Opinion of the Economic and Social Committee on the 'Commission staff working paper entitled "External Aspects of Economic and Monetary Union"'
25. 5. 98 EN Official Journal of the European Communities C 157/65 Opinion of the Economic and Social Committee on the ‘Commission staff working paper entitled “External Aspects of Economic and Monetary Union”’ (98/C 157/16) On 13 May 1997 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the ‘Commission staff working paper entitled “External Aspects of Economic and Monetary Union”’. The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 10 March 1998. The rapporteur was Mr Robert Pelletier. At its 353rd plenary session of 25 and 26 March 1998 (meeting of 26 March) the Economic and Social Committee adopted the following opinion by 63 votes to 19 with 19 abstentions. 1. Introduction 1. 1. The Commission working paper published in April 1997, which is the result of a long process of analysis and consultation, sets out the Commission’s first thoughts on the future role and position of the euro in the international monetary system. 1. 2. The Commission is to be congratulated on its synthesis of highly complex problems concerning the relationship between the economic and monetary union and the rest of the world. 1. 3. The Commission analyses the international consequences of the transition to the euro. It looks in succession at the economic weight of the euro area in the world economy, transitional issues, economic policy and the exchange rate of the euro, and finally Europe’s place as an international partner. 1. 4. On a number of points the Commission does not put forward proposals, but outlines the problems without expressing a view. Thus it has opened a debate which will be fundamental to monetary equilibrium in the world, as the euro is destined to play a decisive international role alongside the dollar. 1. 5. The efforts made by the Commission to promote the euro, should probably be backed up by more detailed technical analysis in order to respond to the problems identified by the United Nations Economic Com- mission (1), the International Monetary Fund (2), the OECD and various well known EU economic research and forecasting institutes (3); these the Commission (1) Economic Survey of Europe in 1996-1997 — United Nations — New York and Geneva — 1997. (2) World Economic Outlook — May 1997 — IMF (a survey by the staff of the IMF). (3) In order to avoid polemics, observations made by national institutions have not been mentioned in this document. It should be pointed out however that as a rule these comments coincide to a great extent with those of the international institutions. omits to mention, or refers to only in passing as participants in an increasingly lively debate in inter- national bodies. 2. Preamble The Committee has already commented on the 2. 1. economic and monetary problems associated with the single currency, for example in its October 1995 Opinion on the Green Paper on the practical arrangements for the introduction of the single currency (4). At the time the Committee pointed out that there was a specific duty — both for the ESC and the Community authorities — to look at the situation realistically. This draft opinion is based on the same principle, and its purpose is essentially to bring the Economic and Social Committee into the debate, without calling into question its support for the introduction of the single currency. At this stage the intention is to raise questions and pinpoint problems rather than to propose solutions. 3. General Comments 3. 1. Section A of the Commission document, which sets out the main economic indicators for assessing the weight of the euro area in the world economy, particularly relative to that of the United States and Japan, clearly shows that this new area will, if it extends to all the Member States, have an economic and commercial weight comparable to that of the United States. Moreover, economic and monetary union will very quickly create one of the largest government bond markets in the world. 3. 2. However, at this stage of monetary union it is necessary to place in its proper perspective the compari- son between 1) the European Union, with its marked differences from one Member State to another in (4) OJ C 18, 22. 1. 1996. C 157/66 EN Official Journal of the European Communities 25. 5. 98 economic structure (GDP varies on a scale of 1 to 4) and in the fundamental rules governing the operation of the Member States’ economies (state intervention, tax system etc. ) and social relationships, and 2) the United States or Japan, which benefit from a higher degree of homogeneity throughout their territory despite signifi- cant regional differences. 3. 3. Assessments of the place of the euro area in the world economy relative to that of the United States or Japan provide a frame of reference for public opinion. They are however, technically speaking, built on flimsy foundations, as they simplify complex international relationships and the relative weight of competing economies. 3. 4. Although the Commission’s approach to defining the euro area is understandable (the Economic and Social Committee fully subscribes to its desire to see the current fifteen Member States participate in economic and monetary union), assuming that the euro area comprises the entire European Union ‘so as to avoid any presumptions concerning the size of initial participation does not make forecasting any easier’ (1). An analysis in the form of a variable scenario would have been more appropriate. 