EMU, thereby helping to
minimise the risk and effects of asymmetric shocks. Hence, in order to enhance the
process of real convergence as much as possible, accession countries should ensure
that they make progress in the restructuring of their economies and gradually align
them with those of the euro area. Real convergence is often interpreted as a
catching-up in real income with the EU. Such a narrow measure is, however, only a
rough proxy for the concept of real convergence I was referring to. Indeed, different
income levels can be compatible with Monetary Union, as we know from our
own experience in the euro area.
As for nominal convergence, accession countries have achieved a remarkable
process of disinflation during the last decade. Inflation is expected to reach around
6% on average by the end of this year. Nevertheless, further progress on disinflation
might turn out to be more complicated in the coming years. First, several macroeconomic
and microeconomic factors as well as transition-related factors will
continue to push up inflation in many accession countries. Second, what is known
as the "Balassa-Samuelson effect", that is, the potential inflationary pressures
arising from higher productivity growth in catching-up economies, has also been
held responsible for higher inflation in accession countries. However, research has
shown that this effect should not be overestimated. These factors should be borne
in mind when designing monetary policy strategies. In this context, disinflation in
accession countries should be promoted, at a pace determined by the overall
economic situation and in particular by the need for these countries to foster real
convergence. In addition, the Maastricht inflation criterion should not be regarded
as an immediate requirement, but rather as a medium-term objective for the
central banks of the accession countries. This should not mean, however, that
accession countries do not have to pay attention to progress in nominal convergence.
On the contrary, a balanced monetary and fiscal policy stance and wage increases
supported by productivity gains should favour the disinflation process of accession countries, and allow them to make progress on nominal and real convergence in
parallel.
As a specific topic that is of great relevance to the ECB in the accession process,
I would like to mention the structure and functioning of the accession countries'
financial sector. Significant progress has been made in restructuring and consolidating
the banking sector over the past few years. This progress has been achieved through
the large-scale privatisation of state-owned banks and the extensive opening-up of
the banking sector to foreign ownership. This process has contributed to greater financial
integration with the EU and significant gains in terms of efficiency and stability.
However, the level of financial intermediation remains relatively low and the
provision of bank financing represents a much smaller share of GDP in the accession
countries than in the euro area countries. Furthermore, the financial sector of accession
countries remains dominated by the banking industry, as capital markets are not
yet fully developed. From an ECB perspective, further deepening of the accession
countries' financial markets is needed to ensure the proper transmission of monetary
policy impulses once they join the euro area, and it may also help these countries
make full use of their growth potential.
Coping with any of the three challenges which I have just mentioned will have a
significant impact on the design of monetary and exchange rate policies. Taking
into account the different starting points and progress made so far in addressing
these challenges, accession countries may well pursue different approaches in the
pre-accession phase. Once in the EU, however, there is a clear path defined in the
Treaty that should be followed by all EU Member States towards the adoption of
the euro.
First, immediately upon EU accession, the new Member States have to treat their
exchange rate policy as a matter of common interest. Furthermore, in view of the
final objective of adopting the euro, accession countries are expected to join ERM
II at some point following accession to the EU.
Most accession countries have already expressed their intention to join the mechanism
as soon as possible after their entry into the EU. However, it should be clear
that ERM II membership does not need to happen immediately after EU accession
in all cases, nor does ERM II membership need to be limited to only two years,
which is the minimum for adoption of the euro. A longer membership of ERM II
may, in some cases, be helpful since it would allow countries to retain the exchange
rate as an instrumental policy variable during the catching-up process. Participation
in ERM II should thus be seen as a meaningful and flexible framework for increasing convergence with the euro area, and for tackling the challenges faced by
accession countries on the road towards the adoption of the euro.
Finally, after having outlined the path along which the euro will go east, I would
also like to say a few words about a path which I am confident will not be followed
- and that is unilateral euroisation. Such an adoption of the euro outside the Treaty
process would not be welcome as it would run counter to the important process of
convergence prior to the adoption of the euro outlined in the Treaty. Unilateral
euroisation would also imply circumventing the process of multilateral assessment
of new members by current EU Member States and as such would be difficult to
reconcile with the co-operative spirit of a community of fellow members. From the
other perspective, I believe it would also not be in the interest of accession countries,
as it would imply relinquishing monetary and exchange rate policy instruments at
a very early stage of convergence for these economies. It would further deprive
the countries concerned of a lender of last resort function and non-negligible seignorage
revenues. Finally, it would make the integration of the central banks
concerned into the Eurosystem operational framework much more difficult, if not
impossible.
Ladies and Gentlemen, I should like to end my remarks here by saying that the
Eurosystem is fully aware of the future implications of the ongoing accession process
for the fulfilment of its own statutory objectives. As the historic process of reunifying
Europe unfolds before our eyes, let me assure you that the ECB is ready
and looking forward to playing its part.
Thank you very much for your attention.
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