I am very honoured to have been invited to give this speech at your conference dinner. The role of consumers and families as members of global consumption society and as market partners, which is the focus of your conference is indeed a very well chosen topic. I do not have competence to make any in depth comments on the very interesting and topical items on your agenda. But I would like to start by highlighting the role of consumers and consumer interest groups as market actors in a global context, thus relating your conference also to the "hot" issue of globalisation.
Our daily life has become more global. Technological development has greatly favoured information transmission and mass media, and thus new cultural tendencies and market information are spreading rapidly and reaching more and more people. It is easy – for example through internet - to find issues and things we are interested in from all around the world irrespective the nature of our interests – be it cultural, commercial, entertaining etc. The process has proceeded so far that it seems justified to say that we are now living in a "global village". (This term was introduced as early as in the 1960s by the "media guru" Marshal McLuhan, while presenting his vision of the impact of developments in mass media on daily life of people.)
One aspect of this development is that the scope of consumer choice has expanded and the share of goods, and increasingly also services, marketed globally in the average consumption basket has increased greatly. Comparison of prices and purchases of goods over country borders has enhanced market competition. Consumers have benefited from lower prices, but perhaps even more important – also from the point of view of a consumer - have been the dynamic effects that follow from opening of global markets for innovative and well-operated firms.
I have no doubt that these changes in consumption patterns follow from rational decisions by well-informed market actors rather than say, the marketing efforts of large multinational companies and that the globalisation process has made a significant contribution to the welfare of most of us.
We can now see clearly the benefits from the globalisation in developed world, but of course the greatest potential for improvement is in the developing world. The emerging market economies have already taken significant steps in gaining access to the global market. Being in the position of a latecomer, they have been able to adopt directly modern technology in consumption, without having to travel through all generations of technology. For example, consumers in developing countries are directly adopting radio-based mobile phone technology, skipping heavy and capital intensive fixed-line telecommunication systems altogether. The pace of the diffusion process can be astonishing. To mention just one example, the number of mobile phone users in China increased in June this year by 4,8 million, that is about the size of the population of Finland.
Another, often overlooked aspect of globalisation is that markets reflect not only the needs and preferences but also the knowledge and the moral of global villagers. In the end, it is the consumers who decide in what kind – also ecologically and socially - of village we live. There are now many examples which show that the opinions of global consumers, with regard to what products are produced and how, cannot be neglected. In order to maintain their image and brands, multinational companies cannot isolate their production in developing countries from the ethical values of their consumers in the developed world.
Globalisation is a deep process with far-reaching consequences for practically the whole population of the world. It is associated with many challenges, and its benefits are not shared equally by all. But overall, I am rather confident that technological change and globalisation taken as a whole will bring with themselves a tremendous increase in the living standards of the now poorest people.
While saying this, I admit that it is a risky business to make forecasts. Therefore, being a central banker and thus highly risk averse, it would be wiser for me to refrain from speculating any further about future developments in this field. Therefore, I am now going to turn to issues relating more closely to central banking.
In Europe, economic integration has proceeded further than in other parts of the world. To some extent, European integration is a reflection of the broader process known as globalisation, and its underlying forces are much the same. But there are also significant differences. The most prominent one is that while globalisation has mainly - but of course not only - been a market-led process, the European integration has to a large extent been created by a deliberate political will. An important difference is also that Europe has created community institutions under the umbrella of the European Union. Some of these institutions have significant union-wide powers, whereas the global governance is almost entirely based on voluntarily intergovernmental co-operation.
When the European integration process was initiated, more than 50 years ago, memories of World War II were still vivid. The main purpose was to create an environment of economic prosperity and stability that would prevent any future wars between Europeans. The main tool chosen to achieve this goal was deep trade integration and the gradual convergence of economic policies. Indeed, from the very start the Treaty explicitly envisaged the creation of a common market based on the four freedoms of movements: goods, services, workers and capital, which were finally laid down in the Single Market Programme of 1985. After the adoption of this Programme it became increasingly clear that the potential of the internal market could not be fully exploited while the relatively high transaction costs linked to currency conversion and the uncertainties associated with exchange rate fluctuations persisted.
