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... А Б В Г Д Е Ж З И К Л М Н О П Р С Т У Ф Х Ц Ч Ш Щ Э Ю Я

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Европейская денежная система

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.


The second challenge comes from the high level of unemployment in


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

typically European welfare state system should be profoundly corrected, but

not suppressed. Many also think that rather than following a "Thatcherian"

policy of cracking down on the trade unions, it would be preferable to work

with, rather than against, the labour organisations, although reform

entails occasional confrontations.

As with inflation in the 1970s and 1980s, so unemployment in the

1990s - while being a European disease - is quite diversified across

European countries and regions, due to differences in both policies and

economic situations. It is over or around 20 per cent in the Mezzogiorno

and Sachsen-Anhalt, but below 7 per cent in Lombardy and Baden-Wьrttemberg;

over 18 per cent in Spain, but less than 4 in the Netherlands.

Notwithstanding the intergovernmental debates at a European level and

the stated intention to undertake common initiatives, the instruments of

employment policy remain in national hands, although only partly in the

hands of governments. I regard this as appropriate because competition

should not be suppressed from the labour market.

Adopting the appropriate policies of structural reform has proved

extremely difficult in many key European countries, including my own and

this one. Other countries, such as the Netherlands and the United Kingdom,

have been more successful. Even the most successful experiences, however,

have shown that reducing unemployment is a long and gradual process.

Although some countries started labour market reforms in the early 1980s,

they only reaped the benefits in the 1990s.

Unemployment will thus remain with us in the years to come and I am

convinced that it should be regarded as the greatest policy challenge not

only by governments and labour organisations, but by the Eurosystem as

well. Let me explain why.

An economy in which unemployment drags above 10 per cent for years is

a sick economy, just like one in which public finances or inflation are

chronically destroying savings. To operate in a sick economy is always a

risk for the central bank and for the successful fulfilment of its primary

mission. In the case of prolonged unemployment, the risk arises both on a

functional and an institutional ground.

On a functional ground, i.e. from the point of view of the

relationship between economic variables that models usually consider, a

chronically weak economy is one in which expectations deteriorate,

investments stagnate, consumption declines. Structural unemployment may

increase the risk of a deflationary spiral because a longer expected

duration of unemployment may imply that households respond more

conservatively (in terms of increasing savings) in the face of a

deflationary shock. Today, we see no signs of deflation. Markets and

observers who pay attention to communications by the Eurosystem know that

the monetary policy strategy of the euro area is symmetrical, equally

attentive to inflation and deflation. Thus, they know that if that risk

became reality, the Eurosystem would have to act, and would act. But we

know that monetary policy is much less effective in countering deflation

than it is in countering inflation.

A more insidious threat, however, may arise on the institutional

ground. It comes from a chain of causation involving social attitudes,

economic theory and policy, actual economic developments and institutional

arrangements. Attitudes of society respond to economic situations and

policies, which in turn depend on the state of development of economics.

Institutions, on their part, are influenced by attitudes of society. Both

the course of economic thought and the practice of policy were lastingly

altered by the Great Depression. The epitome of this historical event was

the Keynesian revolution. In many countries the strong consensus about the

primacy of price stability and the independence of the central bank was the

outcome of the prolonged inflation suffered in the 1970s and 1980s. Here in

Germany, it is rooted in the experience of hyperinflation. Would such a

consensus survive if high unemployment remained a chronic feature of key

European economies for many more years? And how would the position of the

central bank change if that consensus faltered?

As central bankers primarily concerned with price stability, what can

we do to cope with this challenge and to reduce the risks? My answer may

seem disappointingly partial, as I do not think there is a miraculous

medicine that monetary policy can provide. I would phrase it as follows.

Firstly, the central banker should be aware of the danger. He should

know that in the future his principal objective may not receive, from the

public, governments and parliaments the same strong support which has been

the outcome of the two decades of high inflation. Since unemployment is

what concerns the voters and the youngsters most, it may be increasingly

necessary for him to play an educational role in explaining the benefits of

a stable currency to those who have not directly experienced the costs of

inflation. This is very much like the case of the post-war generations in

Europe which, being fortunate enough not to experience the horror of World

War II, need now to be reminded about the human costs of that terrible


Secondly, the central banker should avoid mistakes. It may seem

obvious, but he should never forget that independence does not mean

infallibility and that the likely new environment will offer no forgiveness

for mistakes. A mistake would be the attempt to provide a substitute for

the lack of structural policies by providing unnecessary monetary stimulus:

it is not because the right medicine is neither supplied by the pharmacist

nor demanded by the patient that the wrong medicine becomes effective.

Another mistake would be to give the impression that the central bank has a

ceiling in mind for growth, rather than for inflation. On the contrary, the

central bank should make it clear that any rate of non-inflationary growth

is welcomed and would be accommodated, the higher the better.

Technically, this will not be an easy task. The analytical

uncertainty surrounding estimates of potential output and its growth rate

might lead the central banker to respond quite cautiously to evidence of

shifts in the rate of non-inflationary growth. While such caution is

certainly optimal from an inflation stabilisation point of view, it might

be wrongly interpreted as a systematic deflationary bias by the public and

the politicians. This is a clear case in which any progress made by

scholars in refining the analytical tools of the economic profession will

greatly help the central banker to achieve his goals without imposing

unnecessary costs on society at large.

