Examination of Witnesses(Questions 97
THURSDAY 15 JUNE 2000
97. Commissioner, thank you very much for coming.
We are most grateful. I understand you only have an hour. That
microphone does not work, it is for the television, I am afraid.
(Commissioner Solbes) Okay. Thank you.
98. What is your assessment of the first fifteen
months of the Economic and Monetary Union and the euro? Could
you give us a progress report?
(Commissioner Solbes) Of course. The problem is how
much time do we have. In general terms we could say that the euro
was introduced smoothly. We have been able to introduce the Monetary
Policy in all the Member States without special problems. We have
thought it would have some difficulty, but it has not been like
that. In terms of international utilisation of the euro, if we
analyse the figures, the issues of bonds, both government and
corporate bonds, the euro has increased in a remarkable way. I
have to say something more. I could say that what has been really
remarkable is the evolution of the European Monetary Union during
this period of time.
99. Sorry, Commissioner, the acoustics are terrible,
if you could speak up slightly.
(Commissioner Solbes) I was saying, the economic context
is also closely connected with the euro. In terms of the rate
of inflation the role of the European Central Bank has been crucial
in this context. The reduction of public deficits in 1999, the
average public deficit is about 1.2 per cent, and in 2000 the
figures are still difficult to calculate, but it will be clearly
below 1 per cent. In accordance with the present forecast, in
2001 we will have a situation of a close to balance position as
an average. In general terms, the position of growth, as you know,
is very positive in the European area, 3.4 per cent in the year
2000 and more than 3 per cent in the year 2001. The unemployment
is diminishing rapidly. I think most of these elements would not
be like that without the euro. Of course, I know that there is
a point of controversy, which is the evolution of the rate of
exchange of euro. I know that in the press it is part of a permanent
debate. I have to make a comment on this element, which is relevant
in economic terms because the depreciation of the euro would create
or could increase the evolution of inflation. This is a subject
of preoccupation for all of us. Secondly, nevertheless, we think
that the important point, from the point of view of the stability
of the currency, is the evolution of inflation. We are highly
satisfied with the evolution of inflation in this period. We think
that the policy implemented by the European Central Bank will
guarantee that inflation will continue under control in the future.
Under these conditions we consider that the future of the euro
has to be positive, and that is the reason why the Euro-11 has
always insisted that the current level of the euro does not reflect
the strong economic fundamentals of the euro area. The situation
of the rate of exchange of the euro has to be kept under review
but we are convinced that the euro will improve in the next month.
This would be my first comment, Chairman.
Chairman: We would like to ask you some
questions, if we may.
100. Commissioner Solbes Mira, in January this
year in a speech you made to the International Banks Forum in
Berlin you said, "With hindsight it is not surprising that
the euro experienced an orderly depreciation". Why do you
think that the euro did not live up to the initial expectation
that it would quickly become a strong global currency?
(Commissioner Solbes) You know, there are some explanations
to what has happened. The first explanation is probably the point
of departure of the former ecu was too high. If you analyse the
evolution of the rate of exchange during the period before the
international devaluation, the position of the different currencies
which formed part of the ecu was very positive. The second important
element was probably certain miscalculations. They were not miscalculations,
they were expectations. The expectations which existed at the
end of the year 1999 were not fulfilled. If you remember, during
this period it was not only the position of the Union it was also
the position of other financial organisations and institutions
that the evolution in the European Union would be more favourable
and in the United States not so favourable than finally happened.
It could be explained in a different way. The incidents of the
crisis of 1998-99 could have affected the United States much more.
The reality was different and the situation in the States was
better. Third, the important element, if you want, is the different
evolution of the rate of interest which attracted capital to the
States. All these elements are giving a, sort of, explanation.
Probably they do not provide the complete explanation but they
could help us to understand what has happened, that is the idea
and why we are speaking about this as a kind of orderly position.
Nevertheless, we would consider that the volatility of a currency
is something that happens very often. If you analyse any currency
over a long period of time you will see a certain volatility of
this currency. The important point is the long-term position of
this currency. The Deutschmark, to give an example, was rather
volatile as compared with the United States dollar during a period,
nevertheless we are not speaking about a weak currency, we are
speaking about a currency with a different position in the economic
cycle. Something of this type is happening ultimately.
