ANNUAL REPORT 1998 © European Central Bank, 1999 Address Kaiserstrasse 29 D-60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 D-60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The cut-off date for the data included in this Report was 10 March 1999. ISSN 1561-4573 Contents Foreword 1 Executive summary 5 Chapter I Economic developments in the European Union 1 External macroeconomic conditions 18 2 Economic developments in the euro area 22 2.1 Price developments 22 2.2 Output, demand and labour markets 24 2.3 Fiscal developments 32 2.4 Foreign trade 36 2.5 Bond and stock markets 38 2.6 National monetary policies during 1998 43 2.7 The monetary policy of the Eurosystem 48 3 Economic developments in non-euro area EU countries 55 3.1 Denmark 55 3.2 Greece 56 3.3 Sweden 58 3.4 United Kingdom 59 Chapter II Preparatory work for Stage Three and the changeover to the euro 1 Monetary policy framework 66 1.1 The minimum reserve system 66 1.2 Open market operations and standing facilities 67 1.3 Eligible counterparties and assets 68 1.4 Preparatory work for the implementation of monetary policy instruments 69 1.5 Domestic asset and liability management 69 2 Foreign exchange rate policy framework 70 2.1 The euro conversion rates 70 2.2 Agreement on the new exchange rate mechanism (ERM II) 72 2.3 Foreign exchange intervention and the management of the ECB’s foreign reserve assets 74 2.4 Initial transfer of foreign reserve assets from the NCBs to the ECB 74 2.5 The NCBs’ and Member States’ operations with their foreign reserve assets 74 2.6 The euro reference exchange rates 74 ECB Annual Report • 1998 III 3 Statistics 76 3.1 Implementation of the statistical requirements for Stage Three 76 3.2 Statistics relating to non-participating Member States 78 3.3 Legal aspects 78 3.4 Information systems infrastructure 78 4 Payment systems 79 4.1 The TARGET system 79 4.2 Securities settlement systems 80 4.3 Other payment arrangements 82 5 The development of the euro banknotes and the preparations for the cash changeover 84 5.1 Origination and procurement (February to September 1998) 84 5.2 Pilot series (September 1998 to February 1999) 84 5.3 Protecting the euro banknotes against counterfeiting 84 5.4 The logistics of the changeover to the euro banknotes and coins in 2002 85 5.5 Implementation of Article 52 of the Statute of the ESCB 86 6 Information and communications systems 87 6.1 ESCB systems 87 6.2 ECB systems 88 7 Banking supervision and financial stability 89 8 Co-operation with other institutions 91 8.1 European relations 91 8.2 International relations 92 9 Legal issues 94 9.1 Legal convergence 94 9.2 Preparatory work for Stage Three of EMU 94 10 Internal audit activities 98 11 Changeover to the euro 99 12 Information activities 101 Chapter III Other ESCB activities I Oversight of the ECU Clearing and Settlement System 104 2 Report on electronic money 105 3 Other payment system activities 107 IV ECB Annual Report • 1998 4 Administration of EMS mechanisms and Community loans 108 4.1 EMS mechanisms 108 4.2 Community loans 108 5 Co-operation in the field of banking supervision and financial stability 110 5.1 The impact of Monetary Union on the EU banking systems 110 5.2 The EU banking systems and financial crises in emerging markets 111 5.3 Macro-prudential analysis 112 5.4 Analysis of risk assessment systems 112 6 Advisory functions 114 7 Monitoring of compliance with the prohibition on monetary financing and on privileged access 116 Chapter IV The European System of Central Banks and the Eurosystem 1 Organisation of the ESCB and the Eurosystem 120 2 Liquidation of the European Monetary Institute (EMI) 123 Annual Accounts of the ECB 125 Annexes Glossary 152 Chronology of monetary policy measures taken in the EU in 1998 163 Documents published by the European Central Bank (ECB) 171 Documents published by the European Monetary Institute (EMI) 172 List of Boxes, Tables and Charts Boxes 1 Unemployment and economic policy 30 2 Medium-term budgetary objectives of the Stability and Growth Pact and the policy strategies of Member States 35 Table: Macroeconomic assumptions and fiscal targets enshrined in Member States’ stability programmes ECB Annual Report • 1998 V Boxes (cont’d) 3 Accounting for the decline in long-term bond yields to historically low levels 39 Chart: Long-term government bond yields in the euro area, the United States and Japan 4 Procedures for the decision on the fulfilment of the necessary conditions for the adoption of the euro by non-euro area Member States in Stage Three 61 5 The procedure followed