On the whole, however, it is part of the central banker's role to

make the day-by-day decisions that, in the end, constitute monetary policy.

This responsibility can be neither transferred to, nor challenged by,

policy makers responsible for other areas. Last week, the Eurosystem has

made, for the first time in its life, an affirmative monetary policy

decision by lowering its official rates. In this way, the Eurosystem has

acted in line with its monetary policy strategy and made a significant

contribution towards an economic environment in which the considerable

growth potential of the euro area can be exploited in full. It is now the

responsibility of other sectors of economic policy making to do their part

by strictly adhering to the Stability and Growth Pact and implementing

decisive structural reforms.


The third challenge consists in accompanying and surveying the rapid

changes the European financial institutions and markets are undergoing, and

will continue to undergo over the coming years, partly - but not

exclusively - as a consequence of the euro.

It is sufficient to observe the US Federal Reserve System to

understand the role the Eurosystem should play in the coming years:

attention in monitoring changes in the financial system, active

participation in the policy debate caused by such change, intense dialogue

with both the Administration and Congress, influence exerted on opinions

and decisions.

To a large extent the factors of change are technology determined,

hence independent of the euro and even not specifically European.

Technology is the driving force of the transformation in banking and

finance that modifies the traditional deposit loan structure of banks.

Technology also reshapes dramatically the back office and the communication

with customers, thus producing massive over-branching and over-staffing in

traditional banks. Also the globalisation of finance comes primarily from

the combination of data processing and telecommunications.

Other changes are specifically European. Since universal banking has

historically prevailed in continental Europe, the change from an

institution-based to a market-based financial system is particularly

significant in this part of the world. Similarly, the development of

financial conglomerates is more pronounced in Europe than in the United

States or Japan. Typical of continental Europe are also the labour market

rigidities that make the restructuring of banks so difficult and slow.

Finally, there are changes induced by the euro. The removal of

currency specificity as a cause of national segmentation of the financial

industry is causing a convulsive shake-up of both institutions and markets.

Since the beginning of this year, about ten banks ranking near the top of

their respective national lists have concluded or started merger operations

in France, Spain, Italy, the Netherlands, Belgium and Norway. In most

European countries stock exchanges and other organised markets, which were

legally and structurally organised as providers of a public service, have

been transformed into profit-driven private institutions and are now in a

process of rapid concentration. In the coming two or three years the number

of banks will shrink, the largest banks will become much larger, few

financial centres and market networks will replace the present one-country

one-centre configuration.

In any national system the central bank would actively monitor and

even guide the course of such a transformation. It would do so along with

the various agencies responsible for financial supervision and competition

policy, and with an involvement of the executive power itself. Although

largely determined by business decisions, these developments indeed involve

the public interest in various ways.

Surveying and accompanying a profound transformation of the financial

industry would be a difficult task for any central bank. For the Eurosystem

it will represent a daunting challenge because it will put to the test an

unprecedented articulation of the policy functions that are called for. Let

me briefly explain this assertion.

The institutional setting of the euro area establishes a double

separation between central banking and other public functions. Firstly, a

functional separation, whereby banking supervision is now assigned to

institutions that - even when they are national central banks - no longer

exert independent monetary policy functions. Of this separation we have

many previous examples (Germany, Japan, Sweden, now the UK, etc.). Much

newer is a second, geographical, separation, whereby - with only the

partial exception of competition policy - the area of jurisdiction of

central banking does not coincide with the area of jurisdiction of the

other public functions involved (banking supervision, regulation of the

securities market, etc.).

Experts, including academic people, have so far focused attention on

lender-of-last-resort functions and suggested that the new setting would

not be able to act effectively in a crisis. I have argued elsewhere why

this criticism seems unjustified. Here, I would like to suggest that the

real challenge could come, in my opinion, from tensions between the

national and the euro area interest in the process of financial


The process of industry transformation will inevitably involve

aspects that have traditionally been considered as sensitive by public

authorities: suppression of jobs, location of facilities and headquarters.

Financial transformation will also produce a hardening of competition and

competition will be, to a considerable extent, one between national

financial centers and industries, not only between individual banks or

institutions. The propensity to defend national champions may prevail over

the pursuit of efficiency. The risk for the Eurosystem to fall in the trap

of an improper interplay between the EU and the national dimension of the

public interest may become high. Like any central bank, the Eurosystem

should be both active and neutral in the great transformation of "its"

financial industry. The word "system" that is part of its own name refers,

and should apply in practice, to the whole euro area.


The fourth challenge consists in coping with the lack of a political

union. The relationship between monetary and political union and whether

the latter should be a precondition for the former has been a central issue

in the European debate well before the establishment of the Delors

Committee in 1988. While I do think that there is a lack of political union

and that this lack constitutes a serious challenge for the Eurosystem, I

also think that the expression "lack of political union" is often used in

an unclear way that blurs the issue. Let me thus first consider two

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