Sir Teddy Taylor
101. Two brief questions, why do you think investors
have taken so much capital out of Euroland? We have seen some
alarming figures about the amount of cash coming out of Euroland
and we wonder why. Secondly, as previous single currencies have
got into deep trouble, including two in Europe, the Scandinavian
and the Latin one, because of differences within in the area,
one area going well and the other area going badly, does it worry
you that the inflation figures we saw, I think, yesterday that
says that the Republic of Ireland is over 5 per cent, I think
it was 5.2 per cent, compared with an average of round about 1.5
per cent or two per cent. Does this worry you, that the divergence
seems to become greater between parts of Euroland?
(Commissioner Solbes) As concerns the first question,
we could give two explanations, one of them, is the more simple,
the normally used explanation, the rate of interest is higher
in the States.
102. I see, yes.
(Commissioner Solbes) That can be a good explanation.
Another explanation, probably it is very important, private savings
are diminishing in the States. There is big demand for foreign
capital in the States. We could add other kinds of explanations,
why some enterprises think that the investment in the States at
the present moment of the economy would be more interesting than
investing in other areas. There are other points of interest.
The second point I think is the most relevant one.
(Commissioner Solbes) American enterprises need more
money and they ask for money. The second question concerns the
difference of inflation and the divergences in the context of
the European Monetary Union. The introduction of a single currency
and a single monetary policy implies that decisions are taken
on the basis of figures for the whole area. Of course, average
figures will be calculated taking into account the importance
of the different areas. It implies that the countries that will
be in a divergent position from the point of view of the cycle
will not be so well adapted to the decisions which are taken at
any one moment. In this sense, already, in the Monetary Union
some countries are more advanced than other countries. If, instead
of having a Unified Monetary Policy, you have a National Monetary
Policy, the exact rate of interest would have been different.
That is the consequence of putting together the Monetary Policy.
It is true that you have a different cycle, among other reasons,
because you are not part of the same monetary area. If you are
a member of the same monetary area then part of the differences
are reduced. Another important point is that when you analyse
the situation of the countries with the higher level of inflation
it is rather clear that these countries are countries with a lower
standard of living, in some cases, and with a higher rate of growth
and there is a kind of process of catching-up. That is rather
clear in Spain. It is clear, up to a certain point, in Ireland
and, more or less, it is also clear in Finland. It is so that
there is a kind of acceleration of the process in some countries
from the point of view of growth and this is more accelerated
than in others. I consider that these questions have to be analysed.
I think that the current differences within the euro area are
not so significant.
104. The depreciation of the euro has created
potential strengths and potential weaknesses for the European
economy: what would you say those strengths and weaknesses are?
(Commissioner Solbes) If you want only the strengths,
you are very happy because you can export more. I am not so happy
with this solution. I think that this is not a good solution.
I am more worried about the weaknesses than the strengths. We
have two difficult points. One of them is the evolution of inflation.
I think it is a risk in the long-term. The second important point
is that we want strong money. We consider that the euro has to
be a strong currency and that the psychological effect of weakening
is not positive. If our analysis is correct the evolution of the
situation in Euroland in economic terms ought to leave more room
for appreciation. I hope that we consider this situation of the
weakening of the euro as a kind of period of volatility of the
euro which is, of course, not permanent.
105. You do not believe that the deprecation
of the euro has created substantial export opportunities for the
(Commissioner Solbes) No. If you remember, who are
the countries which have the balance of strength of the euro area?
The most important trade is carried out between ourselves. What
we are depending from abroad is mainly energy and raw materials.
Most of them are paid in dollars, so we have to pay more for these
raw materials and for energy with a weak euro. If you remember,
in the past when the position in Germany was discussed, it was
said that the Deutschemark can be up and at the same time they
are able to be competitive because they were able to reduce the
cost of products as a consequence of a reduced price of the imports
and as a consequence of the appreciation of the Deutschemark.
Sir Teddy Taylor
106. We saw recently you made a speech at the
European Bank for Reconstruction, where you said, you were thinking
that the euro could expand to east Europe in 2003. What I am wondering
is, what would be the implications for the value of euro of extending
the euro in this way to east Europe? Secondly, would it not involve
a great deal of expenditure for these countries? We have tried
to find out, by approaching the European Central Bank and lots
of individual banks to say, "What is the cost of change over?"
We do not really have any direct information about this. Do you
not really think that it will be a major problem to bring in countries
from east Europe when they have such differences in the structure
of their economies?
(Commissioner Solbes) Firstly, I will clarify some
of your information, because I think it is not completely correct.
