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With regard to the government bond markets, an issue of importance for the euro area that I should like to stress is the fact that governments now find themselves in a rather new position as issuers. This reflects a number of developments, two of which I should particularly like to mention.
First, the major public issuers have attempted to position themselves as providers of benchmarks for euro-denominated bond markets. Second, certain issues of government bonds have effectively gained larger portions of secondary markets, in particular in relation to developments that have occurred on bond futures markets.

Market participants have responded to these developments in the bond markets with a range of concurring or competing initiatives and alliances.
In the derivatives industry, market participants have established new alliances. On the trading side, electronic cross-border platforms for bonds have been created or are in the process of being developed. On the clearing side, integrated platforms for different markets have been launched or are being finalised, while, finally, on the securities settlement side, initiatives have also been launched. It is important to note that while some of these developments are internal to the euro area, others aim at creating links with financial markets outside the euro area. One may reasonably expect that all of these new circuits, as well as others, may in the future be enlarged to encompass a growing number of market participants.

4. Equity markets

Turning to equity markets, structural developments of most interest relate to the infrastructure of stock exchanges on the one hand and equity derivative exchanges on the other. First, within the euro area, equity investment and trading activities appear to be less and less influenced by country-specific factors and increasingly subject to area-wide considerations. Consistent with this development, area-wide equity indices have been developing. Market participants are showing considerable interest in these area-wide indices, in particular as they are also now adopting investment positions on area-wide industrial sectors, using the sub-indices made available for that purpose. An indication of the degree of interest raised by area-wide indices is the relatively fierce competition for benchmark status that has developed between the various proponents of area- wide indices.

Second, market developments in relation to stock index futures and options will reflect the rise of area-wide indices. This may in turn lead to either consolidation or product specialisation of equity derivative exchanges. For my part, I consider the development of fair competition between exchanges to be a positive factor in terms of the improvement of the range of products and services available to the financial industry.

Third, in the equity market the euro has also provided a powerful incentive for the creation of new - and possibly competing - alliances among exchanges. Before the launch of the single currency, circuits had been created for the launch of integrated "new markets" within and beyond the euro area, encompassing the shares of small and medium-sized companies with a high potential for growth. The development in the integration of exchanges has also continued more recently, and, as you know, it has not been limited to the euro area.

5. Banking

In the field of banking, the securitisation trend appears to demand strategic and organisational adjustment on the part of banks. The relative importance of the more traditional types of banking activity can be seen to be decreasing, even though it should be mentioned that traditional banking activities have nonetheless continued to grow at a rate exceeding that of growth of nominal GDP. In the euro area, growth in recent years has been much more rapid in assets under the management of mutual funds and other institutional investors than in the assets of banks. This reflects a tendency towards decreasing the relative weight of bank deposits compared with securities in financial wealth.

The euro area banking industry has reacted to this development already by diversifying into the asset management area. Banking groups have been able to "internalise" a significant part of the securitisation tendency as they control a large majority of the mutual funds. As a result of the securitisation trend, there has been an increase in the share of security holdings among bank assets, and an increase in the share of capital gains - although those are quite cyclically sensitive - as well as in fee income stemming from asset management services. Meanwhile, the relative importance of interest income has declined correspondingly. At the bank level, dividend income from equity participations has generally become much more important, indicating an increase in the importance of the profit generated by non-bank subsidiaries.

Beside the establishment of non-bank subsidiaries, there have been other strategic and organisational changes that have resulted in banks strengthening their securities-related activities. In particular, significant motives behind the recent merger trend seem to include the desire to increase bank size and hence to be able to operate efficiently in wholesale securities markets as well as to be able to cater for the needs of large international corporations for investment banking services.

The trend towards securitisation can be regarded as one of the reasons for the structural changes in the banking system that appears to have accelerated recently. There have naturally also been other reasons why banks have sought to merge, predominantly the need to cut capacity and to reduce costs. These cost-driven mergers have taken place primarily among smaller banks.

