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European Banking & Financial Forum 2001 - Yves Mersch
Prague, le 26th March 2001
Seule la parole prononcée fait foi.
Good morning
Ladies and gentlemen,
I should first like to thank the organizers for giving me a second chance to speak to the distinguished audience of the "European Banking & Financial Forum". Maybe I was not convincing enough during last year's session about the role of Central Banks in Europe, focusing on the institutional aspects. Today, as you kindly request Central Banker's perspectives for the year 2001, let me steer towards a straightforward subject, namely the upcoming advent of the euro in its ultimate form: notes and coins and possible consequences for countries outside the euro area.
Indeed if you look at annual reports of NCB's in the euro area that are about to be published in the coming days and weeks they all consider this to be the biggest task for this year.
Let me open a bracket
The increase of uncertainties in the international environment and the seizures of financial markets have led to a swell of speculative comments. Before turning to my subject, let me therefore recall that the ECB
- has a strategy
- has published its strategy
- explains its actions in reference to the published strategy.
This strategy is
a. forward looking
b. aimed at stable prices.
In other words behaviour is
- not activist
- not aimed to fine tuning the economy
- not designed to bring about results which we consider beyond the realm of monetary policy making
Bracket closed
The time is now EUR - 280. Not –280° Fahrenheit as some say in the UK, but 280 days before the exchange of currencies. One year from now legacy currencies will be confined to museums. Printing and minting is on track. Testing and training has started.
Saying that the euro will be the currency of 300 millions Europeans in the near future is factually right. Nonetheless, one should keep in mind that by law or by fact a currency is not confined to its own territory. The Eurosystem's single currency is the second most widely used currency in the world, after the US dollar. The internationalization of the euro is not a policy objective by the Eurosystem but as the consequence of a market driven process, the euro might well play a more prominent role in the future, essentially as an investment and financing currency as well as a payment and vehicle currency. Besides the international use of the scriptural euro, one should not omit the consequences involved in that context by the international fiduciary use of the euro. What lesson could we draw from similar experience of another international currency? In that respect, the Federal Reserve's "Extended Custodial Inventory (ECI)" program, whose inception as a pilot program goes back to 1996, could be an interesting input. The system consists of cash depots held by private sector banks abroad in segregated vaults. The rationale for choosing this system basically was twofold: facilitating and promoting the introduction of new-design currency as well as accelerating the repatriation of old-design currency. The initial goal pertaining to the smooth introduction of new-design dollar currency has finally shifted to the objective of enhancing the international distribution of the currency. For the euro, the forthcoming cash-changeover generates a similar situation. First, the whole process will necessitate the repatriation of former euro area countries' currencies being now in circulation abroad. The repatriation need is equal to the old-design dollar notes. Second, those currencies will have to be replaced by the new single currency.
Let me dwell on the advantages the FED experiences with this system. First, it fosters a smooth international distribution of the dollar as well as the repatriation of old-design notes, complementary to a pure market-driven process. Second, it provides the FED with additional information, not only on the use of the dollar as such but also on the counterfeiting activities. Indeed, the private banks holding the notes on a custodial basis also have the mission to collect this crucial information, allowing thus to give supplementary input to the authorities directly involved in the combat of counterfeiting. Third, the stockpiling of notes abroad contributes to mitigate the fear of inventory shortages, consequently consolidating the confidence in the currency itself. Fourth, the program allows to reduce the shipment costs by giving the custodial banks the opportunity to make large value shipment instead of acting on a transaction-by-transaction approach in function of the ad hoc demands emanating from its customers. This cost efficiency definitely presents an important aspect, having positive repercussions on two levels:
- the banks are contractually held to pass along the gains to their customers, inducing a cost reduction related to the detention of the dollar;
- concomitantly, this involves lower commissions for the dollar on the exchange markets.
The inception of such a system may however have a drawback. As a matter of fact, a potential growth in the use of an international currency as a parallel currency in the countries not being the issuer may well generate a reduction in the seignorage of local Central Banks. However, this effect would be only partial, as the international currency is used as a parallel currency. For the issuing Central Bank of the international currency, the reasoning has of course to be reversed. One could nonetheless also add that an ECI program reduces the traditional role of Central Banks in the cash cycle.
The introduction of a similar program might be an option among others for the Eurosystem. However, some further reflection has to be done in order to see if it could be easily transposable to a monetary zone presenting different characteristics.
Let me dwell on a final point, which pertains to the option of euroisation. This strategy, which doesn't present any precedent, deserves a precautionary approach. Its adoption could lead to non-negligible costs. First, given the Treaty mandate, the ECB could not support the accession countries applying this strategy. Thus, in case of a liquidity crisis, the country could not rely on a lender-of-last-resort facility, the issuing authority being different from the domestic Central Bank. Second, from an institutional point of view, the euroisation would be contrary to the underlying philosophy of EMU considering that the adoption of the euro is a final stage occurring after a nominal and real convergence process and not the other way around.
As you see, a euro zone Central Banker's mind in 2001 will predominantly be seized with the will of perfection related to the preparatory work pertaining to this complex and passionate process which is the cash-changeover. This resource intensive project, which will start on 1 January 2002, will indubitably be focused on the euro zone countries but will in no way circumvent the crucial reflections concerning the international use of the euro, not only in its scriptural but also in its fiduciary form.
Thank you very much for your kind attention.
