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.
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