6. Conclusion

In my remarks today, I have referred to a number of changes and market initiatives in the euro area financial landscape. These developments point to the increasing importance of the fixed income and equity markets that many expected in Stage Three of Economic and Monetary Union (EMU), providing new opportunities for borrowers and investors and causing pressure to adjust for financial institutions. In this respect, I should like to mention the importance of removing the remaining regulatory barriers to the further development of the securities markets. To this end, the European Commission has recently published an Action Plan of regulatory changes to improve the single market for financial services that would certainly - when implemented - boost the integration and market-driven development of the European securities markets.

Finally, I should like to conclude with some remarks about the role of the Eurosystem (the term that we use to mean the ECB and the 11 national central banks of the Member States participating in Stage Three of EMU) in the developments in the financial sector in Europe. First of all, the
Eurosystem contributes to developments in the financial sector by providing it with a stable and credible monetary policy. With a strong and credible commitment to its primary objective, price stability, the Eurosystem has created a situation in which the financial sector can concentrate on those issues that are of the greatest relevance to its activities.

The Eurosystem does not play a direct role in structural developments in the financial sector. With its single monetary policy framework and TARGET in particular, the Eurosystem has created an infrastructure that has proved to be useful for the establishment of an integrated money market in the euro area.

In addition, the Eurosystem carefully monitors structural developments in the financial sector to the extent that they might have an impact on the conduct of monetary policy. To make a final point, in observing developments in the financial sector, the Eurosystem constantly takes account of the fact that one of its tasks, laid down in the Treaty establishing the European Community, is to "contribute to the smooth conduct of policies pursued by the competent authorities relating to (…) the stability of the financial system" [(Article 105 (5))]. Analysis of the common developments in the European financial system represents such a contribution.

***

Economic and Monetary Union in Europe - the challenges ahead

Speech by Professor Dr. L.H. Hoogduin, on behalf of Dr. Willem F. Duisenberg,

President of the European Central Bank, at the symposium sponsored by the Federal Reserve Bank of Kansas

City on "New challenges for monetary policy" on 27 August 1999 in Jackson Hole, Wyoming

From the European perspective, the title of this year's Jackson Hole symposium - "new challenges for monetary policy" - is particularly appropriate. Economic and Monetary Union (EMU) in Europe is a unique project and its consummation with the introduction of the single monetary policy on 1 January 1999 took place less than eight months ago. Today, given the time available, I will not endeavour to review all the challenges which are raised by EMU comprehensively. I shall have to be selective, largely focusing on the primary objective of the Eurosystem, which is to maintain price stability in the euro area. In this context, let me briefly explain our terminology, which may perhaps not be known to everybody as yet. The "Eurosystem" is the name we gave to the European Central Bank
(ECB) and the currently eleven national central banks of those countries which have introduced the euro. The "euro area" comprises these eleven countries.

I should like to start with some observations on the objective and limitations of monetary policy in the euro area. Owing to the successful process of disinflation and convergence within Europe over the past decade, the launch of the euro last January took place in an environment of price stability that few observers would have predicted only a few years ago.
Consumers and firms are already reaping the benefits of this environment.
The relative price signals on which the efficiency of the market mechanism relies are not obscured by volatility in the general level of prices. By avoiding the costs and distortions inflation would impose on the economy, price stability is contributing to the growth and employment potential of the euro area.

This contribution is substantial. Unfortunately, it is all too easily taken for granted. Memories of the still recent past relating to the consequences of high and unstable inflation tend to fade rapidly. We are sometimes already hearing the argument that, given that price stability has been achieved, monetary policy should now be re-oriented away from its primary objective of price stability towards other goals. One of the challenges facing the Eurosystem is to maintain the support of the broad public constituency necessary to resist these calls, which - as I hardly need to point out to such a distinguished audience of central bankers and monetary economists - are misguided and ultimately counter-productive.
However, it can be said that the situation is the same as that in the world of sports; winning a championship and reaching the top is difficult, but staying there is even harder.

The institutional framework for European monetary policy, as created by the Maastricht Treaty (i.e. the Treaty on European Union, which has become part of the Treaty establishing the European Community, or the EC
Treaty, in short) is well suited to meeting this challenge. Most importantly, the single monetary policy has been clearly assigned the primary objective of maintaining price stability in the euro area. To facilitate the achievement of this goal, the ECB and the national central banks have been accorded a high degree of institutional independence so as to protect monetary policy decisions from undue external interference.

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