The text is attached of a speech on 'The Euro - Four Weeks After the
Start' given by Professor Otmar Issing, a member of the Executive Board
of the European Central Bank, to the European-Atlantic Group at the
House of Commons on 28 January 1999.
Among the points Professor Issing made were:
* 'With all the attention and apprehension surrounding the
introduction of the euro on 1 January, it is easy to forget that this
was just one, albeit very important, step on the long road of European
* In order to understand European Economic and Monetary Union, which
has now become a reality, and in order to gauge its prospects, promises
and risks, it is necessary to take a longer-term view and to look back
* The most fundamental precondition for European Economic and
Monetary Union, however, was that monetary policy must be unambiguously
focused on the objective of price stability and that this is best
entrusted to a central bank that is independent from political
* The Maastricht Treaty has assigned the ECB the single, overriding,
primary goal of price stability as the basis for accountability.
* This brings me to the possible risks inside Monetary Union. The
ECB will do its job, but can we be equally confident that everybody
will do theirs?
* Europe suffers intolerably high rates of unemployment. For the
most part, this unemployment is structural in nature and needs to be
addressed urgently through labour market reforms and increased
flexibility in the wage-setting process.
* Precisely because monetary policy can no longer respond to national
conditions, the exact opposite of greater centralisation and
harmonisation may be required in other areas.
Talk of uniform European wage-setting or an ambitious social union is
going in the wrong direction; different productivity and real economic
conditions across the euro area must be taken into account more than
ever. Following similar reasoning, there is a strong case for retaining
and even strengthening national (and in some cases "sub-national")
responsibilities for fiscal policies.
* Historically, currency jurisdictions and national borders have
tended to coincide. This reflects the simple fact that the right to
issue money has always been a key attribute of national sovereignty and
therefore monetary union would not appear to be just a small and
innocuous step of a primarily technical nature.
* One is indeed hard pressed to find any precedent in history, where
sovereign nation states voluntarily ceded sovereignty in the monetary
field to a genuinely supranational body. It is therefore clear that
European Economic and Monetary Union has been and will continue to be
not just an economic, but also a political project.
* The birth of the euro four weeks ago, on 1 January 1999, is
certainly not the end of history, nor is it the sudden dawn of an
entirely new age. It is, however, an important milestone on the road
In answering questions Professor Issing underlined that, contrary to
the proposals of the European Commission and of the French and German
Finance Ministers for 'greater tax co-ordination' and for 'harmful tax
competition to be removed', his own belief was that while economic
conditions across the euro area differed undue harmonisation should be
He emphasised that harmonisation would tend to raise taxes whereas
competition would tend to lower them.
The birth of the euro on 1 January 1999 was an event of historic
proportions. After months and years of practical preparations and
testing, the new currency was delivered smoothly, if not entirely
painlessly. The irrevocable euro conversion rates for the
currencies had been adopted by the EU Council in the early afternoon of
31 December 1998. This was the starting shot for the "changeover
weekend". During this time, billions of electronic records had to be
converted from national currencies to the euro and final tests for the
new payments and securities settlement infrastructure were conducted.
Several thousand staff members were at work or on call within the
Euro-system, which comprises the European Central Bank and the national
central banks of the euro area. Tens of thousands more - not least in
the City of London - laboured intensively in financial institutions
across the globe.
When the markets opened on the morning of 4 January 1999, the baptism
of the new currency followed swiftly. In fact, trading in euro had
already started in the Sydney market at 6 p.m. (Central European Time)
on 3 January. A total of 944 banks participated in the first main
refinancing operation of the Euro-system at a fixed interest rate of
which was successfully completed on 5 January and settled on 7 January.
In order to assist the adaptation of financial institutions to the new
environment of the euro area money market, a relatively narrow corridor
for the ECB's standing facilities was set, as a transitional measure,
for the period between 4 January and 21 January.
The launch of the euro occurred in an environment of price stability
that few observers would have imagined only a few years back. The
year-on-year increase in the Harmonised Index of Consumer Prices stood
at just below 1% (the last available figure for November 1998), which
consistent with our definition of price stability. Long-term interest
rates have hit record lows, which points to a high level of confidence
in the ability of the Euro-system to maintain price stability in the
future. At the same time - according to current data - real activity
the euro area has, overall, held up reasonably well in the face of
considerable turbulence in the global economy.
