Euro may trim interest rates
Interest rates should fall to the low levels of Germany and France after the introduction of the single currency, not settle at the average rate of all the participating countries, the governor of the French central bank said yesterday. Mr Jean-Claude Trichet echoed recent remarks by his German counterpart, Dr Hans Tietmeyer, and stressed that the new currency must be perceived as being "at least as good" as each of today's national currencies.
Addressing the Institute of European Affairs in Dublin, Mr Trichet said the concept of "benchmarking" the best economic practice was central to the development of the single currency, and could be seen in the criteria for entry laid down in the Maastricht treaty.
Mr Trichet has been nominated by the French government for the job of governor of the future European Central Bank.
"It is very important to understand that we are not, in Europe, converging towards a kind of average of monetary credibility, and therefore the average of the market interest rates," Mr Trichet said. "We are organising the convergence of the Europeans towards the best possible level of monetary credibility for today and tomorrow, and therefore towards the benchmarks in terms of currency and market interest rates."
Such a development would see Irish interest rates and mortgages tumble from their current levels by as much as two percentage points.
The task facing governments, Mr Trichet said, was to persuade their citizens that the new currency would be at least as good and as solid as their own currencies.
"The euro must have the credibility of the most credible ERM currencies, in particular the guilder, the deutschmark, the franc. It is what is required by the spirit and letter of the treaty. It fits with the very essence of `convergence', which is a benchmarking concept." The policy of keeping a strong euro could not by itself ensure stability, and the threat of "appropriate fiscal discipline" was essential, Mr Trichet said. The stability pact would help prevent well-run economies from having to bear unjustified risk premiums by setting up a system of penalties for excessive deficits, and also acted to prevent excessive deficits.
"The stability pact allows us to disprove the assertion that the euro has no automatic stabilisers in the event of asymmetric shocks to a member economy," Mr Trichet said. "By urging governments to aim for a fiscal position close to balance or in surplus in the medium term, the pact enables them to let national fiscal stabilisers come fully into play during recessions without exceeding the 3 per cent reference value."
"In short, it allows them create a fiscal buffer during normal economic periods that can be drawn on if asymmetric shock occurs. It is important to remember that the single currency will make it possible to absorb this shock by substantially increasing the national public deficit without particularly disrupting monetary stability, interest rates or the financing of the balance of payments deficit," he added.
Regarding the prospect of becoming the governor of the European Central Bank, Mr Trichet was even more reticent: "I can only say that I am in the hands of the wisdom of the European Commission."