European Monetary System

Table of contents

1. Introduction

2. Policy missions

3. New challenges

4. Making the eurosystem a central bank

5. Dealing with the European unemployment

6. Managing financial transformations

7. Coping with a lack of political union

8. Conclusion

1. INTRODUCTION

I participate in this Dies Academicus, at the University that carries

the name of Goethe, in the town of Frankfurt, in the first year of the

euro, with thoughts and emotions that are hard to conceal.

In my early youth, at the time of the decisions that determine one's

life, the dearest of my Gymnasium teachers told me: "You have to resolve,

in order to decide your future, the dilemma of what interests you most:

whether to understand or to change the world." My choice has been

Economics. And, the subject of economics being human action, I early

discounted that the call for action would prevail, in my motivations, over

the enquiring spirit. I did not expect how strongly that dilemma would

continue to accompany my life. More importantly, I did not understand, at

the time, how much acting and enquiring are complementary ways of being in

the world and searching for truth, as Goethe's work and life so profoundly

witness. Science changes reality; practical activity not supported by

reflection and analysis is ineffective and even harmful.

If I now live in Frankfurt and am here today it is because most of my

professional life was spent in an institution - the Banca d'Italia - where

eminent persons like Guido Carli, Paolo Baffi and Carlo Azeglio Ciampi

allowed the dilemma of my early years being kept somewhat unresolved and

favoured independent analysis as a complement of practical activity. They

also shared and encouraged the combination of enquiry and action that

helped the euro to become a reality. To them I therefore dedicate this

lecture.

Academia is the place where teaching and enquiring reinforce each

other by going hand in hand. It originates from Socrates' precept that "the

wisest recognises that he is in truth of no account in respect to wisdom".

Teaching is assertive, enquiring interrogative. One is based on the

presumption that we have answers to transmit; the other is based on the

modesty imposed by unresolved questions.

The mode of the following remarks will be the interrogative, rather

than the assertive one. Not only because presumption is certainly not my

#"+ !-+ 1999\EVALUATION DER BEITRAEGE AUS JUNI99.DOC¤АјXї[pic][pic]?- -#"+

!-+ 1999\EVALUATION DER Bйtat d'esprit today, but, more importantly,

because the theme of this lecture - the new challenges posed by the advent

of the euro - has a distinctly intellectual dimension, not only a practical

one. The success of EMU will largely depend on the ability to identify new

problems at an early stage and to analyse them without prejudice. While the

mission entrusted to central bankers is not new, the challenges in the

years to come may indeed differ from those of the last few decades. They

may be "new" either because they have not been experienced before, or

because they have acquired a new dimension.

In reviewing what I consider to be, for the Eurosystem, the most

important of such challenges, I shall use the academic privilege of taking

a free and forward-looking perspective. My point of view will, therefore,

not necessarily coincide with that of my institution. Moreover, I shall not

be objective, because I shall mainly draw on the intellectual and practical

experiences that have constituted my professional life.

2. POLICY MISSIONS

Policy missions have not been altered by the start of the euro. They

correspond to aspects of the public interest that were not redefined, and

did not need a redefinition, because of the euro.

In the field of central banking the public interest is to provide

economic activity with a medium of exchange that preserves its value over

time. In the broader field of economic policy - of which monetary policy is

part - the public interest is, to use words from the Maastricht Treaty that

can be similarly found in most national constitutions and legislation, "to

promote economic and social progress which is balanced and sustainable"

(Article B). In the field of European integration, the mission is that of

"creating an ever closer union among the people of Europe, in which

decisions are taken as closely as possible to the citizen" (Article A).

Finally, in the field of international relations the public interest is to

"maintain international peace and security" (UN Charter Article 1.1) as

well as to "contribute to the promotion and maintenance of high level of

employment and real income" (Articles of Agreement of the IMF, Article

1.ii).

The formulation of these policy missions has taken shape over the

course of this century, or even earlier, on the basis of experience,

scholarly investigation, political debate and action. There would be no

consensus about the primary mission of the central bank if countries had

not experienced first hyperinflation and then successful monetary

management by a stability-oriented and independent central bank. Social

progress and economic growth would not be on the agenda of governments

without the labour movement and the Great Depression. We would not have the

EU Treaties and the Charter of the UN without the tragedy of two World

Wars.

Economists have explored the scope for economic policy action, and

the limits thereof, in the monetary, fiscal and regulatory fields. Without

thirty years of academic debate about the role of monetary policy, the EMU

Treaty and the Statute of the ESCB/ECB would not have been written the way

they were. The subordination of economic policies to the principle of "an

open market economy with free competition" would not have been explicitly

inserted in the Maastricht Treaty (Article 3A) had those principles not

gained recognition in the community of scholars.

Central bankers (most notably in the Delors Committee) have prepared

the blueprint for the single currency. International and constitutional

lawyers have elaborated the legal concepts and studied the procedures to

carry out the policy missions. They have built that legal monument that is

the Rome/Maastricht Treaty. Citizens and politicians have discussed,

promoted and implemented the whole process.