The existence of separate currencies and different exchange rates indeed appears to be a barrier to trade and in particular to the retail trade, as has been witnessed by recent empirical economic research. The reasons for this are likely to be of micro-economical rather than of macro-economic origin, such as transaction costs and different information problems including the difficulty of price comparisons. From this point of view, the single currency should be seen as a necessary complement, the crowning achievement of the Single Market, as well as, as facilitating further economic integration.
Currently, the euro area comprises a single market of twelve EU countries with free movement of capital, labour, goods and services and with a single currency for more than 300 million Europeans. In this respect the euro area is comparable with the two major economies in the world, the US and Japan.
Monetary policy in the euro area countries is on the responsibility of the European Central Bank. According to the EU Treaty, the main goal of the monetary policy of the ECB is the maintenance of price stability in the euro area. The clear priority given to the price stability objective is based on the fact that monetary policy will make the best overall contribution to improving economic prospects and raising living standards by maintaining price stability in a credible and lasting way. The ECB does not have either the means or the responsibility for ensuring a high level of employment and real growth, beyond the positive impact of price stability.
The European Central Bank has defined price stability as increase in consumer prices in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), less than 2 % annually. Many people think that a positive inflation target is better than stability in price level because inflation is less dangerous than deflation. But a much more convincing argument for the ECB definition of price stability is that it allows for some inaccuracy in the measurement of the price level. Most central statistical offices are not able to properly account for improvements in the quality of consumer goods and therefore published consumer price indices - including the HICP - give a downward biased estimate of the true inflation. Furthermore, the ECB definition indicates a medium term objective, not to be adhered mechanistically from month to month or even necessarily annually.
From the point of view of the consumer, price stability is useful because it reduces noise from price comparisons. Empirical evidence has shown convincingly that low inflation is closely related to stable inflation. The consumer is therefore less uncertain about real interest rates and other inter-temporal relative prices in an environment of stabile prices than in inflationary conditions. Empirical evidence also shows that the variability of relative prices correlates positively with the rate of inflation. Therefore the consumer is also less uncertain about contemporaneous relative prices in an environment of stabile prices than in inflationary conditions.
Before joining the EMU (Economic and Monetary Union), the problem of asymmetric business cycles was discussed in Finland and elsewhere. Some sceptics believe that because in a monetary union there is no national monetary policy available to counteract asymmetric shocks to the economy, monetary union cannot last very long. For example, Professor Milton Friedman said recently – in the context of his 90th birthday – that he expects that the EMU will have a much shorter life than he has had. He said that it is good if the monetary union in Europe will last for 15 years. Here I must say that I cannot agree with him. To some extent, I can rely on empirical evidence.
The Finnish business cycle was, in the past, usually very different from the "core" European countries. Therefore, the worry was that common monetary policy, geared to "average" European needs, would be sometimes too lax and sometimes too tight for Finland. The former situation would cause inflation to get out of control; in the latter case, policy would curtail aggregate demand too much and could cause an unnecessary recession.
I do not want to sound imprudent, but I think that the experience, which we have so far, suggests that these fears were probably exaggerated. Economic fluctuations in Finland have become significantly more synchronised with the rest of the euro area, although the amplitude of the fluctuations in our economy are still steeper.
The past inflationary character of our economy was mostly due to weak credibility of our monetary policy. Now this problem does not exist any more. Being a member in the EMU with a credible monetary policy has finally ended devaluation speculations and brought about the credible price stability that is needed for solutions to build sustainable welfare. It is thus not surprising that wage and price developments in Finland during the past years have been very encouraging.
Ladies and Gentlemen,
Let me once again congratulate you for the very interesting topic of your Conference. It goes without saying that choices of consumers and families are decisive to economic developments. Consumer has always been a King, and will remain so, even increasingly in a globalised world. Without denying the role of policy makers – I as a central banker - would like to highlight the important contribution that the stability oriented monetary policy can make by providing a stability "anchor" for consumers' decisions on consumption and investment - it is thus very much up to consumers to decide whether consumption and production are ecologically and socially sustainable and how the welfare in the world is achieved. In the end, markets reflect our needs and skills, but also our moral.
I wish you all the success in your conference and hope that you also have some time to enjoy your stay in Helsinki.