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Helmut Schieber Deutsche Bundesbank

Frankfurt 21 September 1998


The full text is attached of an pertinent speech on 'The International Role of the Euro' which was made by Helmut Schieber, a member of the Directorate of the Deutsche Bundesbank at the 'Euromoney' conference held at Frankfurt on 21 September 1998.

He discussed the role of the Euro as a reserve currency, as an investment currency and as a transaction currency and then reviewed some important considerations affecting a satisfactory introduction of the Euro.

Among the points Herr Schieber made were:

* 'World foreign exchange reserves amounted to around US$ 1.614 billion at the end of March 1998 - the share of the US dollar roughly 61%, the D-Mark roughly 13% [and] European currencies (including balances in private ECU, but excluding Swiss franc) together a share of some 20%.

However, a substantial proportion of the reserve assets denominated in D-Mark is held by European central banks which will become part of the ESCB upon entry into Stage Three of EMU. All assets that are denominated in national currencies of the future euro area countries will be converted into euro assets and will lose their character as currency reserves for central banks inside the euro area.

Therefore, the share of euro-dominated international currency reserves could initially be lower than the present market share of all EMU currencies put together. The share of US dollar-denominated international currency reserves might thus rise to some 75%.'

* 'As an investment currency, the US dollar outweighs any other currency. The share of the US dollar in the international market for bonds and notes amounts to 40%, while the D-Mark accounts for 10%. But the currencies of all EU member countries, taken together, make up one-third of this market.

Different national regulations will continue to hamper the complete integration of financial markets in Europe and that the low stock market capitalisation of European firms is likely to guarantee the predominance of the US stock market - at least over the medium term.

Furthermore, the full realisation of the euro's potential as an investment currency crucially hinges on the participation of Great Britain in EMU which, unfortunately, is still not certain.'

* 'The euro's role as a transaction currency in foreign trade and in foreign exchange markets. According to estimates, roughly 50% of global exports are settled in US dollars, some 15% in D-Mark and around 6% each in French francs and pound sterling. Since a relatively large share of what is now foreign trade will become internal trade under EMU, the euro's role as an international invoicing currency will be relatively limited - at least immediately following the introduction of the new currency. The importance of the D-Mark, however, hinges crucially on its role as a vehicle currency (a connecting link for bilateral transactions). Since foreign reserve transactions between euro countries will cease to exist, the importance of the euro as a vehicle currency is likely to be much smaller than the current role of the respective national currencies put together.'

* 'The main risk to the stability of the euro is that, whereas the responsibility for monetary policy will be transferred to a supranational institution, the responsibilities for the areas of fiscal, economic and structural policy as well as wage and social policies will remain at the national level.'

* 'Most EMU countries are still a long way from the medium-term objective of a balanced budget. Some countries were able to fulfil the Maastricht criterion of a deficit not exceeding 3% of GDP only by resorting to substantial one-off measures. Even more important, the excessive stock of public debt harbours the potential of conflicts with monetary policy.'

* 'In order to prevent these potential conflicts from arising, it will be necessary to implement the Stability and Growth Pact in a determined manner. The role of the euro as an investment currency and, as a consequence, its international importance will hinge decisively on compliance with the requirements of this pact. I am concerned about the fact that some of the future EMU countries seem to be allowing their deficit ratios to deteriorate even further - at least in structural terms - to say they do not use the 'stability dividend' to bring down their public debt but to buffer painful adjustment.'

* 'Another threat to internal stability in the euro area is the high level of unemployment in Europe - and not just because it could undermine the social consensus in EMU member states. There have been repeated suggestions that a weak euro could solve Europe's serious employment problems.

These suggestions are extremely dangerous, as they ignore the root causes of our unemployment problem and could potentially jeopardise acceptance of the euro. The high level of unemployment in Europe is largely structural and can only be overcome through more flexibility in labour markets.

* 'The flexibility of the labour markets and the problems of public finance including the social security systems will be the Achilles' heel of EMU'

* 'Economic size does not guarantee the international success of a currency. The success of the euro as an international currency will depend first and foremost on two factors: the determination of efforts to eliminate the market distortions prevailing in Europe, and the willingness of European governments to subordinate fiscal policies to the goal of macro-economic stability in the euro area as a whole.'

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For the text of the speech of Helmut Schieber, please see Speech

Last update: 24 March 1999

© Copyright Anthony Cowgill and Andrew Cowgill, 1999

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