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
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
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
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.
6. MANAGING FINANCIAL TRANSFORMATIONS
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
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
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.
7. COPING WITH A LACK OF POLITICAL UNION
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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