European Monetary System

institutions in foreign countries

as % of total domestic assets, 1997

In EEA countries In third countries

TOTAL

Branches Subsidiaries Branches

Subsidiaries

AT 2.6 NA 3.7 NA

NA

DE 12.0 7.3 7.8 0.9

27.9

ES 5.5 1.4 2.1 5.9

14.9

FI 5.9 0.3 6.6 0.3

13.1

FR 9.1 6.9 9.4 3.8

29.2

IR 8.3 14.9 1.3 10.1

34.6

IT 7.2 2.7 3.8 1.5

15.2

SE 7.2 NA 5.4 NA

NA

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 3. Concentration: Assets of the five biggest credit

institutions as % of total assets

1985 1990 1997

AT 35.8 34.6 48.3

BE 48.0 48.0 57.0

DE NA 13.9 16.7

ES 38.1 34.9 43.6

FI 51.7 53.5 77.8

FR 46.0 42.5 40.3

IE 47.5 44.2 40.7

IT 20.9 19.1 24.6

NL 69.3 73.4 79.4

SE 60.2 70.02 89.7

UK NA NA 28.0

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 4. Number of branches and subsidiaries of foreign credit

institutions, 1997

From EEA countries From third

countries TOTAL

Branches Subsidiaries Branches

Subsidiaries

AT 6 20 2 11

39

BE 25 16 15 15

71

DE 46 31 31 45

153

ES 33 21 20 6

80

FI 9 0 0 0

9

FR 46 118 43 98

305

IR 18 21 3 7

49

IT 36 4 17 4

61

NL 11 8 11 19

49

SE 14 0 3 1

18

UK 106 18 149 114

387

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 5. Private non-financial enterprises' bonds, credit

institutions' bonds and government bonds outstanding as % of GDP,

1997

Private Credit Government

non-financial institutions' bonds

bonds bonds

AT 2.7 31.1 30.6

BE 10.0 38.3 111.0

DE 0.1 54.6 37.6

ES 2.6 4.5 52.9

FI 3.7 7.1 35.5

IE 0.01 1.6 32.2

IT 1.6 19.4 100.4

NL NA 43.1 53.4

SE 3.6 38.6 46.5

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Euro and European integration

Speech delivered by Eugenio Domingo Solans,

Member of the Governing Council and the Executive Board of the

European Central Bank,

at the "Euro and Denmark" exhibition in Aalborg, Denmark,

on 10 September 1999

INTRODUCTION

It is a real pleasure for me to participate in the "Euro and Denmark"

exhibition in Aalborg. It is the first time since my appointment as a

member of the Executive Board of the European Central Bank (ECB) in May

1998 that I have had the opportunity to speak in Denmark. Thank you for

your invitation and for asking me to share my views on the euro and on

European integration with investors and experts of this "pre-in" country.

I should like to refer to two main topics. First, and more

extensively, allow me to explain the ECB's view and my own view on the role

of the euro as an international currency. After this I intend to make some

brief comments on the key role that the euro and the Eurosystem are playing

in the process of European economic integration.

Before I begin, I should like to add that it goes without saying that

the institutional position of the ECB - and therefore my own official

position - concerning Denmark's entry to the euro area is one of strict

neutrality. This is an issue which has to be decided by the Danish people,

whenever and in whatever way they deem appropriate.

THE EURO AS AN INTERNATIONAL CURRENCY

The three basic functions of the euro

Every currency fulfils three functions: store of value, medium of

exchange and unit of account. Concerning the first function (store of

value), the euro is used and will increasingly be used as an investment and

financing currency by market players, and as a reserve currency by public

authorities. Regarding the second function of money (medium of exchange),

the euro is used and will increasingly be used as a payment or vehicle

currency for the exchange of goods and services and for currency exchange

itself. It will also have an official use as an intervention currency.

Finally, as regards the third function of any currency (unit of account),

the euro is used and will increasingly be used by economic agents as a

pricing or quotation currency and as a pegging currency by the authorities

responsible for exchange rate issues.

Let me give you some information about the present use of the euro in

each of these areas. I shall first refer to the private use of the euro,

after which I shall consider its official public usage.