Our position as the Commission is first that the applicant countries
could become members of the European Union, not of the European
Monetary Union, on 1st January, 2003. To be more specific, we
will be able to receive them from 1st January, 2003. What it means
is that we could sign an agreement from this moment on. The agreement
must be, of course, ratified. The normal entry day would be 1st
January 2004 if they are ready to accept the commitments of being
members of the Union. It could even be before, but it is not normally
easy to start implementing agreements before the start of the
year. Second, I have always said that we have to distinguish between
being members of the European Union and members of the Monetary
Union. Being members of the Monetary Union means that the new
applicant countries have to fulfil the criteria established in
Maastricht. One of the criteria is that we have to make an evaluation
of the situation of the different countries no earlier than two
years after they have joined the European Union. Why? Because
it is absolutely necessary to evaluate the evolution of the rates
of exchange of the different countries. We have to assess and
evaluate the rates of exchange of the different countries once
they are members of the European Union. We think that this position
is rather wise in the sense that even if some applicant countries
have a very stable monetary position we have no guarantee that
this stable position will continue after they join because they
will have to introduce structural reforms and we do not know exactly
what will be the final results of those changes. This is the reason
why we have always said that you will only be able to be members
of EMU not earlier than two years after you are members of the
Union. So we could speak about 2006, for example. Of course, it
implies that they are able to fulfil the economic conditions because
if they are not able to fulfil the economic conditions, convergence
criteria, then you could be right in saying "if your economic
positions are not similar to ours then you can weaken the euro".
This is the same argument that we have been using with Greece:
"you cannot become members of the Monetary Union unless you
are able to fulfil the convergence criteria". If they are
able to fulfil the convergence criteria, and probably some of
them will be able to do this, not more than two or three I am
thinking, they could become members. Could this affect the Monetary
Union? I do not think so. I do not think so because if the economic
conditions are similar to those of the other State Members this
will not have a negative effect on the euro. If your question
is the question that you have added, what would happen from the
point of view of public expenditure, concerning expenditure probably
we could distinguish between two different questions. One of them
is the cost of changing for the new countries. I think this is
not so relevant in global terms. A different point is the transfers
from the Union to the new applicant countries as a consequence
of the different levels of development existing between the new
applicant countries and the the Union as a whole. This is a different
chapter of negotiations with the applicant countries and this
will be solved in the context of the regional policy and regional
funds, aid systems existing in the context of the Union. This
is my view and I think it is the correct explanation.
107. When we interviewed our experts earlier
on in the week they unanimously thought that the ECB had done
a good job discharging its monetary policy function, although
Professor Buiter was a bit more critical about the monetary policy
framework for the Bank. He particularly criticised the inflation
target. He said it was an inflation target that dared not speak
its name and he would like to see a point reference. He was also
critical of the second pillar, M3, which he wanted to see dethroned,
demoted, because it was unclear how this was being interpreted.
Would you go along with those two criticisms?
(Commissioner Solbes) I think this is more a point
for the Governor of the European Central Bank to decide to give
you an explanation. I will give you a secondhand explanation.
I would like to clarify this point. As you know, the traditions
in the different central banks were not exactly the same, some
central banks were more committed to a model based on targeting
the amounts of money in circulation, others were more in favour
of a model based on an inflation objective. After long discussions
in the context of the preparatory meetings to create the European
Central Bank, not to create it but to define the strategy of the
monetary policy, the common position was that there was no contradiction
as such using both objectives. The evolution of M3 which is more
or less reflecting private credit evolution is another element
to be considered. M3 is an important subject. You know that M3
has been criticised in some countries because it is not so representative
of the real situation of the monetary past and, in addition, it
has been even more criticised at the level of the euro 11 because
it was a new figure with no history behind it. We had to compare
this figure with the aggregates of the former situations at national
level. We had to take into consideration that these national figures
were the result of different monetary policies. This is why using
inflation as another pillar was very useful. The European Central
Bank has used both of them. It is true that when you are using
two targets not everybody is making exactly the same conclusions
but the European Central Bank is concerned with what is the relevant
weight in every one of its decisions. I think that the European
Central Bank up to now has balanced well both elements. There
is one important point that concerns inflation which is that the
decisions of central banks are not taking into consideration the
existing inflation today, but the expectations of future inflation.
So they are not considering only what is happening today but what
are the new elements to be considered in the future. In addition,
as you know, the evolution of the monetary policy instruments
and the system by which the ECB provides liquidity have excited
some discussion. During the last governing council the Bank decided
to begin to use the variable rate instead of the fixed rate and
the final result will probably be a more market orientated model.
Also this change has been criticised by some people who say that
if you are introducing a model of this type you are introducing
a factor that is dependent on the decisions of the Bank. It is
a point that can be debated, why not. I think these kinds of debates
are correct. I can say to you that you have experience of inflation
targeting in this country and it is now functioning very well.
