Европейская денежная система

public.

A further important building block in order to establish credibility

is the promotion of an efficient implementation of the monetary policy

decisions. The Eurosystem has aimed to set up an operational framework

which is consistent with market principles and which ensures equal

treatment of counterparties and financial systems across the euro area. The

Eurosystem's operational framework is based on the principle of

decentralisation in order to take advantage of the established links

between the national central banks and their counterparties. The monetary

policy operations will therefore be conducted by the national central

banks, while decisions are taken centrally in the ECB's decision-making

bodies.

The consequences of a single currency: perspectives for the future

The most important effects of the single currency relate to the

possibility of improving macroeconomic stability and credibility for the

policies pursued; these effects are particularly important for the smaller

European economies. Moreover, important benefits can be derived from

microeconomic factors, such as lower transaction costs, wider and deeper

financial markets, improved price transparency and increased competition.

Starting with the macroeconomic factors, Monetary Union makes it

possible for the participating countries to combine their credibility. In

this way, small countries can, to a certain extent, "borrow" credibility

from some of the large countries which have pursued stability-oriented

policies for a long time. Under credible conditions, the financial markets

are no longer under pressure from speculative attacks by large

institutional investors. Price and interest rate developments are

stabilised, and the investment climate for companies is secured. In the

microeconomic field, the most obvious consequences relate to lower

transaction costs and increased price transparency across national borders.

These factors are likely to contribute to increased competition and

downward price pressure on many products.

One very important consequence is that the use of a single currency

will give rise to larger and more competitive financial markets in the euro

area. In most European countries, the financial markets have, by tradition,

been rather shallow, with few participants and a rather narrow set of

financial instruments on offer. A high degree of segmentation and a lack of

cross-border competition have implied relatively low trading volumes, high

transaction costs and a reluctance to implement innovative financial

instruments.

On the introduction of the euro, the foreign exchange risk of trading

in the different national markets in the euro area fully disappeared. This

has triggered increasing cross-border competition and has provided an

incentive for the harmonisation of market practices. In fact, the trading

of money market paper and euro area government bonds can already be

considered to be largely integrated. The markets for private bonds are

still segmented owing to the differing institutional and regulatory

conditions across Member States, but they, too, will gradually integrate

and provide an incentive for increasing the issuance volumes of private

bonds. This will contribute to reducing the financing costs for private

companies, and it will provide improved opportunities for investors.

Monetary Union provides much needed assurance of exchange rate

stability for exporters, importers and investors. This is particularly

important for small and open economies. In fact, most countries in Europe

are to be considered small in the current global perspective. The active

use of the exchange rate as a tool of economic policy could be an

alternative for a large reserve-currency country. For a small country,

experience has shown that large changes in the exchange rate tend to give

rise to higher costs rather than benefits, due to the harmful effects on

expectations and higher interest rates.

Some of the economic effects of the Monetary Union may partially

benefit also the countries remaining outside Monetary Union. Nevertheless,

it is important for the "out" countries, to assess whether they find that

the benefits of maintaining a national monetary policy "autonomy" - if

there is any such autonomy in an integrated and globalised market situation

- outweigh the possible drawbacks of not being able to fully draw on the

credibility of the euro area, the integration of the euro area financial

markets, lower transaction costs, improved price transparency and increased

competition.

The euro and the Nordic countries

The Nordic countries have chosen to organise their monetary policy

ties to the euro area in very different ways: Finland is the only Nordic

country taking part in Monetary Union as from the start of Stage Three;

Denmark negotiated an opt-out from Monetary Union but follows a fixed

exchange rate policy vis-а-vis the euro within the new Exchange Rate

Mechanism (ERM II); Sweden decided not to participate in Monetary Union

from the start of Stage Three, without having a formal opt-out and the

Swedish krona still floats freely against the euro; and Norway and Iceland

remain outside the EU altogether.

The divergent approaches taken by the Nordic countries as regards one

of the most important economic and political projects in Europe in modern

times are somewhat strange in view of their traditionally close cultural,

historical, political and economic ties. Nordic co-operation has always

been very important and close. I note with satisfaction that the public

opinions in Denmark and Sweden now seem to be swinging in a more favourable

direction with regard to future membership. Maybe the successful

implementation of the euro has made the public understand that Monetary

Union is aimed at ensuring long-term stability in Europe. In this context,

the recent signals from the Government of the United Kingdom in favour of

membership in the Monetary Union are also very encouraging.

Personally, I think that it would be beneficial to all Nordic

countries - and the United Kingdom - to join Monetary Union within the not

too distant future. I hope that Sweden and Denmark can become members

already before the introduction of the euro banknotes and coins in 2002.

It is important for these countries to also assess the political

aspects of remaining outside Monetary Union. Experience has shown that EU

Member States which have taken initiatives and worked constructively

towards European integration have been generally more successful in gaining

influence than those less committed to the project. In this respect, it

should be noted that the aim of the Maastricht Treaty is clearly to

establish a Monetary Union comprising all EU Member States.

Personally, I also think that the Nordic countries could provide a

fruitful joint contribution to the long-term success of Monetary Union.

There is no need to overemphasise the role of small countries in this

process, but it is clear that co-ordinated views by a group of small

countries would have a larger influence than the views of individual

countries. One of the benefits of the Nordic countries - and small

countries in general - is that they are seldom bound to their old

traditional system. In contrast, they typically fight for efficient

solutions which would be in the interest of the whole of the euro area.

Concluding remarks

The project to establish European Economic and Monetary Union was

carefully prepared and based on very strong political commitment. It has

contributed to the co-ordination of economic policies - even in a wider

sense - in an environment of deregulated financial markets and the free

flow of capital. The stability arguments behind the introduction of the

euro have been so well accepted that we are already seeing serious and

visible efforts aimed at the next step towards a global "single currency"

through the establishment of exchange rate co-ordination between the euro,

the US dollar and the Japanese yen. In order for any such world-wide

currency co-ordination to become successful, there would be a need for

political commitment to globally harmonising fiscal, monetary and

structural policies. In this context, I would advise realism, caution and a

gradual approach in spite of the longer-term ideal goal of global

stability. There are still many challenges and adjustments ahead within the

euro area before any world-wide steps should be considered. Our first

priority is to ensure long-term stability in the euro area economies under

the single monetary policy and on the hope that the euro area will soon

cover all EU countries.

***

Eurosystem: new challenges for old missions

Inaugural Lecture by Tommaso Padoa-Schioppa,

Member of the Executive Board of the European Central Bank,

on the occasion of his appointment as

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Universitдt,

Frankfurt am Main, 15 April 1999

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

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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

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