The euro and the dollar – new imperatives for policy co-ordination
Speech delivered by Ms Sirkka Hämäläinen, Member of the Executive Board of the European Central Bank, at conference “Transatlantic Financial Policy Co-ordination in an Age of Global Capital Markets”, at the European Institute, New York, 18 September 2000
Ladies and gentlemen,
First of all, I should like to thank the European Institute, and its President Ms Jacqueline Grapin, for inviting me to provide my remarks for this conference. I find it particularly interesting to do so because the theme of the conference “Transatlantic Financial Policy Co-ordination in an Age of Global Capital Markets”, touches upon an issue which represents an increasing challenge for policy-makers. This is certainly very true for central bankers, and especially for those central bankers whose currencies perform an international role.
On the one hand, our mandates and our institutional objectives are defined in “domestic” terms, while on the other hand, the fields in which we operate to achieve these objectives are increasingly global. Financial markets, where we conduct our operations and which are at the core of the transmission process of monetary policy, are indeed global markets nowadays.
This raises the issue of whether we can achieve our domestic objectives with domestic policies, or whether the globalisation of the economy calls for a similar globalisation of economic policies.
I shall concentrate my remarks on this topic around two propositions:
First, the globalisation of financial markets requires reflection on the co-ordination of basic rules rather than the co-ordination of policies.
Second, in the context of interdependent economies, global stability can be achieved if there is a similarity of policy objectives across different areas, but individual policy-makers primarily concentrate on keeping their own houses in order.
As I discuss these two propositions I shall, if I may, use for illustration purposes some elements of the European experience in these fields.
1. Globalisation and the need for co-ordination of basic rules
When talking about globalisation, it may be a good idea to start by defining what we mean by this. After all, cross-border economic transactions have always been part of our landscape. The degree of interdependence of our economies, the degree of internationalisation of production, trade and finance are without doubt greater now than at any period in history, but they are not without precedent.
So there must be something which is now different, which has justified the coining of the new word “globalisation”. One element of the answer may be the fact that, when we talk about globalisation, we refer generally to the “invisible” part of the economy: money, information, immaterial services. Both in the United States and in Europe, this invisible part is becoming ever more important and the speed of interaction has increased dramatically.
This is very significant, because it represents a much stronger challenge to the concept of sovereignty than in earlier periods of history. Traditionally, the notion of sovereignty is associated with the idea that economic activity conducted on the territory of one country is ultimately subject to the laws and regulations of that country. This implicitly assumes that it is possible to identify and, to a certain degree, to control the activity conducted in a country. This is increasingly difficult – even impossible – as regards the invisible or immaterial part of the economy. With the development of new technologies, information and financial transactions can circulate around the world in a matter of seconds. They cannot be stopped at national borders.
The new concept “globalisation” can be seen as referring to activities which cannot be contained in the boundaries of the traditional national legal and regulatory systems.
We should not underestimate the consequences of this concept. Indeed, one reason why we welcome the development of cross-border economic relationships between countries is that it promotes the smooth functioning of an open market economy with free competition, favouring an efficient allocation of resources. I did not choose the words I have just used at random. They are inscribed in the Treaty establishing the European Community, and underline our attachment to the principles of a free market economy. There is no questioning your attachment, in the United States, to the same principles.
However, we should not forget that a market economy is not only an economic model. It is also a model of social organisation, based on a number of rules. I am referring here both to such basic elements as the respect of private property, or the obligation to fulfil the terms of a contract and also to more elaborate rules, such as the regulation of financial markets or financial intermediaries. Binding rules in these areas are essential to create a climate of discipline and confidence in the economic and financial system. Without this confidence in the system, there is no real economic freedom.
As some segments of economies have become global, it is sensible to ensure that at the global level there is a set of rules similar to those that we take for granted at the national level.
One example, directly relevant for a central banker, is that the globalisation of financial markets has meant that financial stability is no longer a domestic issue. This argues in favour of laying down – either at the international level or in a co-ordinated way at the national level – legal or regulatory rules which are as conducive as possible to the smooth functioning of the global financial system and to its stability. Many fora, such as the International Monetary Fund (IMF) or the Bank for International Settlements (BIS), are working on these issues and it is important that the rules they establish – whether related to capital adequacy requirements, transparency, or other topics – apply to all participants in the global financial system. This represents an important and necessary field for co-operation among policy-makers, not only in Europe and in the United States, but all over the world.
In fact, our experience in Europe argues strongly in favour of such an approach. The process of European integration is different on many counts from the process of globalisation of the world economy. In particular, European integration has been politically driven, but it has also been taking place among countries which are exceptionally homogenous from a cultural, economic and political point of view. Yet, in spite of this traditional homogeneity, there are national differences and it was felt very early on that economic integration could not be successful without a set of common rules. In Europe, such common rules are achieved through the use of Community legislation, which is imposed at a higher level than national legislation.