In some countries in the Monetary Union before they were members
of the Monetary Union they had a system of inflation targeting
with a variable rate which functioned rather well. We are at the
beginning of a very complex process that we are trying to adapt
108. Thank you. A common criticism earlier this
week was in terms of the Bank's presentation of its decisions,
particularly at the onset where in part they were misleading.
Now one of the reasons which was put forward for that was the
size of the Council. Clearly with enlargement the size of the
Council is going to increase quite substantially, whether the
United Kingdom is in or not. They felt that was going to be an
additional problem. Is there a need for the Executive Council
to take a strong role or does an entirely new mechanism need to
be created which actually limits the size of the Council when
making these decisions?
(Commissioner Solbes) As you know the system is established
in the Treaty. The system will continue to be exactly the same
unless we modify the model. You are considering a hypothetical
evolution of the model on the basis of a certain interpretation
of how the Treaty might change after enlargement. I think it is
a little bit premature to say something about this question. As
I have said before, the new applicant countries will not be members
of the Monetary Union in any case I think before 2006. To begin
to discuss in 2000 what will be the final solution I think is
a little bit hypothetical.
109. Commissioner, when you are sitting in the
independent Central Bank you have always got two intentions, to
make it credible and independent from day to day political interference
but also to reassure people, and voters and politicians, that
it is accountable. Do you think that so far in the experience
of the ECB that it has proven to be sufficiently accountable?
(Commissioner Solbes) First, of its independence,
absolute independence, there is no doubt. I tell you that we,
as the Commission, are invited to be present in the governing
council of the European Central Bank. You will never hear the
Commissioner speak about what happens in the European Central
Bank because the Commissioner never speaks in the European Central
Bank when they discuss monetary policy. Of course there are exchanges
of technical subjects, technical positions and technical documents,
figures between the European Central Bank and the Commission but
that is just technical. Secondly, accountability. Accountability
is a very, very long debate. The principle of accountability is
accepted by everyone I think, there is no doubt on this point.
The question is how the accountability can function. The system
that we have established is that accountability has to be applied
in the context of the European Parliament with the regular presence
of the President of the European Central Bank in the Parliament.
There is a special committee, the Committee of Monetary Questions,
where the President of the European Central Bank comes every three
to four months to explain what they are doing. Is this enough?
We can discuss whether this is enough or not. Could we improve
the accountability? Probably yes, you can always do things better.
I am sure we can do things better, we have to do things better.
Your colleague has presented the question of communication, probably
we have to improve the communication. The European Central Bank
has to improve communication.
110. Can I press you further though on improving
accountability. In the United Kingdom with the new independent
Bank of England this Committee has taken quite an active role
in trying to hold the Monetary Policy Committee of the independent
Bank to account. The structure with the Chancellor of the Exchequer
setting the inflation target is an important part of political
accountability. Do you not think when you say there is room for
making it better that it is not just about presentation but there
may be aspects of the system of accountability which might even
require Treaty amendments which could be improved so the wider
people of Europe, the citizens of Europe, could actually feel
this accountability is strengthened?
(Commissioner Solbes) As concerns the principle I
could agree with you, if you could be a little bit more explicit
it would be very useful. What are we doing up to now? Of course
there are appearances in the European Parliament. There is a clear
objective from the point of view of inflation. There is a clear
objective from the point of view of evolution of M3.
111. Commissioner, sorry, we cannot hear you.
Your voice suddenly disappears.
(Commissioner Solbes) As I have said, I repeat, within
the accountability today there is a clear definition of the objectives
of the European Central Bank. There is a presence in the European
Parliament. The monthly documents published by the European Central
Bank define the position of the European Central Bank on many
subjects. The annual report of the European Central Bank explains
what they have done. The participation of the European Central
Bank in the euro 11 and the macro economic dialogue with social
partners: all these are elements of accountability. If you say
your system is better than the European Central Bank system, probably
I would say yes because you have already a very long experience.
We are at the beginning of the process of the European Central
Bank. As I have said before, we have to advance with our system
of accountability. Even if your system is, say, more elaborate
than ours. I have doubts whether your system could be applied
at the European level but that is a different question.
112. Can I come back on that because our system
is actually relatively new, Commissioner. Unfortunately it is
only in the recent past that we have made the Bank of England
independent from political control. The reason why many of us
think our system has been more transparent and more accountable
is partly through more regular publications from the Monetary
Policy Committeethey publish their minutes every monthand
it is not just the fact they publish but the content of what they
(Commissioner Solbes) Yes.
