TEXT: TREASURY OFFICIAL ON THE EMU AND THE WORLD ECONOMY
(Geithner upbeat on Economic and Monetary Union)

Washington -- A European Economic and Monetary Union (EMU) that provides additional stability on the continent will be good for the United States and the world, says Assistant Secretary of the Treasury Timothy Geithner.

"We see no threat to U.S. interests in a successful effort to build a strong, integrated European economy, with a sound and stable currency," Geithner said in a May 7 speech focusing on the recent announcement that eleven European countries have qualified for, and decided to establish, an EMU.

"Work on the plumbing of this new financial system has made substantial progress," Geithner said, but added that many challenges remain that will affect how the new monetary union is put in place. Among these, he said, are continued high European unemployment and opposition to greater labor market flexibility, large budget deficits, and resistance to market liberalization in such areas as financial services.

Following is the text of Geithner's remarks:

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I am pleased to be here. Your timing for this conference could not be better, but at a time when almost everyone on the planet is speaking about EMU in some capacity its hard to convey much new light on this issue.

I think my role today is to say something about what EMU might mean for the United States, and to provide one perspective on where our interests, America's interests, lie in this endeavor.

I don't think it will surprise you to hear that our approach to EMU starts with the recognition that what is good for Europe economically is basically good for the United States. Europe's gain is our gain. An economically unified, stable, prosperous, even ascendant Europe is better for us than the alternatives. U.S. companies are well positioned to benefit from the potential opportunities created by this next stage of European integration.. We see no threat to U.S. interests in a successful effort to build a strong, integrated European economy, with a sound and stable currency.

Progress Toward EMU

I think it is remarkable how far Europe has come over the past six months, not to mention since the Maastricht Treaty itself was signed.

-- There has been remarkable convergence in interest rates and inflation performance, and significant cumulative reductions in fiscal deficits.

-- The Euro skeptics are in retreat, with new optimism emerging about corporate sector restructuring on the Continent. The strong Euro camp is more ascendant in the market's eyes than the soft Euro school that dominated a few months ago.

-- Work on the plumbing of this new financial system has made substantial progress.

-- And all this has come with a moderate recovery in confidence and growth in the major continental economies.

The Challenges Ahead

Yet, not all is bright. Many of the challenges that clouded the European horizon in the recent past still exist, though they have been masked somewhat by the growing recovery. How these challenges are resolved will have much to do with how Europe fares as monetary union is put in place.

-- Unemployment remains high in large parts of the continent, and the recovery has not yet produced meaningful growth in private sector employment.

-- Attempts at structural reform in the form of greater labor market flexibility still face strong opposition.

-- There is still much to be done to increase competition, innovation, and growth in the markets for many products and services, including financial services.

-- Despite the progress on the fiscal front, budget deficits in the major economies are still at levels that are unsustainable over the long run and provide little scope for automatic stabilizers to work in the event of a future slowdown.

-- The institutional framework for setting monetary policy and for cooperating on other policy issues has yet to be fully defined or tested in practice.

-- Popular opinion is still not be fully supportive of EMU in some important member countries, though polls show they will acquiesce in its arrival.

-- Europe still faces the question of how countries will adjust to assymetric shocks given the existing degree of labor mobility and in a context where they will no longer have the capacity to use macroeconomic policy or the exchange rate.

So, where does this leave the United States? We have made a substantial investment over the last several years in assessing the implications of EMU for the United States and the international financial system. We've had a team of Treasury people in Europe following the process, and an informal group of analysts in Washington at Treasury, the Fed, and the CEA. We've drawn heavily on the work of the academic community and the analysts in the financial community. My remarks reflect the results of this investment.

The Framework for Macroeconomic Policy

America's interests in EMU lie first in seeing the establishment of a credible framework for monetary and fiscal policy that will provide a sound foundation for domestic-demand-led economic growth and a sound new currency. This means an independent central bank, free of political influence. It means achieving and maintaining more sustainable fiscal positions. And it means establish a clear exchange rate orientation that is insulated from temptation to use the exchange rate to compensate for the constraints on other policy instruments. Together, these things will be critical to the confidence investors have in the new currency.

Credibility, however, will be more complicated than simply applying the stability pact and stating that monetary policy will be directed at the objective of price stability. Credibility will ultimately depend on whether the macroeconomic policy framework is successful in delivering sustainable growth that creates jobs. For if EMU fails to deliver the economic results on which most governments are ultimately judged, then it may not be viewed as sustainable politically.

