The role of the ECB at the international level

The Treaty establishing the European Community (the "Treaty") stipulates which European institutions are allowed either to speak or to act on behalf of the euro area at the international level. The euro area, like the Eurosystem, has no legal personality. This implies that the euro area cannot negotiate and conclude public international law agreements or become a member of international organisations. This also implies that the euro area has to be represented externally by Community institutions or bodies which have a legal personality; this means: 1) the Council of the Ministers of Finance and Economy of the EU ("ECOFIN Council"); and 2) the ECB and, in accordance with an ECB decision, one or more NCBs. While the Treaty provides for interaction between the ECOFIN Council and the ECB in a number of cases, these entities have well-defined responsibilities.

This legal framework provides guidelines to give the euro area a voice at the international level. In particular, when the external representation of the euro area in the field of international co-operation involves the tasks entrusted to the Eurosystem, decisions are centralised in the hands of the Governing Council of the ECB. This facilitates the decision-making process with regard to external representation. While NCBs may participate in international fora depending on their respective memberships (e.g. G7, G10, G20), the participation of the ECB in all relevant fora gives continuity and visibility to the external representation of the euro area.

The roles the ECB plays in the international community differ depending on the Eurosystem tasks involved in international relations. In particular, the ECB can play three different roles. First, the ECB is a primary and autonomous counterpart whenever the Eurosystem's exclusive competencies - i.e. monetary policy and related central banking tasks - are involved in international relations. Second, with regard to issues related to the exchange rate of the euro, the ECB shares with the ECOFIN Council the responsibility for both consultations with third parties - for example at G7 level - and communication to the general public. However, the ECB is solely responsible for deciding foreign exchange operations. Third, within the limits of the Eurosystem's field of competence, the ECB can advise other euro area policy-makers on international issues. In specific circumstances the ECB may also act as a "catalyst for co-operation". This may happen when the Eurosystem develops common views on issues which fall within the competence of other euro area authorities (mainly national governments), but in which the Eurosystem has a strong institutional interest, in accordance with its statute. This applies, for instance, to issues related to the stability of the global financial markets and the architecture of the international monetary system. In dealing with these issues, the ECB may provide value added to the development of common euro area positions to be taken at the international level.

The relations of the ECB with other policy-makers at the international level involve a number of co-operation activities designed to increase the "joint welfare" resulting from their policies.

Generally speaking, "international co-operation" takes place, within the relevant organisations (e.g. IMF) and fora (e.g. G7), between the competent authorities of different countries for either a given policy (e.g. monetary policy) or a set of policies (e.g. macroeconomic policies). In this context, the term "country" should be understood to include monetary unions such as the euro area. In principle, co-operation can include a wide spectrum of activities, namely:

As I shall discuss, the Eurosystem is directly involved in most, although not all, of these activities.

The economic rationale for the ECB's involvement in international co-operation activities rests on the international externalities of domestic policies, i.e. spillover effects which policies in one economy can produce on other economies via, for instance, interest rates, exchange rates and equity prices. The euro area, however, is a large and relatively closed economy. The degree of trade openness of the euro area is much smaller than that of its constituent countries. Measured by the average of exports and imports as a share of euro area GDP, the degree of openness is 16% in the euro area. By contrast, prior to Monetary Union, the average export ratio of individual Member States stood at around 35% in 1997. This helps to understand both why the euro area is not affected by spillover effects to the same extent as small open economies, and why the Eurosystem is in a position to pursue its primary objective - maintaining domestic price stability - in the most effective way.

This does not mean, however, that the ECB neglects external economic developments when establishing the euro area monetary policy. On the contrary, the ECB takes these developments into due account as they may have an impact on domestic economic developments, and thus on price stability.

The ECB's approach to external economic developments has three implications for the participation of the Eurosystem in the process of international co-operation in the area of macroeconomic policies.

First, a substantial component of the ECB's co-operation is the reciprocal exchange of information and views within international organisations and fora. Regular consultation on external economic developments enhances the ECB's ability to analyse the outlook for price developments in the euro area. By taking into account possible spillover effects from third countries' policy actions, consultation plays a part in reducing the likelihood of misinterpreting the impact of external developments on domestic variables. Given its voluntary nature, consultation does not impinge on the ECB's independence.