3. 5. And yet we already know that four EU Member States will not be joining monetary union in 1999, either because they do not wish to join at present or because they cannot fulfil the economic and monetary criteria laid down in the Maastricht Treaty. This uncertainty as to the number of ‘ins’ limits the impact of the Commission’s working paper. Even if we accept that the Member States outside the euro area will be highly dependent on the single currency area by virtue of the rules to which they will be subject and the area’s influence, it is not true that all fifteen Member States will be conducting a single policy in these areas. 3. 6. It is difficult to be sure even if the possibility exists, that tensions between the European currencies will disappear. However, if there is complete conver- gence, as in the case of Denmark, or if convergence efforts are made in a credible manner, as in the case of Greece, or if there is the political will to join the euro bloc at an early opportunity, for which there are ever clearer indications, for example in the United Kingdom, there will be little room for tensions and arbitrage. The existence of ‘in’ and ‘out’ currencies will leave the foreign exchange markets almost daily opportunities for arbitrage (2). 3. 7. Euro financial market The Commission rightly stresses the new 3. 7. 1. dimensions of the financial market, for example with the creation of one of the largest government bond markets in the world, even if national bonds retain their individual characteristics. 3. 7. 2. The Economic and Social Committee would have liked the Commission to be more explicit on a number of points which the Committee considers essential. Greater precision is needed with regard to: — the obstacles to real integration of the market arising from differences in tax systems and the danger of a massive outflow of savings to the euro area countries with the most favourable tax systems; — the danger that application of reserve requirements by the ‘ins’ will place at an advantage ‘outs’, which might subsequently join economic and monetary union, having secured a dominant market share for themselves; — the effects of a unified monetary and financial market on the relative situations of existing financial centres. The reduction, which is considered inevitable, of the number of stock markets and centres for financial transactions places the future of some national financial centres in doubt (3). The EU currently has 32 stock markets, compared with eight in the USA. Although the Commission document submit- 3. 7. 3. ted for the Committee’s opinion looks at the external aspects of the euro, it would be worthwhile devoting a specific communication to the impact of monetary union on the financial markets. 3. 8. Internationalization of the euro 3. 8. 1. The Commission believes that the international use of the euro, for example by non-EU firms trading with the euro area, will increase, as will its use in transactions outside the euro area. 3. 8. 2. On the other hand, the Commission considers that, for reasons of stability-orientated fiscal and mone- tary policy, use of the euro as a reserve currency should be encouraged by economic operators and central banks. 3. 8. 3. The idea, not specifically stated but nonetheless possible, is that the euro could in effect at least partly (1) See point 3 of Introduction to Commission document. (2) See also the Bank of England publication entitled ‘Practical issues arising from the introduction of the euro’. (3) See interview with David Clementi, deputy governor of the Bank of England, in which he argues that London, although outside the euro area, will become the leading euro financial centre (Financial Times, 20 January 1998). 25. 5. 98 EN Official Journal of the European Communities C 157/67 replace the dollar as an internationally held investment asset. 3. 8. 4. This view, which figures prominently in all the literature aimed at promoting the euro, deserves further analysis: 3. 8. 4. 1. The role of the dollar as a reserve currency held by central banks has been less the result of a choice than of an obligation imposed partly by the United States’ trade deficit and inadequate domestic savings, and partly by the inability of the central banks to sell their dollars on the foreign exchange markets without causing the exchange rate to collapse. The example of Japan, with its ‘glut’ of US Treasury bonds — a quid pro quo for its trade surplus with the United States — is a perfect illustration of this phenomenon. 3. 8. 4. 2. The idea that the status of reserve currency brings only advantages also needs to be qualified. If the euro comes to be regarded as desirable for its intrinsic qualities, it will be highly valued by the foreign exchange markets in relation to its major competitors, the dollar and the yen. 3. 8. 4. 