Structural Reform

The second area critical to U.S. interests is the structural agenda. Our interests lie in seeing the Europeans succeed in making their economies more dynamic in adjusting to structural change and their labor markets more flexible. The fundamental and most troubling paradox of EMU is that it does not itself address what are probably the greatest economic challenges in Europe -- the structural agenda -- and yet Europe's success in dealing with these challenges will be critical to the success of monetary union itself.

Conventional wisdom has for some time been quite dark on the prospects for success in this area. The efforts by the Governments in some of the major economies have not been particularly ambitious, and where they may have attempted ambition, they have not been particularly successful.

A successful attack on structural problems is difficult because it will almost certainly require a substantial reduction in the role of the state in the continental economy, a less generous benefit system, a regulatory regime that rewards innovation rather than inhibiting it, and a willingness to let both firms and workers be exposed to the costs of adjustment and the consequences of failure.

Just to say it again, this area is critically important, because structural change that produces a more flexible, responsive European economy, will be critical to making monetary union work economically and to making it politically sustainable.

Europe on the Broader Global Stage

A third area of importance to the broader implications of EMU lie in the institutional framework for decision making and the outward orientation of the new regime. Our interests lie in seeing Europe preserve a capacity to act effectively on the world stage and to support further economic integration with its trading partners.

The architects of EMU believe a Europe united on economic issues will speak with a single, more powerful voice on the economic stage. This may be true, yet what matters more is what Europe says and how it uses it voice. What is significant to Europe's trading partners is that the requirements of consensus not impede effective action, that the challenge of making EMU work not distract attention from other compelling problems, that the political pressures that will come with structural reform in economies with very large unemployment not tilt the balance in Europe toward those more separatist than integrationist in outlook.

It is also important to the international community that Europe develop an architecture of decision making that makes it possible for us to act together effectively with individual members states and with the new European institutions.

This is important in areas where speed, discretion, and a common framework are important, as in exchange market cooperation. And it is important in areas where the security and economic interests and the policy preferences of the member states may be quite diverse, and yet we may need to act together to address common concerns. This may be true with respect to common challenges we face in the specific regions of the world. And it may be true on specific policy issues that involve the international financial institutions.

These factors are important criteria against which to evaluate the potential impact of EMU. Europe's success in these areas will determine the degree to which Europe is able to create a more dynamic economy that can increase private sector employment, a strong euro, and a more open Europe that remains supportive of further integration with the world economy and Eastern Europe.

Our view is that a successful EMU measured against these objectives would be very much in the interests of the United States and of the world economy as a whole.

Implications for the International Monetary System

There are those who say that a successful EMU may present a threat to the United States economy and a serious challenge to the dollar's role as a reserve currency. We do not share their concerns.

If the leaders of Europe deliver a successful, credible EMU backed by strong policy fundamentals, a more integrated capital market, and a more dynamic economy, then EMU would probably be associated with some gradual increase in the euro's role in the system, relative to that now enjoyed by the original currencies of the participating economies.

This is not something we in the United States should view with concern, and it is not something we should try to resist.

All the bad scenarios for the dollar would probably have to start in the United States, with some event that would undermine the unique set of factors that now account for the dollar's central role in the system. Our primary concern should be to focus on those among this set of factors that we can influence. And that means to focus our attention on sustaining policies that make people regard our currency as a reliable store of value and an attractive means of payment, that make the U.S. financial markets the most deep and liquid and innovative in the world, and that make the U.S. economy an attractive place to invest.

EMU has also raised some other interesting questions about the international monetary system, in particular the exchange rate system.

At this point, it looks like there will be more continuity than change in the international monetary system as a result of a successful EMU. For the participants in EMU as a group, trade will represent roughly the same share of GDP as is the case now the United States and Japan. The exchange rate policy and the monetary policy orientation of the euro area look likely to be quite close to Germany's at present, and thus quite similar to that of the Japanese and U.S. monetary authorities. There will continue to be a flexible exchange rate system among the major currencies, which we regard as a good thing. And we will seek to maintain an effective process for cooperation on economic policy and in the exchange markets when circumstances make that desirable and effective.

In this world, exchange rate stability depends mostly on each of us achieving sustained, non inflationary growth at home, and avoiding serious domestic and external imbalances. EMU won't change that.

Conclusion

Let me conclude by giving you the definitive word. President Clinton issued the following statement on Monday:

"We welcome this weekend's historic announcement that eleven European countries have qualified for, and decided to establish, an Economic and Monetary Union (EMU). The United States has long supported European integration. We admire the determination that Europe has shown in moving toward the economic convergence that makes EMU possible. A strong and stable Europe, with open markets and healthy growth, is good for America and for the world. A successful EMU that contributes to a dynamic Europe is clearly in our best interest."

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