Second, consultation is supplemented by international surveillance. In this case, a third and independent party, such as the IMF or OECD, regularly monitors and assesses the economic policies of its members. In this regard, whenever the euro area monetary policy is under surveillance, the ECB is solely responsible for interaction with the IMF and OECD. International surveillance adds to the ECB's transparency as both the IMF and the OECD make their assessments of euro area economic policies available to the public. In the context of surveillance, the international community is also developing common understandings on a number of "rules of the game" to be implemented in each individual country on a voluntary basis. An example is given by the IMF Code of Good Practices on Transparency in Monetary and Financial Policies. The selection of best practices and rules enhances competition and transparency among policy-makers, thus making the idea of good public governance a central component of international co-operation.

Third, consultation and surveillance are the forms of international co-operation which are relevant to the ECB in the area of macroeconomic policies. Any form of ex ante international co-ordination of monetary policy with other macroeconomic policies could easily be incompatible with the Eurosystem's mandate and independence. Attempts to co-ordinate ex ante would not only blur the specific responsibilities of individual policy-makers, but also reduce their accountability. In determining its monetary policy stance, the ECB should and does take into account all relevant information. It cannot let its policy be determined solely by the current and future course of other policies. This could easily compromise the maintenance of price stability. The inappropriateness of ex ante policy co-ordination also applies to the more specific option of exchange rate co-ordination between large economic areas, for instance by setting ranges for the fluctuation of the major currencies. In this regard, I should like to take the opportunity to reaffirm that the ECB does not pursue any exchange rate target. Our objective is to maintain stable prices in the euro area and not a specific level of the euro's exchange rate.

Last but not least, the Eurosystem takes part in the process of international co-operation not only in its role as a "primary player" - i.e. when euro area monetary and exchange rate policies are involved - but also in its roles as advisor to other euro area authorities on international issues and "catalyst for co-operation". In this case, international co-operation is mainly designed to ensure global financial stability and enhance the architecture of the international monetary system. The economic rationale for this kind of co-operation can be summarised as follows. First, financial instability can materialise even with sound macroeconomic policies, as a result of factors such as inadequate supervision in emerging market economies and so-called "contagion", i.e. the international transmission of instability. Second, a world divided into sovereign states has inevitably moved more rapidly towards full capital mobility than towards common rules. The asymmetry between the free movement of capital, which takes place on a global scale, and policy-making, which remains mainly in the national domain, can have implications for financial stability and calls for enhanced international co-operation.

Over the past two years, the representation of the euro area in international organisations and fora has been decided in accordance with the aforementioned guidelines laid down in the Treaty. These guidelines and decisions, however, have no direct legal bearing on the statutes and/or internal rules governing international organisations and fora. This implies a need for the gradual adaptation of the traditional institutional framework for international relations. That framework was not tailored to the involvement of monetary unions as such, nor to the advent of the Eurosystem - and, more generally, the euro area - as a new actor in international relations. Until now, this process of adaptation has been conducted to a large extent on the basis of ad hoc solutions. In the longer run, however, a more fundamental approach may be needed.

A first challenge arises from the fact that the international intergovernmental organisations - the IMF and the OECD - were created at a time when only national states were responsible for domestic policy-making. As a result, only individual countries - and not the ECB and other representatives of the euro area as such - are members of the IMF and the OECD, even if these organisations deal, among other things, with the euro area monetary and exchange rate policy. Both the IMF and the OECD have adjusted their internal rules to reflect the new context. In particular, the Executive Board of the IMF has granted permanent observer status to the ECB, and the OECD has allowed the ECB to participate in the work of its relevant committees and working groups as a separate member of the European Community delegation alongside the Commission.

