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.
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