3. The handicap which a euro overvalued on the foreign exchanges could represent for all the euro area’s firms is rarely mentioned. The Economic and Social Committee would like to see this question made the subject of a detailed study (1). Moreover, undervaluation would be quite as damaging as overvalu- ation. It is perhaps the international monetary system which needs a radical overhaul. The dollar and the yen have experienced extreme exchange-rate fluctuations and it is possible that the same thing might happen to the euro. One positive aspect of monetary union however is that is that the external dependence of the Member States will diminish greatly as the bulk of trade will be transacted in euros between the participating countries. The external value of the euro will therefore be much less significant than hitherto, for example, the external value of the French franc for France or the Belgian franc for Belgium. 3. 8. 4. 4. In point 10 the Commission looks, unfortu- nately too briefly, at the fundamental problem of monetary policy, namely control of the monetary aggre- gates, trends in which will be influenced by the decisions of foreign operators. Logically, the development of 3. 8. 4. 5. the inter- national role of the euro should also lead to the accumulation outside the euro area — as has happened with eurodollars — of euro deposits serving as a basis for the granting of loans, the amount of which will be beyond the control of the European Central Bank or any other supervisory authority. 3. 8. 4. 6. The Commission and the European Mone- tary Institute ought to carry out a detailed study of the dangers inherent in weakened control of the monetary aggregates, which would mean loss of control of the euro money supply (2). 4. Transitional Issues — Section B The Commission says that, while the longer-term 4. 1. outlook for an international monetary scene with the euro is favourable, there are however a number of transitional issues associated with the introduction of the single currency. They refer to a potential risk either of exchange-rate instability between the euro and other major currencies, or of a deviation of the value of the euro from what is considered appropriate. This is clearly a real danger in the current international monetary system, unconnected with the transition to the single currency in Europe. However, the external value of the euro will be much less important for the European economies than was the external value of their respective national currencies. This is a major step forward. 4. 2. The document states that instability could arise before 1 January 1999 or during the transitional period for four main reasons: — a perception by economic operators that the Euro- pean Central Bank would in future have to adopt a tight monetary-policy stance; — looser fiscal policy on the part of the Member States; — a dollar overhang at the central banks; — the unpredictability of market transactions resulting from the introduction of the euro into investors’ portfolios. 4. 3. Although the Commission offers reassurances on the first three points, it admits to uncertainty as to the behaviour of investors during the transitional period. 4. 3. 1. In the light of the Commission’s analysis, a scenario could be imagined in which the euro exchange rate is initially fixed at a level quite different from that suggested by the fundamentals of the European economy in all its diversity. (1) The European Parliament warns against the deflationary effects of over-valuation of the euro (see Resolution of 13 January 1998). (2) Mr Duisenberg acknowledged the problem in a meeting with the Section for Economic, Financial and Monetary Questions of the Economic and Social Committee but said that it was up to the monetary authorities of the countries outside the euro area to control any movements of euro deposits. C 157/68 EN Official Journal of the European Communities 25. 5. 98 4. 3. 2. The European Central Bank could in effect be obliged to impose an excessively tight monetary policy and to raise interest rates in response to financial market scepticism as to the objective of price stability arising as a result of the policies pursued by certain countries. During the transitional period therefore all actions must be avoided which might damage the credibility of the European Central Bank. The dollar reserves held by the European central 4. 4. banks, already overweight, could prove excessive if the fixed parities of currencies participating in the euro and a sharp fall in trade and financial transactions in currencies other than the euro, with two thirds of trade being intra-Community, were to reduce the need for foreign currency reserves. at $350 bn (1). Foreign exchange market transaction volumes will diminish as a result of the disappearance of national currencies in the euro area, but the foreign exchanges are, and will continue to be, dominated by dollar transactions. 4. 8. Despite the convergence of the fundamental indicators, the euro area could be temporarily exposed to turbulence on the foreign exchanges. The tensions experienced by the European Monetary System as a result of fluctuations in the value of the dollar will be transferred to the euro. Whilst it is likely that the European Central Bank will be in stronger position to resist such pressures than under the present system of consultation and mutual support between central banks, the dislocating effects of the floating exchange rate regime will not however really be totally eliminated (2). 4. 4. 1. In view of the favourable risk/reward ratio for the euro, reinforced by greater market liquidity, investors will increase their euro holdings. It would be unwise to exclude the possibility of 4. 