2. Policy co-ordination: Independence in interdependence
Let me now come to my second proposition, which is that, in the context of interdependent economies, the primary concern of monetary policy-makers should be to keep their own house in order. This may seem paradoxical, because I have just advocated the need for common rules beyond the national level in a number of fields. In addition, I represent the ECB, which has been established as a consequence of the fact that 11 countries – soon to be 12 with the accession of Greece – have decided to go beyond monetary policy co-ordination by adopting a single monetary policy.
Allow me to try to explain this apparent paradox. Paul Volcker said in January this year that “if we are to have a truly global economy, a single world currency makes sense”. However, he immediately added that he would not live to see this single world currency. I do not know whether we shall one day have a single world currency, but I am quite certain that I shall not live to see it either.
Indeed, in order to be able to introduce a single currency among European countries, a number of stringent conditions had to be met.
First, of course, there needed to be a high level of convergence between our economies.
Second, a strong consensus on the objective of monetary policy was necessary. Based on the negative experience of high inflation in many European countries in the 1970s and 1980s, a strong consensus had indeed emerged on the monetary policy objective of price stability.
Finally, and this is very important, there needed to be a solid perception of common interests. What I mean by this is that the European people needed not only to agree on the objective of price stability, but also on the fact that this objective had to be defined at a pan-European level. They had to be willing to exchange goods and services among themselves against a currency, the euro, which would not be linked to gold or to the power of the state, and which has no value other than the confidence placed in it by them.
In view of the sovereignty of the countries participating in the euro area, we do not have a single fiscal policy. Every country has its own fiscal policy. This reflects the view among Europeans that the terms of fiscal policy are better defined at the national rather than the Community level. This may relate, for instance, to different perceptions of what the emphasis of fiscal policy should be, such as education, defence, or public transportation. It may also reflect different views on the degree of social security and welfare to be provided through public means.
There are also differences in structure between different countries on such issues as, for instance, labour market regulation or pension policies. Therefore, according to the principle of subsidiarity, fiscal policy issues remain the responsibility of the national – and sometimes regional or local – authorities.
This, however, should in no way be misinterpreted as an obstacle to the smooth functioning of the single currency area. A centralised fiscal policy is not a requirement for the conduct of the single monetary policy, to the extent that the decentralised policies are efficiently co-ordinated. There is a broad agreement that fiscal policies should be “disciplined”. This is the purpose of the Stability and Growth Pact of the EU countries, which is quite similar to the US concept of a balanced budget target. Insofar as each EU Member State observes the terms of this Pact, fiscal policy-makers are free to adjust their policy to accommodate any shocks which may affect their economies in a different way to those of other Member States.
What we have here is what I would call, borrowing the phrase from Charles de Gaulle, a situation of “independence in interdependence”. In the context of interdependent economies, there is a similarity of goals (fiscal discipline), but independent implementation of the policy required to achieve these goals. This is conducive to the overall stability of the system.
If I extend this example to monetary policies in the global economy, I find that there is a somewhat similar situation to that I have just described for fiscal policy in Europe.
Indeed, the goals of monetary policy are defined in broadly similar terms in the United States, Japan, the euro area and many other countries. There is a wide consensus that price stability should be the main objective of monetary policy.
Even though our goals are similar, however, there is no single, global goal. I think this argues strongly against accommodating, in the formulation of our monetary policy stance, international factors beyond the influence of external economic developments on domestic prices. Rather, I firmly believe that by concentrating monetary policy on domestic stability in each region of the global economy, monetary policy-makers actually best contribute toalleviating global imbalances.
This creates what I described earlier as a situation of independence in interdependence. On the one hand, the globalisation of the openness of our economies creates a situation of interdependence, because the balance of risks to price stability is also affected by external factors. On the other hand, a monetary policy geared towards domestic price stability must remain independent so that it has maximum flexibility to accommodate these external, as well as internal, developments.
In conclusion, I should like to come back to Paul Volcker’s prophecy. He might be right, and we might one day have a single world currency. Maybe European integration, in the same way as any other regional integration, could be seen as a step towards the ideal situation of a fully integrated world. If and when this world will see the light of day is impossible to say. However, what I can say is that this vision seems as impossible now to most of us as a European monetary union seemed 50 years ago, when the process of European integration started.
The globalisation of the economy, by contrast, is already a reality today. Moreover, this is a situation that we must handle in the present. It is important to consider the consequence that the the smooth functioning of the global financial system and its stability requires that certain common rules are established at a global level.
It is also important that we recognise that global stability will be enhanced if the goals and aims of macroeconomic policies are as similar as possible across the different regions. Finally, I firmly believe that within this framework the best contribution that policy-makers can make to global stability is to keep their own house in order.
Ladies and gentlemen, I thank you for your attention.
European Central Bank
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