The euro, which represents an economic area of 290 million people -
in terms of the share of world GDP second only to the United States -
will, from the very beginning, play an important international role.
The health of the new-born currency will be under constant observation
and critical scrutiny, both by global financial markets and by the
public at large. Let me assure you that the euro's immediate parents
and guardians will do their utmost to see to it that the new currency
will prosper and flourish and will not stray from the path of
With all the attention and apprehension surrounding the introduction
of the euro on 1 January, it is easy to forget that this was just one,
albeit very important, step on the long road of European integration.
The first four weeks since the launch of the euro have made for a
promising start, but this is evidently a far too short time span to
assess its prospects for the future. In order to understand European
Economic and Monetary Union, which has now become a reality, and in
order to gauge its prospects, promises and risks, it is necessary to
take a longer-term view and to look back in history. This perspective
comes naturally in premises as illustrious as those in which we find
ourselves this evening. Only future generations will be able to judge
whether the newly born European Central Bank can pass the test of time
even remotely as convincingly as the institutions of British democracy
have done over the centuries.
2. A look back in history
The long process of European integration started in the immediate
aftermath of World War II. It has been characterised by a combination
of grand political vision and a succession of small pragmatic steps to
reap the concrete benefits of bringing the economies and the people in
Europe closer together. The balance between vision and realism has not
always remained constant and progress has not always been steady.
British leaders over the decades have made substantial contributions to
the process of European integration, frequently injecting healthy
of realism, but also, at various times, providing new ideas and
leadership for Europe.
Indeed, it was none other than Sir Winston Churchill who first
expressed the vision of a "United States of Europe" in his famous
in Z|rich on 19 September 1946. As you know, however, he did not
envisage that the United Kingdom, whose place would remain in the
Commonwealth, would take part.
As you will be equally aware, the process of integration unfolding on
the continent later proved to develop a seemingly irresistible force
attraction for many countries not involved initially. This appears to
confirm a general principle already noted by Aristotle. In his Politics
(Book V, Chapter 6) he writes, if you allow me to quote, "and
constitutions of all forms are broken up sometimes from movements
initiating from within themselves, but sometimes from outside, when
there is an opposite form of constitution either nearby or a long way
off yet possessed of power." [Aristotle's Politics, Book V, Chapter 6,
translated by H. Rackam MA (Heinemann, 1932).]
To avoid any misunderstandings: The mechanism described by Aristotle
in general terms need not work only in one direction. Indeed, in the
case of Europe, integration has been a process of mutual adaptation and
reciprocal influences. The continuous process of integration has,
moreover, been compatible to date with a considerable degree of
variation in constitutional arrangements. It is not clear to me why
this should not continue to be possible in the future, as long as
sufficient common ground is guaranteed.
At the time of Churchill's speech, most of Europe still lay in ruins.
Memories of the ferocious wars and destruction that have savaged our
continent this century provided powerful political inspiration for
closer European integration. This was particularly true for the
immediate post-war years, but it appears to hold to this day. The long
shadow of the past has, in fact, also been prominent on both sides of
the debate over European Economic and Monetary Union. No doubt most of
you will recall the arguments raised in some quarters about monetary
union as a "question of war and peace", on which opinions differ. The
existence of such debates supports the view that monetary union cannot
be understood in isolation. It must be seen in the context of the
economic and political process of European integration.
Having learned their lesson from history, Europeans - starting with
the formation of the European Coal and Steel Community in 1952 - turned
early to the creation of common, supranational institutions as an
of integration. This was regarded as the best way to overcome national
divisions in a lasting manner and to ensure that integration would be
robust in the face of crises. Thus, from the inception of the ECSC to
the present day, Europe has embraced a unique mixture of supranational
characteristics and insistence on national sovereignty, which is
quite adequately captured by the term "European Community".
Rather than pursuing grandiose political designs, European leaders
quickly focused on concrete economic issues, especially after the
agreement on a European Defence Community had to be abandoned when it
was not ratified in the French National Assembly in 1954. The ideal of
European integration as an "ever closer union" was nevertheless
enshrined in the preamble to the Treaty of Rome in 1957, which created
the European Economic Community (and also Euratom), with the objective
of creating a customs union and a common market among Member States.
