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Europe’s Monetary Union in practice

José Manuel González-Páramo

Member of the Executive Board and Governing Council of the European Central

Bank

14th Osaka City University (OCU) International Academic Symposium

Osaka, 27 October 2006

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Introduction

• “EMU will contribute to the creation of a large zone of monetary stability in Europe. The euro, in particular, will be a strong and stable currency that will foster further economic and financial integration among member countries” (Duisenberg, 1997)

• Has EMU fulfilled these expectations?

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Outline

• Assessing price stability

• Assessing financial integration

• Conclusions

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Assessing price stability. Establishing credibility. The ECB’s approach

• Full independence

• Specific quantitative definition

• Medium-term horizon

• Two pillars: economic and monetary analyses

• Communication: - Publication of monetary policy strategy- Press conference- Monthly Bulletin

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Assessing price stability. Inflation expectationsInflation expectations(annual percentages)

Sources: Eurostat, Consensus Economics and ECB.

1.0

1.5

2.0

2.5

3.0

1999 2000 2001 2002 2003 2004 2005 2006

1.0

1.5

2.0

2.5

3.0

ten-year break-even inflation rate (monthly average)

upper bound of definition of price stability (below 2%)

inflation expectations 5 to 10 years ahead (Consensus Economics Forecasts)

HICP inflation expectations (SPF) for the five-year period ahead

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Assessing price stability. Predictability

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Assessing financial integration: Its benefits

• Enhances the smooth and effective transmission of monetary policy

• Contributes to safeguarding financial stability

• Contributes to smooth operation of payment systems

• Fosters financial development

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Assessing financial integration. The role of the Eurosystem

• Enhance knowledge and raise awareness

– Regular publication of quantitative indicators of financial integration in the euro area

• Act as a catalyst for private sector activities

– STEP initiative, SEPA, European Master Agreement for financial transactions

• Provide central banking services

– TARGET, Single list of collateral, CCBM

• Give advice on the legislative and regulatory framework

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Assessing financial integration. The current status (I)

• Money market:

10

Assessing financial integration. The current status (II).

• Government bond market:

11

Assessing financial integration. The current status (III).

• Corporate bond market:

12

Assessing financial integration. The current status (IV).

• Equity market:

13

Assessing financial integration. The current status (V).

• Banking markets:

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Conclusions

• Has EMU been effective in promoting economic stability?

– Yes, the response has allowed the anchoring of inflation expectations and a high degree of predictability

– But other economic policies are needed: sound public finances and structural reforms

• Has EMU been effective in fostering financial integration?

– Yes, money market is a good example

– But financial integration is still lagging behind in some areas (retail, clearing and settlement infrastructure…)