9. a divergence between the value of the euro and that of the currencies of the Member States remaining outside the euro area. It is unhelpful to conjure up the notion of competitive devaluation to illustrate this risk. 4. 5. The role of the European Central Bank will thus be decisive and the risks inherent in an overvalued euro or a desire on the part of the European Central Bank to impose a strong euro by means of high interest rates cannot be underestimated. 4. 6. Other uncertainties which could give rise to speculation concern the future external value of the single currency against other currencies. This value will be a function of the economic capacity of the participating countries and investors’ confidence in the European Central Bank. Any monetary grouping carries with it uncertainties which on the financial markets will be translated into higher risk premiums. Turbulence caused by massive speculation is a 4. 7. real danger, despite the reassurances of the monetary authorities and the views expressed in certain authorita- tive financial circles. Although conditions now are different from those prevailing at the time of the events of September 1992, the monetary authorities might have great difficulty in containing abnormal pressures on one or more currencies. Although it is dangerous to compare flows and stocks, it should be borne in mind that the volume of daily transactions on the foreign exchanges is estimated at approximately $1 300 bn. This figure varies significantly from day to day however and needs to be scaled down to take account of intra-day transactions. Even a much scaled down figure however still by far exceeds the total foreign currency reserves of the European central banks, which the IMF estimates 4. 10. Although over the last few years the central rates have shown growing convergence and great stability, one scenario which has to be considered is strong market pressure, which the European Central Bank and the associated national central banks would be powerless to control by intervention. The European Monetary Institute acknowledges the existence of this risk, but believes that it would be able to deal with it via interest rates and open market intervention. The resulting threat to the cohesion of the 4. 11. economic and monetary union must not however, be underestimated. It could not withstand a wide disparity in competitive conditions resulting from disordered exchange rate adjustments. The Economic and Social Committee feels that the matter needs further study. The impact of a euro area on the prospects for 4. 12. enlargement of the European Union to the Central and Eastern European Countries also needs to be studied. It is difficult to imagine these countries joining the euro area within the timescale envisaged for enlargement. (1) See annex 1 to Commission document. (2) In its resolution of 13 January 1998 on the Commission document which is the subject of this opinion, the European Parliament stated that during the period immediately following its introduction the euro was likely to experience exchange rate instability. and that this period of instability could last some time, as the disappearance of intra- European exchange rate volatility would probably be counter-balanced by greater euro exchange rate volatility. 25. 5. 98 EN Official Journal of the European Communities C 157/69 4. 12. 1. On the other hand, the benefits in terms of competitiveness which these countries are likely to derive from the weakness of their currencies against the euro need further study. 4. 13. The Committee is acting as spokesman for the views of the social partners and the European Union’s citizens and firms. It is essential that the monetary authorities adopt concrete measures to ensure that the pessimistic scenarios mentioned above are not realized. Clearly, it is not necessary for these measures to be spelt out in detail, as speculators would be quick to take the necessary counter-measures; it would be sufficient for the market to know that measures were in place and that, in the regrettable event that they became necessary, they would be effective. 4. 14. Adopting effective measures which do not restrict the free movement of capital or the freedom to provide (financial) services is certainly a difficult undertaking. Nor would it be possible to impose restrictions on European markets alone, which would place them at a disadvantage vis-à-vis competing, non-European markets. The only concrete measures which could be taken are the continued application in Europe of orthodox monetary and fiscal policies. Speculation is generally triggered only when there are imbalances, inconsistencies and contradictions in the monetary and fiscal policies of certain states. The aim should therefore be to promote specific surveillance and cooperation commitments by the Member States’ supervisory authorities and the international central banks, with a view to applying the necessary measures. 5. 2. The Commission states that ‘Among the long- term considerations, the euro exchange rate will reflect the functioning of EMU. In particular, the challenges of greater competition must be met by appropriate structural policies. Greater labour market flexibility, tax and social security reform in the direction of the most efficient systems will help the European economy to adapt to global challenges. If these reforms were to continue, EMU would contribute to a structural reform which would ultimately have a positive impact on employment’ (1). 