After this had largely been achieved in the late 1960s, the first
attempt at monetary union was launched, culminating in the "Werner
Report" of 1970, which envisaged that monetary union would be in place
by 1980. This first attempt at monetary union in Europe came to
in the face of the world wide currency turmoil of the 1970s.
As we now know, the next attempt met with success. It started with
the foundation of the European Monetary System in 1979. The Single
European Act and the single market programme then prompted increasing
calls for further monetary integration in the late 1980s following the
logic of "one market - one money". To a non-negligible number of
observers, at the time, this logic appeared anything but compelling and
a single currency anything but inevitable. Strong commitment on the
part of leading European politicians brought this process, once set in
place, finally to a successful conclusion. With the benefit of
hindsight, the exchange rate crises of 1992-93, which for a moment had
seemed set to derail the whole project, actually served to contribute
its success. In the aftermath of this experience, efforts to achieve
greater economic convergence intensified and, in the end, allowed a
timely launch of the single currency.
The most fundamental precondition for European Economic and Monetary
Union, however, was a broad consensus that monetary policy must be
unambiguously focused on the objective of price stability and that this
is best entrusted to a central bank that is independent from political
3. Price stability and central bank independence
Central bank independence and an unequivocal commitment to price
stability are the common tenets of both the monetary policy framework
enshrined in the Maastricht Treaty and that currently in place in the
United Kingdom. It is now widely accepted - in this country and around
the world - that price stability is a common good that is best
safeguarded by independent central banks, which are not subject to the
usual short-term pressures that characterise the political process.
Chancellor of the Exchequer, Gordon Brown, expressed this very
eloquently in his statement on 6 May 1997 when he announced that the
Bank of England was to be granted independence. "A fully credible
framework for monetary policy can only be built", he said, "if the
long-term needs of the economy, not short-term political
guide monetary decision-making. We must remove the suspicion that
short-term political considerations are influencing the setting of
interest rates". In the words of the Chancellor, "price stabil
ity is an essential precondition for the Government's objectives of high
and sustainable levels of growth and employment".
These two fundamental lessons reflect the experience in Britain and
elsewhere over recent decades. In the case of Britain, like in many
other countries, there had been growing disillusionment with the
perpetuation of stop-and-go policies. A great number of British
Chancellors have been associated with short-lived booms that later
turned out to be unsustainable. As a consequence, Britain has now
a long way towards the philosophy and institutional set-up underlying
the Maastricht Treaty. In particular, it is now accepted that the
appropriate objective for monetary policy is to maintain price
over the medium term, rather than to attempt short-run macroeconomic
Both theoretical considerations and the empirical evidence
accumulated over the years suggest that high rates of inflation are, on
average, detrimental to growth and employment in the longer run. At
very least, nobody seems to be arguing that inflation is good for
at any level. An environment of stable prices is a principal
precondition for the efficient functioning of a free market economy and
sustainable increases in both the standard of living and productive
employment. The proposition that monetary policy should have price
stability as its primary objective is not only enshrined in the
Maastricht Treaty, but has become increasingly consensual across the
industrial world and beyond.
A substantial body of research also confirms that independent central
banks tend to be more successful in the pursuit of price stability
dependent central banks, without any identifiable costs in terms of
output growth or volatility. In the words of Nobel laureate Robert
Lucas, "long-run price stability is one of the few legitimate 'free
lunches' economics has discovered in 200 years of trying. It (...) can
be had for the asking." The principle of central bank independence is
firmly entrenched in the Statute of the European System of Central
and of the European Central Bank. It is an important precondition for
the successful pursuit of price stability in the euro area, but the
of the ECB will no doubt be greatly facilitated if other policy areas
follow a stability-oriented course as well.
The Maastricht Treaty provides for a clear division of
responsibilities among policy-makers in Europe. In this context, the
ECB has been created as an independent supranational institution and
given the unambiguous primary objective of maintaining price stability.
This set-up reflects the well-founded view that, in this way, the ECB
can best contribute to the shared broader objectives of the Community,
including growth, employment and social cohesion.
* * *
For the remainder of the speech please see Part 2 and Part