The euro as a store of value

The available information seems to confirm that the euro already

plays a significant role as an investment and financing currency in

international financial markets. Without going into precise details (1),

regarding the international debt securities market (money market

instruments, bills and bonds), it can be said that in the first two

quarters of 1999 net international issues denominated in euro amounted to

EUR 83.9 billion, compared with EUR 74 billion for the US dollar and EUR

50.9 billion for former euro area national currencies and ECUs during the

same period of 1998. In other words, in the first two quarters of 1999 net

international issues of debt securities denominated in euro were 13.4%

higher than those denominated in US dollars, and 64.8% higher than those

denominated in former euro area national currencies and ECUs issued during

the same period of last year.

With regard to equity markets, the weight of euro area stock

exchanges in terms of capitalisation ranks a clear second, far behind the

United States.

As to the banking sector, the latest data show that, at the end DX

:>48@>2:0 ?;5=:8T- -#"+ !-+ 1999\DXCODE.HTof March 1999, above 40% of

deposits and loans vis-а-vis non-residents were denominated in euro, with

the share of the US dollar almost as high.

The euro as a medium of exchange

As for the second function of money (medium of exchange), the euro

needs more time to develop as a payment currency for goods and services in

international trade and as a vehicle currency in the foreign exchange

markets. Although no precise data are available at this stage, the value of

world exports denominated in euro is not likely to differ significantly

from that of euro area exports. By contrast, the value of world exports

settled in US dollars is nearly four times as high as that of US exports.

This difference can easily be explained by the combined and reinforcing

effects of network externalities and economies of scale in the use of a

predominant international currency, as is the case with the US dollar.

The euro as a unit of account

The use of the euro as a unit of account (its third general function)

is closely linked to its use for the other two main functions. The use of a

currency as a unit of account is, in a way, the basis for its use as a

store of value or as a medium of exchange. The value stored in euro, or the

payments made in euro, will tend to be recorded in euro. Therefore, we can

conclude that the euro is playing an ever larger role as a unit of account

for all the financial assets linked to the use of the euro as an investment

and financing currency, and has a much less relevant role as a standard for

pricing goods and services, owing to the widespread use of the US dollar as

a payment and vehicle currency in international trade. The convenience of

using a single standard for pricing commodities in the international

markets, allowing traders to make direct comparisons between prices, makes

it difficult for the euro to acquire a significant role in this respect. We

can conclude that the development of the euro as a unit of account will

follow the pace at which the issuers or suppliers of assets, goods or

services priced or quoted in euro obtain a predominant position in the

international markets.

The official use of the euro

The euro also has official uses as reserve, intervention and pegging

currency, all three functions being strongly interrelated in most cases.

With regard to its official use, the euro is currently the second

most international currency after the US dollar, this being a legacy of the

former euro area national currencies.

Compared with the former euro area national currencies, there has

been a technical decline in the share of the euro as a reserve (and,

therefore, as an intervention) currency, mainly owing to the fact that such

former national currencies became domestic assets within the euro area.

However, there are good reasons to expect an increase in international

public use of the euro as a reserve and intervention currency, inasmuch as

the public authorities understand that it is worthwhile to allocate their

foreign reserves among the main international currencies and to give the

euro a relevant share in accordance with its internal and external

stability and the economic and financial importance of the euro area.

In connection with the use of the euro as a pegging currency,

approximately 30 countries outside the euro area currently have exchange

rate regimes involving the euro to a greater or lesser extent. These

exchange rate regimes are: currency boards (Bosnia-Herzegovina, Bulgaria,

Estonia); currencies pegged to the euro (Cyprus, FYROM [the Former Yugoslav

Republic of Macedonia] and 14 African countries in which the CFA franc is

the legal tender); currencies pegged to a basket of currencies including

the euro, in some cases with a fluctuation band (Hungary, Iceland, Poland,

Turkey, etc.); systems of managed floating in which the euro is used

informally as the reference currency (Czech Republic, Slovak Republic and

Slovenia); and, last but not least, European Union currencies pegged to the

euro through a co-operative arrangement, namely ERM II. As you well know,

Denmark and Greece joined ERM II on 1 January 1999 with a ±2.25%

fluctuation band for the Danish krone and a ±15% fluctuation band for the

Greek drachma. Although the euro remains in second position after the US

dollar in terms of its official use, the role of the euro will increase in

the future, without a doubt.

