Remarks by Michael H. Moskow
President and CEO
Federal Reserve Bank of Chicago
"Five Years of the Euro: Successes and New Challenges" Conference
Federal Reserve Bank of Chicago
Good morning. I am Michael Moskow, president and CEO of the Federal Reserve Bank of Chicago, and I'd like to personally welcome each of you to the Chicago Fed.
We are honored to host this important event to discuss the euro and the future of the EMU (European Economic and Monetary Union). As you look around, you see that this conference has brought together academics, policymakers, journalists, and key business and financial leaders from both the U.S. and Europe.
This event would not have been possible without the support of the European Commission or the sponsorship of The George J. Stigler Center for the Study of the Economy and the State at the University of Chicago. So, I'd like to thank Randy and his colleagues at the Stigler Center and also thank the European Commission's Delegation in Washington.
One of the core principles that most economists believe in is this: open markets, expanded trade and increased cross-border investment help raise people's living standards. This principle has, so far, survived several centuries of active, lively debate, and it has provided a clear sense of direction for international trade policy. For decades now, economic borders have been fading away and the world's nations have grown more interconnected. Countries have joined regional free trade zones. They have dropped barriers to foreign direct investment and reduced tariffs and non-tariff barriers. And many countries have privatized government-owned institutions like banks, airlines, and telephone companies, and left the firms' fortunes to be decided in the global market place.
In the context of this increasing globalization, the introduction of the euro seemed like a natural next step to further open the European economies and ease trade between them. Yet, in many ways, the event was nothing short of remarkable. A group of nations— with disparate cultures and economies— willingly abandoned their national currencies, and independent control of their monetary policy, in favor of a single unit of exchange and easier trade. The scale of the affected area was huge. When put together, the member nations formed a population almost equal to that of the U.S., and an economy with output and world trade slightly greater than the U.S. The expected benefit from such a decision must have been significant for countries to make the political decision to forgo that independence. Part of our discussion today will evaluate whether those benefits have been realized, and whether additional potential gains lie ahead.
As an idea, the euro predated the recent, rapid advances in globalization. The euro can trace its roots back to the Treaty of Rome, signed in 1957, in which the signors sought "an ever closer union among the peoples of Europe." But the euro only started to become a growing reality in the early 1990s. In 1992, the Maastricht Treaty outlined the economic criteria for countries to join the EMU. Seven years later, on January 1, 1999, the national legacy currencies were irrevocably fixed against the euro and the euro was born as a legal unit of account. And then three years after that, the euro became a tangible reality, as circulation of euro bank notes and coins began, and national bank notes and coins were withdrawn.
Such a large and ambitious monetary change raised a whole host of issues for economists to debate. Among the more prominent issues centered around the macroeconomic benefits of large currency areas. Some economists argued that large currency areas offer their members economies of scale, cushion against shocks, and the potential for better monetary policy. Others argued that the members might not be harmonized well enough to benefit from unified monetary policy, and that language and cultural barriers would contribute to problematic labor market inflexibility.
The advent of the euro was also accompanied by vigorous debate about how effectively the new currency could unite the European economies. Many commentators, for example, argued socio-political factors—such as entirely separate legal and regulatory regimes and separate fiscal policies—could hamper the euro's prospects. Others noted that Europe was becoming more like the U.S. in matters such as market deregulation, closer coordination and integration of markets, and reductions in cross-border impediments to linkages across the national borders of EMU members.
Five years after the euro's birth, many of these debates remain unresolved. However, we have learned enough during this time to know what are the important questions to ask and to evaluate the challenges that have yet to be addressed.
Today's event will examine the challenges of the unified European currency in three panel discussions, each with a different context.
The first panel will consider the macroeconomic and exchange rate challenges, from the political, business, and economic perspectives. This panel will address questions such as: How have exchange rate dynamics changed since the introduction of the euro? How has the introduction of the euro changed business practices in Europe? And, have the expected macroeconomic benefits been realized?
The second panel will discuss the integration and regulation of Europe's banking and financial markets. The questions that this panel will address include: How have financial market and banking integration progressed in Europe? What factors explain the progress toward integration? What impediments have prevented further integration? And will those impediments continue to be important factors in the future?
Our final panel will discuss derivatives exchange and clearing issues. Derivative products offer users the ability to shift and manage risk in an efficient manner. Some might argue that the integrated currency area offers a lower cost means of choosing between dollar or euro denominated contracts, and therefore should affect competition in these markets. Have we seen evidence of that increased competition? Have there been new products developed as a result of increased competition? Have there been changes in market liquidity or volume that can be attributed to the euro? And, perhaps more importantly, has there been any impact on the ultimate users of these products? For example, have there been any efficiencies generated that resulted in price reductions for the services provided?
You can see from our agenda that we've assembled well-respected panelists to address these issues. In addition to the panels, we will hear from two eminent keynote speakers—Michael Mussa and Otmar Issing. I am looking forward to their remarks, as well as a lively discussion of these important issues.
*The views presented here are my own, and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.