Курсовая: Европейская денежная система

Курсовая: Европейская денежная система

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

honorary Professor of Johann Wolfgang Goethe-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 йtat 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 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 conflict.

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 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 transformation.

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 meanings of this expression

with which I do not concur.

First, I do not concur with the idea that there is no political union in

Europe today. It is not because the content and the competence of the

European Union are mainly economic, that its nature and historical role are

not political. Even before the single currency, EU competence extended over

virtually the whole Corpus Iuris of economic activity, from the establishment

of "the free movement of goods, persons, services and capital" (the four

freedoms proclaimed by Article 3 of the Treaty) to external economic

relationships. To understand how very political these issues are, it should

suffice to think about the place they take in the US political debate today,

or have taken in the politics of our countries before the creation of the

European Community. Moreover, the institutional architecture of the European

Union is entirely that of a political system, not that of an international

organisation based on intergovernmental co-operation: a legislative capacity

that prevails over that of Member States, a judicial power, a directly

elected Parliament.

Second, I do not concur with the idea that Monetary Union has developed

outside the political process. Quite the contrary is true. The establishment

of a single currency in the European Union has been achieved because of the

strong political determination of elected governments over a full decade,

from June 1988 to May 1998. It is significant that during that long period

continuity has not been broken by repeated changes of political majority in

virtually all countries except Germany. Technocrats, i.e. central bankers,

have "only" played their role, crucial as it may be. They have provided

expertise, from the drafting of the blueprint to the preparatory work for the

actual start of the system. And, no less important, they have loyally

accepted the limits of their role and recognised that the ultimate decisions

have belonged to elected politicians. This is the meaning of the two

statements of July 1988 and March 1998 with which the Bundesbank has defined

its position at the beginning and the end of the crucial decade. "In der

Beschrдnkung zeigt sich der Meister".

The establishment of a single currency is a strongly political event in its

genesis and a profound social and cultural change in its nature. As

economists and central bankers we pay limited attention to notes and coins

because they are a minor and endogenous component of the money stock. For

many politicians, however, Monetary Union meant little else than a common

banknote. They saw, better than us, that for the people money has to do with

the perception of the society to which they belong and, ultimately, with

their culture. As such, money goes well beyond the economic sphere of human

action. Indeed, the act whereby we accept to provide goods or services to an

unknown person in exchange for pieces of paper that have no intrinsic value

is perhaps the most significant and widespread testimony of the social

contract that binds people. This is why coinage and money printing have

always been a prerogative of the State.

Yet, for two main reasons it remains true that Europe has a lack of political

union. First, the European Union is still not the ultimate provider of

internal and external security, the two key functions that constitute the

raison d'кtre of the modern State. Second, EU institutions still fail to

comply with the key constitutional principles that constitute the heritage of

western democracies: foundation of the legislative and executive functions on

the popular vote, majority principle, equilibrium of powers.

Why does the lack of political union constitute a challenge for the

Eurosystem? I would answer as follows.

In a period of less than thirty years money has abandoned both the anchors it

has had since the earliest times: metal and the sovereign. It is true that

central banks have struggled for years to free the printing press from the

influence of the modern sovereign, as they struggled in the past to free it

from the influence of private interests. It is equally true that the present

status of the Eurosystem in the constellation of public powers is

exceptionally favourable. However, only a superficial thinker could confuse

independence with solitude and take the view that the lack of political union

strengthens the position of the central bank and makes it freer to fulfil its

mission.

The security on which a sound currency assesses its role cannot be provided

exclusively by the central bank. It derives from a number of elements that

only the State or, more broadly, a political union as previously defined, can

provide. When we say that a currency is a "safe haven" we refer not only to

the quality and credibility of its central bank, but to the solidity of the

whole social, political and economic structure to which it belongs. And

historical experience shows that when that structure appears to weaken, the

currency weakens, irrespective of the actions of the central bank. A strong

currency requires a strong economy and a strong polity, not only a competent

central bank. The central bank is, and should remain, an institution with too

limited a mission to replace the lack of a political union.