Mr Davey: So, for example, in those monthly
minutes each member of the Monetary Policy Committee, and I accept
that there are only nine members so it is a smaller committee,
each of them votes and there is a vote taken every single month,
and those votes are recorded so it is therefore more transparent.
Many people in the financial markets in the UK
Chairman: Edward, we have not got much
113.they think this is a better structure.
Have you any comments? How could the European Central Bank develop
in that way?
(Commissioner Solbes) I think that your structure
is very well elaborated but it was not the structure of the German
Bundesbank, of the Banque de France, of the Spanish Banco De Espan¯a,
of the Italian Central Bank, it is a different model. I understand
your model. I have nothing to say. The instruments that you have
used are instruments to be analysed, to see whether they could
be used by the European Central Bank. I think you cannot compare
your history, with a Bank that has already been long established.
Mr Fallon: Commissioner, you spoke in
Dublin of the adoption by the Member States of the euro and the
single interest rate at very different points of their economic
cycles and you have spoken today of catch-up in the peripheral
areas. Who is responsible then for the five per cent inflation
Sir Teddy Taylor
114. 5.2 per cent.
(Commissioner Solbes) That is a good question to put
to a former Minister of Finance. When we explain or when we have
to discuss about who is responsible for inflation we always try
to explain in national terms saying that inflation is the consequence
of different aspects: evolution of wages, problems of structural
reforms, excess of demand, many different things. The problem
is that in the context of the European Union we have decided to
have Monetary Union so it means instead of having a rate of interest
that is variable between countries, the rate of interest is the
same rate, the one decided by the ECB for the whole euro area.
You have to adapt all the other elements of these countries. Of
course, if you are more advanced in the cycle you have to be more
cautious as concerns fiscal policy, as concerns structural reforms.
If the final result is that it will function efficiently in this
way, and I am convinced it will, the different cycles will be
more and more similar because of using similar policies which
in the past were different. I do not say that all of them will
be equal but they will be more similar. I think that this is a
kind of exercise of adapting ourselves to the new situation.
115. So it is the failure of the Irish Government
to bring forward structural reforms rather than a single interest
(Commissioner Solbes) Probably of the Irish Government
and of Irish history in the sense that the structural situation
of Ireland is not exactly the same situation in terms of competitiveness,
openness of the market, and so on that it is in other countries.
That is the normal consequence of having to adapt to a new context.
116. Commissioner, is the UK economy sufficiently
convergent with Euroland for UK entry into the euro to be a practical
(Commissioner Solbes) The question requires first
the definition of convergence. Convergence meaning convergence
on the basis of the basic criteria or convergence on the basis
of other criteria? If you put the question on the basis on which
we are normally working, which is the Maastricht criteria, you
are able to fulfil most of the criteria. Many times we have discussed
the evolution of the rate of exchange, the period of stability
required for the rate of exchange.
117. Sorry, you disappeared then.
(Commissioner Solbes) You are able to fulfil all the
Maastricht criteria with the exception of the exchange rate. If
you are speaking of other criteria, for example the position of
the British Government and the five conditions of the British
Government, I cannot give you any answer because we have never
analysed this question. If you tell me that the position of the
cycle of the British economy and the average cycle in Europe are
very similar I have to believe you but I see some clear differences.
An interesting question is whether this evolutionary cycle will
be reduced or increased if you are in or out of the Monetary Union.
That is a point of technical debate, it is difficult to give an
answer, at least at the present moment. As you know, the problem
of the United Kingdom is not from the legal point of view with
regard to the Treaty, it is not a problem of convergence, it is
a problem of the position of the British Government and British
118. Can you repeat that, it seemed to me an
important point that you were making. If you can say it louder.
(Commissioner Solbes) From the legal point of view
of the convergence criteria there is not a problem. The decision
will depend on the final position of the British Government and
of the British institutions, it is up to you. You have the right
to decide whether to go in or not to go in, it is up to you to
119. Just on that point, Commissioner, and I
found that very helpful, the UK Chancellor of the Exchequer has
announced that in addition to the Maastricht and other criteria
that you have referred to there would be five economic tests which
he outlined in October 1997 whether or not UK entry into the euro
would affect UK investment, UK jobs and the other three. I just
wondered why you thought or why the Commission thinks that Gordon
Brown introduced these new five tests in addition to the very
full list of convergent criteria that are already in place?
(Commissioner Solbes) I think that it is not our task
to analyse why national politicians adopt decisions. It is the
role of national politicians to adopt their decisions.