Christian Noyer: Challenges ahead - the accession process Speech by Mr Christian Noyer, Vice-President of the European Central Bank, at the Foreign and Commonwealth Office, London, 12 November 2001. *  *  *  Ladies and gentlemen, It is a great pleasure for me to be able to be here today at the Foreign and Commonwealth Office to share with you some thoughts on the process of EU accession and the challenges that this process poses for the accession countries. While recognising that this process raises challenges for the EU itself, I will not elaborate on those in my speech today. Undoubtedly, the enlargement of the European Union to embrace a number of countries from central, eastern and southern Europe and the Mediterranean constitutes, after the changeover to the euro banknotes and coins, one of the main challenges currently faced by European policy-makers. However, I would be giving a somewhat misleading impression if I devoted my speech today solely to the “challenges ahead” without first mentioning the very foundations of the European structure. The latter form the basis for our capacity to actually meet those challenges. EU enlargement rests on the proven success of European integration. The European Union constitutes an unprecedented framework for the successful development of regional co-operation.
The exchange rate is generally a more potent transmission channel of monetary policy decisions than domestic interest rates, and it also plays a crucial role in explaining the pass-through to price developments in most accession countries. Thus, in order to achieve further disinflation and sustainable growth, excessive exchange rate fluctuations need to be avoided. In our view, and this view is supported by our previous experiences with the EMS/ERM framework, ERM II provides a useful mechanism to anchor exchange rate expectations. At the same time, ERM II, with its adjustable central rate and its current fluctuation band of ±15%, provides accession countries with the same degree of flexibility as the EMS/ERM following the decision to widen the fluctuation band in 1993. This may be suitable for accession countries. Given that accession countries still need to complete the process of restructuring their economies and catching up in terms of real income, the flexibility inherent in ERM II and its wider fluctuation bands provides accession countries with sufficient scope to accommodate these reforms. Bearing in mind that ERM II constitutes a multilateral arrangement, and that it is consistent with the regional integration process in which all accession countries are deeply involved, ERM II is likely to have fewer potential weaknesses than other alternative exchange rate arrangements have shown over recent years. Of course, as for any exchange rate arrangement, coherence between macroeconomic policies must be ensured for successful participation in ERM II.