A second challenge is the definition of an adequate representation of the euro area in those international fora where both ministers and central bank governors are represented (e.g. G7 and G20). Here the problem raised by the creation of the euro area was its capability to speak - if and when appropriate - "with one voice". Specific arrangements between the euro area and its counterparts in the various fora have dealt with this problem. These arrangements, however, may still call for some improvement. For instance, it is true that issues such as the architecture of the international monetary system fall primarily under the competence of individual euro area countries. The ECOFIN Council, however, needs to gain an increasingly higher profile when these issues are discussed in the competent fora (e.g. G7). This would strengthen the European stance and simplify the process for decision-making at the international level. In this respect, the Eurosystem may provide - as I will discuss afterwards - significant value added to euro area governments. More generally speaking, the ECB would welcome any initiative of euro area governments designed to enhance - in compliance with the respective competencies of the ECOFIN Council and the Eurosystem - the credibility and clout of the euro area in the international community.

The other major challenge for the ECB and the Eurosystem in the years to come will be to become more directly involved in the process of international co-operation beyond the area of macroeconomic co-operation. This relates, in particular, to current work being done to strengthen the international financial architecture, which is close to the area of traditional competence and expertise of the central banking community. The Eurosystem supports this process for two reasons. First, because the achievement of its primary objective of safeguarding price stability in the euro area would be facilitated by a safer and more resilient international financial system. Second, because the statute of the Eurosystem establishes that the Eurosystem shall contribute to the smooth conduct of policies relating to the stability of the financial system.

A wide range of topics could be discussed here. However, the interest that the IIF has shown in the recent past in the issue of "private sector involvement" leads me to focus on the ECB's assessment of ongoing discussions.

Owing to changes in the magnitude and composition of capital flows, the private sector is playing an increasingly important role in the financing of emerging market economies. According to recent IIF estimates, in the 1990s 85% of total net inflows of capital to the major borrowing countries came from the private sector. Such inflows averaged USD 170 billion per annum, compared with USD 35 billion per annum in the 1980s. By contrast, net official flows averaged USD 30 billion per annum throughout the 1990s and reached only USD 5 billion in 1999, their lowest level for over 20 years.

Despite these developments, however, in times of financial distress the role of the official sector remains crucial in providing financial assistance to emerging market economies. It is true that informal arrangements are in force in order to facilitate negotiations with the main creditors of the private sector. The so-called "London Club" has become a kind of permanent institution, like the Paris Club for obligations vis-à-vis official creditors. However, the development of new instruments for lending to emerging market economies and the increasing diversification of the creditor base, while facilitating the financing of the countries concerned, render negotiations between debtor countries and their private sector creditors more difficult in the event of a crisis. This explains why, so far, only ad hoc measures have been developed in order to involve private sector creditors - on a case-by-case basis - in the resolution of financial crises.

In addition to enhanced efforts to improve the communication channels between debtor countries and their creditors, which would also enhance crisis prevention, the ECB would support a move to strengthen the existing framework for the management of financial crises. Three fundamental principles may be helpful to this aim.

First, the framework should rely more on rules and less on discretion than was the case in the second half of the 1990s A case-by-case approach, lacking clear "rules of the game" on the respective roles of private and official sectors in times of distress, runs the risk of creating the perception that official resources would provide a "safety net" if need be. Such a perception is likely to distort debt management on the borrowers' side and risk assessment on the creditors' side, thus engendering problems of moral hazard on both sides.

Second, the IMF cannot - owing to its limited resources which do not match private capital outflows - and should not - owing to moral hazard problems mentioned above - act as an international lender of last resort. IMF financial assistancecan neither be unlimited nor cover all the financing needs of a country. The IMF should rather play a catalytic role. IMF conditionality in the form of adjustment programmes should, in conjunction with IMF financing, be instrumental in improving the external position of member countries and quickly restoring market confidence. Actual ceilings on access to IMF financing facilities should also be established.

Third, as a logical consequence of limited official financing, the private sector should be involved in the resolution of financial crises. It is a matter of fact that a country running into financial difficulties will need to involve its creditors in one way or another. In this context, the crucial question is how "orderly" such an involvement should be. In their efforts to secure adequate private sector involvement,debtorcountries should try to reach market-based and co-operative solutions with all classes of creditors, respecting comparable treatment among and within different classes.

We are convinced that a strengthened framework based on these principles would create the right expectations in both the private sector and the official sector. It would also allow for sufficient flexibility to address specific cases in the course of a crisis.