Different policies carry different degrees of compulsion and

effectiveness. In general, instruments are more strongly framed when they

are entrusted to institutions whose area of jurisdiction coincides with

that of the nation state. Strongly framed instruments, however, do not

necessarily produce strong results. Tough regulation against air pollution

adopted only by a small country is less effective, for that same country,

than softer regulation adopted by a larger group of countries. The economic

literature about externalities, or that about optimal currency areas, are

seminal examples of the contribution economic research can make in this

respect.

In the following I shall focus on the mission of the central banker,

because this is the function assigned to me. I am convinced, however, that

the missions I mentioned are fundamentally complementary. Different

assignments are part of an orderly division of labour. In a democratic and

market-oriented environment not only citizens, but also officials, can

consider the aims of the various policy bodies and charters - national and

international - to which they refer as forming a consistent configuration.

I regard this as a special privilege of the time and space in which I have

lived so far.

3. NEW CHALLENGES

In the last thirty years central bankers have fought for two

objectives: the recognition of the primacy of price stability for monetary

policy, and the independence of the central bank. This has been the period

in which the combination of political democracy and fiduciary currency made

the governance of money particularly difficult in many countries.

The intellectual recognition, then the political acceptance and

finally the actual implementation of a monetary constitution based on price

stability and central bank independence have required a long process. The

academic profession has contributed to it in a powerful way, from Irving

Fisher to Don Patinkin to Robert Lucas. Even those who have denied the need

of having a central bank, like Milton Friedman and Friedrich A. von Hayek,

have in the end contributed to clarify its role and function. No less

persuasive have been the arguments of experience. In a positive sense, the

economic success of the country - Germany - where the two elements had been

introduced at an early stage. In a negative sense, the social evil of high

and prolonged inflation suffered by many other countries, including my own.

In legal and institutional terms, the result of this long fight has

been engraved in the Treaty of Maastricht. The Treaty represents the

strongest monetary constitution ever written, not only because of its

substance, but also because the procedure to amend it is more difficult

than that required for the charter of any existing central bank. Largely

induced by Maastricht and EMU is also the independent status of national

central banks in the European Union. We should indeed not forget that,

until recently, key decisions in the field of monetary policy were still in

the hands of the Treasury in such countries as the United Kingdom, France,

Italy and Spain. The Maastricht process has been the catalyst for monetary

reforms central bankers had advocated for years.

Partly, but not exclusively, because of this process, the conditions

under which the single currency has come to life differ from those

prevailing in the past years.

Prices have for some time now shown the highest degree of stability

seen for more than thirty years. Most countries have made significant

progress towards fiscal consolidation. The consensus on sound principles of

budgetary and monetary management is broader and stronger, among both

politicians and ordinary people, than in any other period the present

generation can remember. Few dispute in an open way the now widely used

expression "culture of stability".

However, when in 1981 it was decided to save the last specimen of the

smallpox virus in a laboratory for the sake of documentation, health had

not ceased to be in danger. Similarly, none of these achievements can be

considered as permanent and central bankers should primarily strive to

preserve them. To this end, detecting new challenges at an early stage is

essential. The question is: where do the problems come from? What are the

circumstances under which the "old mission" will have to be accomplished in

the coming years? What threatens our health besides smallpox?

4. MAKING THE EUROSYSTEM A CENTRAL BANK

The first challenge consists in making the Eurosystem a central bank.

It may seem simple, but is not. Let me start my explanation from the two

key words of this proposition.

Eurosystem is the word chosen by the ECB to indicate the "ECB+11

participating national central banks", i.e. the central bank of the euro.

The Treaty has no name for this key entity, while it refers extensively to

the ESCB (European System of Central Banks) formed by the ECB and the 15

European national central banks). However, as long as there are "out"

countries, the ESCB in its full composition will remain a scarcely relevant

entity because it neither refers to a single currency area nor has any

policy competence. Instead, the word Eurosystem indicates clearly the

articulated entity which is for the euro what the Federal Reserve System is

for the dollar.

Central bank is the institution in charge of the public interests

associated with the currency. It originates from fundamental changes in the

technology of payments: the adoption of banknotes, cheques and giros, and

their final disconnection from gold. These changes have shaped the two

other functions that most central banks have derived from the original

payment system function: monetary policy and banking supervision. Man-made

money made monetary policy possible. Commercial bank money made banking

supervision necessary.

These three functions have most often been entrusted to the same

institution because they are inextricably linked. Just as money has the

interrelated roles of means of payment, unit of account and store of value,

so central banking has a triadic function that refers to the three roles of

money. Operating and supervising the payment system refers to money as a

means of payment; ensuring price stability refers to money as a unit of

account and a store of value; pursuing the stability of banks refers to

money as a means of payment and a store of value. The function remains

triadic (albeit, in my view, in a less satisfactory way) even where

prudential control is entrusted to a separate agency. I am referring to the

special "supervision" any central bank has over its banking community,

necessitated by the fact that banks are the primary creators of money,

providers of payment services, managers of the stock of savings and

counterparties of central bank operations.