The problems posed by the coexistence of a single currency with a still

unachieved political union will influence both practical and intellectual

activity in the coming years. They will have implications for the central

banker, the politician and, more generally, the citizen. For the politician

the implication is that his political decision to move ahead with Monetary

Union in advance of political union contains an implicit commitment to work

for the completion of political union. The central banker should be aware of

the special difficulties and responsibilities deriving from this anomalous

condition. On the one hand he will have to cope with this situation and adapt

his attitudes to a composite - EU and national - institutional architecture,

one that lacks the simplicity he was used to and in which the Eurosystem now

represents the most advanced supranational component. On the other he should

be prepared for the further evolution of that same architecture. Finally,

from the citizens that we all are, it will require a deeper reflection about

the multiple "social contracts" he is part of, and the loyalties they entail.

8. CONCLUSION

I have been fortunate to operate in an environment in which no conflict has

arisen between the central banking profession I have exercised for more than

thirty years and the European conviction that, like many persons of my

generation, I matured in my youth. Since the early '80s I have also been

convinced that monetary union, i.e. a confluence of the two motives, was

desirable and possible. At the same time, the challenges for the Eurosystem

originate precisely from that confluence.

The challenges are not solely economic in their nature, nor can their

features be captured by the functional relationships economists are most

familiar with. Although partly related to economic factors, their features

are in fact tied to the special institutional environment to which the

Eurosystem now belongs. They derive from the tension between the completion

of the union in the monetary field and the incompleteness of the overall

construction. It is a tension because in that environment the notion of the

public interest is no longer as simply and statically defined as it was when

the Nation-State was an all-pervasive reality and the jurisdiction of the

central bank coincided with its jurisdiction. Inevitably, this tension runs

through the institutions of the European Union, the Eurosystem itself, and

even our minds.

A challenge is a call to a difficult task; it entails the two notions of

necessity and difficulty. The problems I have tried to describe are a

challenge not only for practitioners, but also for the academic profession,

because their solutions can hardly be found in a textbook and will only be

invented if the creativity of practitioners will be supplemented with that of

scholars.

***

Monetary policy in EMU

Prof. Otmar Issing

Member of the executive board of the European Central Bank

Washington, D.C.

6 October 1998

1. Introduction

On 1 January 1999, the curtain will rise on a world premiиre. For the first

time in history, sovereign states will abandon their own currencies in favour

of a common currency, and transfer their monetary policy sovereignty to a

newly created supranational institution. This process is all the more unusual

from a historical perspective because the national currencies involved are

not being abolished because of their weakness. On the contrary, proof of a

large measure of monetary stability is demanded as a precondition for

participation.

The decision has been taken. The Euro will start on time. It must not - and

it will not - fail. The European System of Central Banks (ESCB) will devote

its best endeavours to making European Monetary Union (EMU) a success.

The French president recently called this unique project a "great collective

adventure". As a central banker I am generally not in favour of "adventures"

- but who would deny that there are risks and uncertainties in this

enterprise? You should be reassured that at the European Central Bank (ECB),

we have the necessary independence, instruments and tools to deal with these

risks and uncertainties in a successful way. I will discuss some of these in

a moment.

Moreover, when considering the uncertainties implied by the transition to

Stage Three of EMU, we should not forget that Monetary Union will also

reduce, or even eliminate, a number of risks. This has already been

demonstrated, even before the actual introduction of the euro. Recent turmoil

in international financial markets did not cause any significant disruption

to exchange rates among currencies of the designated participants in Stage

Three. This is a clear demonstration of the success of the EMU process.

Today, I will address the role of monetary policy in EMU.

First, I will make reference to the final goal of monetary policy - the

maintenance of price stability.

Second, I will discuss some important issues relating to the design and

implementation of the monetary policy strategy at the outset of Stage Three

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