for the computation and adoption of the irrevocable euro conversion rates 70 Table: Calculation of the ECU exchange rates on 31 December 1998 6 Consultation procedures in 1998 114 Tables 1 Price and cost developments in the euro area 22 2 Composition of real GDP growth in the euro area 24 3 Industrial production in the euro area 27 4 Unemployment in the euro area 29 5 Fiscal positions in the euro area 33 6 Trade in goods of the euro area 37 7 Exports and imports by product of the euro area 37 8 Macroeconomic indicators for Denmark 56 9 Macroeconomic indicators for Greece 57 10 Macroeconomic indicators for Sweden 59 11 Macroeconomic indicators for the United Kingdom 60 12 Euro central rates and compulsory intervention rates for currencies of the countries participating in ERM II 73 13 Legal acts and agreements 96 14 Outstanding Community loans 109 15 National central banks’ percentage shares in the key for the ECB’s capital 122 Charts 1 Main developments in major industrialised economies 21 2 Breakdown of HICP inflation in the euro area by components 23 3a Contributions to annual real GDP growth 25 3b Contributions to quarterly real GDP growth 25 4 Confidence indicators for the euro area 27 5 Total employment in the euro area 28 6 Unemployment in the euro area 30 7 Stock price indices in the euro area, the United States and Japan 41 8 Difference between market and theoretical ECU exchange rates 42 9 Three-month interest rate in the euro area 43 10 Short-term interest rate differentials against Germany 44 11 Exchange rate deviations from ERM bilateral central rates against the Deutsche Mark 45 12 Official and key interest rates 46 13 ECB interest rates and the overnight market interest rate 52 14 Monetary aggregates in the euro area 53 VI ECB Annual Report • 1998 Abbreviations Countries BE Belgium DK Denmark DE Germany GR Greece ES Spain FR France IE Ireland IT Italy LU Luxembourg NL Netherlands AT Austria PT Portugal FI Finland SE Sweden UK United Kingdom JP Japan US United States Others BIS Bank for International Settlements BPM4 IMF Balance of Payments Manual (4th edition) BPM5 IMF Balance of Payments Manual (5th edition) CDs certificates of deposit c.i.f. cost, insurance and freight at the importer’s border CPI Consumer Price Index ECB European Central Bank ECU European Currency Unit EMI European Monetary Institute ESA 95 European System of Accounts 1995 ESCB European System of Central Banks EU European Union EUR/E euro f.o.b. free on board at the exporter’s border GDP gross domestic product HICP Harmonised Index of Consumer Prices ILO International Labour Organisation IMF International Monetary Fund MFIs Monetary Financial Institutions NCBs national central banks OECD Organisation for Economic Co-operation and Development repos repurchase agreements SITC Rev. 3 Standard International Trade Classification (revision 3) In accordance with Community practice, the EU countries are listed in this Report using the alphabetical order of the country names in the national languages. ECB Annual Report • 1998 VII VIII ECB Annual Report • 1998 The decision-making bodies of the ECB The Governing Council Back row (left to right): L. Á. Rojo, A. Verplaetse, A. Fazio, Y. Mersch, A. J. de Sousa, M. Vanhala, K. Liebscher, N. Wellink, J.-C. Trichet, M. O’Connell, H. Tietmeyer Front row (left to right): E. Domingo Solans, O. Issing, C. Noyer, W. F. Duisenberg, S. Hämäläinen, T. Padoa-Schioppa Willem F. Duisenberg President of the ECB Christian Noyer Vice-President of the ECB Eugenio Domingo Solans Member of the Executive Board of the ECB Antonio Fazio Governor of the Banca d’Italia Sirkka Hämäläinen Member of the Executive Board of the ECB Otmar Issing Member of the Executive Board of the ECB Klaus Liebscher Governor of the Oesterreichische Nationalbank Yves Mersch Director General of the Banque centrale du Luxembourg Maurice O’Connell Governor of the Central Bank of Ireland Tommaso Padoa-Schioppa Member of the Executive Board of the ECB Luis Ángel Rojo Governor of the Banco de España António José Fernandes de Sousa Governor of the Banco de Portugal Hans Tietmeyer President of the Deutsche Bundesbank Jean-Claude Trichet Governor of the Banque de France Matti Vanhala Governor of Suomen Pankki Alfons Verplaetse until 28 February 1999 Governor of the Nationale Bank van België/ Guy Quaden as from 1 March 1999 Banque Nationale de Belgique Nout Wellink President of De Nederlandsche Bank X ECB Annual Report • 1998 The Executive Board Back row (left to right): T. Padoa-Schioppa, O. Issing, E. Domingo Solans Front row (left to right): C.