In performing its triadic function the central bank exerts

operational and regulatory powers, interacts with other public authorities

and the financial community, entertains relations with other central banks,

participates in international debates and negotiations about monetary and

financial matters. In all these activities it pursues and represents the

public interest of a sound currency; all are instrumental to that interest.

From the point of view of the perceptions of people and markets all such

activities refer to that same public good that we call confidence.

For the Eurosystem the challenge is to rise to a full central banking

role as just defined. It is necessary because of the links that bind the

various functions of money. The Eurosystem would find it hard to play

effectively its most delicate role - the pursuit of a stable currency or,

as the German Constitution puts it, "die Wдhrung zu sichern" - if it

appeared as an inexplicable exception to the classic paradigm of a central

bank. The public, the markets, the international institutions and fora

would not understand.

But it is also difficult, because the steps to take are multiple and

complex from both a conceptual and a practical point of view. Moreover,

they cannot all be taken at once. Let me briefly explain.

In the articulation of any federal constitution (Bund, Land and

local, to use the German terminology) the central bank undoubtedly belongs

to the level of the "federation", or Bund. The fact that important

activities are conducted by "local" components of the system

(Landeszentralbanken, or Federal Reserve District Banks) is an

organisational feature that does not impinge upon the constitutional

position of the central bank. The same happens within Monetary Union. The

Eurosystem is the central bank of the euro area, even though operations are

carried out - to the extent possible and appropriate - through its

component parts, the NCBs. Indeed, the constitutional and the

organisational profile of the institution are not in contradiction.

Although a federal and decentralised central bank is not a novelty,

the Eurosystem is a special case. It is the central bank of an economy that

has a much deeper national segmentation than any other currency area. Its

components have for many generations (and until few weeks ago) performed

the full range of central banking functions under their own responsibility

and in a national context. They have been accountable to, and sometimes

dependent on, national institutions. Public opinion has perceived, and

still perceives, them as national entities. The notion of the public

interest they were referring to was the notion of a national interest.

Significant differences existed, and partly remain, in their tasks,

organisations, statutes and cultures.

In this situation, making the Eurosystem a central bank requires

drawing the appropriate distinction between being national in the

organisational sense and being euro area-wide in the definition of the

public interest pursued. This is a difficult distinction to draw in

conceptual terms, not only in practical terms or from the point of view of

personal attitudes.

In the preparatory discussions and negotiations that led to the

Maastricht Treaty, central banks took the view that monetary functions are

indivisible and that, contrary to the fiscal field, subsidiarity cannot

apply to the monetary field. Their traditional and strongly held position

has been that the public interest assigned to central bank is a whole which

cannot easily be decomposed. Indeed, while there is a fairly well developed

theory of fiscal federalism, there is no equivalent for the monetary field.

As I said, I do think that the functions of a central bank constitute

a whole that cannot be split. This does not exclude that the Eurosystem

should avoid seeking more uniformity than necessary and that some diversity

is a positive factor and has always been valued as an aspect of the

richness of Europe. Perhaps even a limited degree of internal competition

may be used as an incentive to good performance. But can the Eurosystem

depart from the two historical models of the Federal Reserve System and the

Bundesbank? What are, in conceptual terms, the criteria of what I just

called the "appropriate distinction"? What should be the touchstone?

It would be an illusion, I think, to expect or pretend to have a full

and satisfactory answer solely from legal interpretation. And it would be

unfortunate if the Eurosystem were to fall into the trap of the narrowly

legalistic approach that paralyses international organisations. The

Eurosystem is not an international organisation, its model is not the

Articles of Agreement of the IMF. Of course, the answer will have to comply

with the Treaty, which provides useful guidance. However, the system is

entrusted to decision-making bodies that are composed not of lawyers, but

of central bankers. They carry the primary responsibility to manage the

euro and are accountable for that responsibility. They have known for years

what a central bank is and how vague the wordings of central bank statutes

have historically been. Their touchstone can only be, in the end, the

effectiveness in the accomplishment of the basic mission embodied in the

triadic paradigm of central banking functions.

5. DEALING WITH EUROPEAN UNEMPLOYMENT

The second challenge comes from the high level of unemployment in

Europe.

Every economist, observer or policy-maker would probably agree that

the most serious problem for the European economy, today and in the years

to come, is high unemployment. In large parts of continental Europe the

economic system just seems to have lost the ability to create new jobs.

Also on the nature and causes of European unemployment there is a

large degree of agreement, as there was agreement on the nature and causes

of European inflation well before price stability was finally restored in

the 1990s. The key words describing such agreement are structural factors

and flexibility. There is agreement that perverse incentives, direct and

indirect taxation of labour, unsustainable pension schemes, overly tight

employment rules and rigidities throughout the economy are the main

obstacles to the creation of new jobs. There is agreement that the

Страницы: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18