The position of the Eurosystem concerning the international role of

the euro

As a general conclusion stemming from the previous analysis of the

use of the euro in the world economy, we can affirm that the euro is the

second most widely used currency, behind the US dollar and ahead of the

Japanese yen. The private use of the euro as an investment and financing

currency and its official use as a reserve, intervention and pegging

currency are increasing rapidly, while it is developing at a slower pace as

a payment currency in the exchange of goods and services. The use of the

euro as a unit of account is linked to its use as store of value and a

medium of exchange.

Taking the current situation as a starting point, the Eurosystem's

position concerning the future international role of the euro is crystal

clear: we shall not adopt a belligerent stance in order to force the use of

the euro upon the world economy. We are convinced that the use of the euro

as an international currency will come about anyway. It will happen

spontaneously, slowly but inexorably, without any impulses other than those

based on free will and the decisions of market participants, without any

logic other than that of the market. In other words, the

internationalisation of the euro is not a policy objective of the

Eurosystem; it will neither be fostered nor hindered by us. The development

of the euro as an international currency will be a market-driven process, a

free process, which will take place, without a doubt.

Factors determining the importance of the euro in the world economy

We understand that the euro fulfils the necessary conditions to

become a leading international currency with the US dollar and not against

it. There is enough room for both currencies in the world economy.

The necessary conditions for a currency to become an international

currency are based on two broad factors: low risk and large size. The low

risk factor is related to the confidence inspired by the currency and its

central bank, which in turn mainly depends on the internal and external

stability of the currency. The low risk factor tends to lead to

diversification among international currencies, since diversification is a

means to reduce the overall risk; it acts, so to speak, as a centrifugal

force. By contrast, the large size factor relates to the relative

demographic economic and financial importance of the area which supports

the currency; in other words, the "habitat" of the currency. The large size

factor generally tends to lead to centralisation around one or several key

international currencies. It can be seen as a centripetal force, as a

virtuous circle, which will tend to lead to an increasing use of the euro

as an international currency. Let us consider these two factors in more

detail.

The stability of the currency and the credibility of the ECB

The first factor concerns low risk, credibility and stability. The

stability of the euro is a priority for the ECB. Compared with the idea of

stability, the strength of the euro is of lesser importance. This does not

mean that the exchange rate of the euro does not constitute an element to

be considered in the monetary policy strategy of the ECB. However, the

basic factor that will determine the importance of the euro as a widely

used currency in the world economy, in addition to the demographic,

economic and financial dimensions of the euro area, is, without a doubt,

the stability of the new currency, understood as a means to maintain the

purchasing power of savings.

In the global economy the transmission of financial crises by means

of different mechanisms (devaluations of weak currencies, subsequent

increases in interest rates, etc.) is frequently mentioned. Less is said

about the spillover or transmission of positive economic circumstances,

such as stability. The Eurosystem will "export" stability to the rest of

the world economy, and not only in the case of those countries which decide

to tie their currencies, formally or otherwise, to the euro (through the

ERM II or other arrangements). In a global economy the euro area cannot be

an island of stability, but it can transmit its stability to the rest of

the world economy as the links between regions increase.

Stability is the basic requirement for a good currency. It is what we

at the ECB want for the euro. We want a stable euro, not necessarily a

strong euro. In the long term the euro will derive strength from its

stability.

The stability of the euro is the basis for the confidence in and the

credibility of the ECB, without which a large international role for the

euro would be unthinkable. Stability is the proof of the effectiveness of

the institution. Yet in order to be credible it is not sufficient for the

ECB to maintain stability. Other parameters of its action must be

considered: accountability, transparency and communication, a Europe-wide

perspective.

The conditions for the credibility of the euro are certainly

demanding. However, the achievement of these conditions is the aim of all

those of us who have responsibilities in relation to the operation of the

Eurosystem.

The "habitat" of the euro

The second factor, which we have called the large size factor or the

habitat of the euro, is important because without a certain critical mass,

a currency cannot have international relevance, however high its degree of

stability. In addition to quality, quantity is required, as suggested by

the example of the reduced degree of international use of the Swiss franc

in relation to other stable currencies, such as the US dollar or the

Deutsche

Mark until 1998.

The figures relating to the population and the GDP of the euro area

illustrate this. With 292 million inhabitants, its population exceeds that

of the United States (270 million) and that of Japan (127 million). The GDP

of the euro area is, on the other hand, equal to 76% of the GDP of the

United States (EUR 5,774 billion compared with EUR 7,592 billion), though

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