5. 2. 1. The Economic and Social Committee would prefer that measures with such important implications were made the subject of detailed further analysis (2). 6. Section D defines Europe’s role as a partner at international level 6. 1. A single exchange rate and monetary policy are direct consequences of economic and monetary union. 6. 2. The question arises of the Community’s represen- tation at international level, for example at the IMF. The conclusions of the December 1997 Luxembourg European Council are rather vague, merely stating that ‘the Commission will be associated with external representation insofar as necessary to enable it to fulfil the role assigned to it by the Treaty’. Clarification is needed in this area. 4. 15. In the light of this the Committee considers the Council’s decision to set irrevocable parities between the participating currencies as early as May 1998 to be a positive step, and notes that at the end of 1997 the parities are not far from the probable conversion rates. 7. Conclusion 4. 15. 1. The announcement of exchange rates will help reduce uncertainty. It will provide market and economic operators with important information regard- ing the economic operation of the union. The announcement will spell out the frame- 4. 15. 2. work for the conduct of monetary and exchange rate policy during the interim period (May to December 1998). 5. Impact of economic policies on the euro exchange rate — Section C The Economic and Social Committee would like 7. 1. to participate fully in the debate on the conditions and effects of introduction of a single currency in the economic union. 7. 2. The comments and scenarios set out in this draft opinion are in no way intended to call into question the Committee’s approval of the principle of monetary union, but rather to contribute to the detailed study of the practical conditions of its realization. In view of the objectives of fiscal consolidation 5. 1. and full employment, it would seem desirable for monetary policy in the euro area to be relatively non-restrictive, without however endangering the objec- tive of price stability. (1) See point 22 of Commission document. (2) See the detailed analyses carried out by Horst Siebert, President of the World Economic Institute, Kiel, and one of the German government’s five ‘wise men’, or that of Heiner Flassbeck, Chief Economist of the Institute for Economic Research (DIW). C 157/70 EN Official Journal of the European Communities 25. 5. 98 7. 3. The evaluation and discussion contained in the Commission staff working paper on the external aspects of economic and monetary union and the Communi- cation on the practical aspects of the introduction of the euro are an essential contribution to the debate on economic and monetary union, without however exhaus- tively exploring a problem which is crucial to the harmonious completion of an experiment without his- torical precedent. 7. 4. There is a disparity between the detailed studies of the technical conditions for the realization of econ- omic and monetary union carried out by the Com- mission, the EMI and professional bodies and the still inadequate analysis of its economic and social repercussions. 7. 5. Paradoxically, the most voluminous studies on the subject are to be found in the reports of international institutions unrelated to the European Union (IMF, United Nations, BIS, OECD etc. ) or in work carried out by national economic research institutions which have still to be summarized. It is therefore essential that the Commission make its views known on the subject. 7. 6. The majority of these reports and studies voice concern as to the effect of monetary union on economic expansion and thus on the improvement of the employ- ment situation in Europe. Brussels, 26 March 1998. 7. 7. The convergence of all economic, monetary and fiscal policies on a more rigorous approach, the weight of the Maastricht criteria and the adoption of a stability and growth pact are aimed at placing Europe on a growth path, but also give rise to concerns. 7. 8. The Economic and Social Committee does not at present feel that it is in a position to judge how far these fears are justified. It would merely like to see the Commission’s analyses addressing these concerns. This approach, far from calling economic and monetary union into question, is intended to allay fears as to the ability of economic and monetary union to adapt to the resumption of growth which is needed to bring down unemployment, and in the longer term for the success of the single currency itself. 7. 9. The Economic and Social Committee hopes to reinforce and enhance its participation in the fundamen- tal debate on the efforts made in connection with EMU by involving internationally renowned economists in its discussions. 7. 10. The Economic and Social Committee is interest- ed and pleased to note that many of the concerns expressed in its opinion are echoed in the European Parliament’s resolution of 13 January 1998 on the Commission’s working paper. The President of the Economic and Social Committee Tom JENKINS