SUERF Colloquia and Colloquia Publications 1969-2003 in Figures and Locations
Colloquium 11: Government Policies and the Working of Financial Systems in Industrialized Countries
Madrid, October 1983
President of SUERF and Chairman of the Colloquium: Mario Monti Colloquium Book
Editors:Donald E. Fair in cooperation with F. Léonard de Juvigny
Authors:José Ramon Alvarez Rendueles, Palle S. Andersen, Christian de Boissieu, Rolf Caesar, Jean-Claude Chouraqui, Anthony S. Courakis, Jean Dermine, Otmar Emminger, Einar Forsbak, Giampaolo Galli, Dermot Glynn, Pieter Korteweg, Bưrje Kragh, Christian Lutz, Rainer S. Masera, Peter E. Middleton, Mario Monti, John Odling-Smee, Raimundo Ortegaz Fernandez, Dominique Strauss-Kahn, Andrew Threadgold, Robert Vandeputte, Joseph Vuchelen, Uwe Westphal.
Publishers:Martinus Nijhoff Publishers, Dordrecht/Boston/Lancaster, 1984, vii, 432 pp.
– The explosion of government deficits at a time of stagflation:
“...By 1982, only one country, Norway, (i.e. of the main fifteen industrialized countries in the world) was recording a surplus, whereas nine years earlier (i.e. just before the first oil shock) only three countries had a deficit.”
(P.S. Andersen, Head of Section, BIS, in a penetrating empirical analysis, p. 42)
“We certainly find ourselves in a gloomy situation of generalized increases in government deficits and of low economic growth ... There is an important structural component in such a situation, which can be seen as a characteristic result of the slow response of government policy to a changing economic environment, or rather, as governments are not that short sighted, as a result of strong social resistance to the adjustments required ... Several developments have been taking place simultaneously in our financial systems that ... are bound to be a check on unwarranted delays in adjustment: (a) ... the important and generalized upgrading of inflation rates ... has been an underrated influence upon financial policy. Such inflation rates deeply eroded whatever monetary illusion pervaded agents’ behaviour and devastated those
financial institutions and instruments that relied on low levels of inflation. ...
Inflation broke the rules of the game, forcing a complete reconsideration of financial intermediaries and markets; (b) a second element ... is the marked shift of monetary policy from interest rate targets towards quantitative targets for monetary expansion ... the very shift to quantitative monetary control has forced authorities to reconsider their instruments of action leading them ... to allow for a growing role of market forces in monetary policy intermediation;
(c) when government deficits started to grow, ... these could have been accommodated by higher rates of monetary expansion, but this has not been the rule. Instead, compensatory adjustments have tended to be imposed upon the financing of the private sector, which incidentally may have contributed to make “crowding out’ a lively subject; (d) other domestic developments (p.m.); (e) On the external front ... the acceptance of floating rates (and) the massive growth of the external debt of many countries ... Governments have proved more sensitive to depreciating exchange rates than expected ... (The growth of external debt) has implied a terrible erosion of the role of exchange controls as an instrument of monetary policy and has forced authorities to be extremely careful for the external repercussions of their monetary and fiscal policies.” (José Ramon Alvarez Rendueles, Governor of the Banco de Espađa, p. 14-16)
– Towards a‘law of government retrenchment’ in a non-Keynesian world
“It is high time to reverse for good this (Wagner) law of increasing government expenditure and to replace it by a ‘law of government retrenchment’. And as concerns the Keynesian notion of fiscal policy as the great ‘stabiliser’, we should recognise that this concept has often led economic policy astray.” (Otmar Emminger, Former President of the Bundesbank, p. 27)
– A dissenting opinion
“... Derrière cette pression à la réduction-voire même à la suppression ‘par décret’ – des déficits publics, se cache une volonté d’empêcher en partie l’Etat de poursuivre deux de ses missions principales: la régulation conjoncturelle et l’allocation des ressources. Or c’est grùce à un déficit actif et contrơlé que l’Etat peut effectivement diminuer l’amplitude des fluctuations économiques et participer de manière décisive à la nouvelle politique industrielle, nécessaire pour sortir de la crise Il convient dès lord de s’interroger sur la stratégie réelle poursuivie par ceux qui souhaitent retirer à l’Etat – notamment par la contrainte politique – les moyens nécessaires à son action.”
(Dominique Strauss-Kahn, Professor at the University of Paris, p. 131)
– Crowding-out: the star of the Colloquium?
“Quite clearly, it (i.e. the star of the Colloquium) turned out to be young
‘crowding out’. It appeared in constantly changing disguises – financial crowding out, portfolio crowding out, transactions crowding out, exchange rate crowding out, indirect or ex post crowding out versus direct or ex ante and versus accustomed crowding out, allocation policy – as against fiscal policy – crowding out, crowding out of safety and crowding out of quality, not to forget about over-crowding and crowding-in. Even when it produced a no-show, as it happened in several econometric tests, it made an event out of it...” (Christian Lutz, Director, Gottlieb Duttweiler Institut, Zürich, p. 411)
“... While, on balance, econometric evidence does not rule out some activity- supporting role for budget deficits, these are currently seen, at worst, as constituting an impediment to economic recovery by crowding out private investment and, at best, too high to exclude the possibility of counter-cyclical fiscal action. This apparent contradiction between the conclusions to be drawn from most econometric models and the principles upon which fiscal policies are presently based, stems from two shortcomings in the current state of quantitative knowledge. The first is the imprecise estimation of the interest rate effects of budget deficits, given the complexity of factors influencing the private sector’s financial savings behaviour. The second derives from the difficulties of assessing the impact of budget deficits in a medium-term context, and of incorporating expectations and confidence elements into the analysis.” (Jean-Claude Chouraqui, Head of Monetary and Fiscal Policy Division, OECD, p. 247 – and in the same sense, for Germany, Rolf Caesar pp. 83-84)
– Why interest rates have remained so high...
“In the first place interest rates remained so high in comparison to current inflation because of the financing of large government deficits which, despite some crowding-out, have meant that the total recourse to the capital market has risen sharply. In some industrialized countries more than half of the available resources of the capital market is now taken up by the government ... Secondly, after bitter experience in the past, the financial world has gradually dropped the ‘veil’ of money ... Thirdly, all over the world banks are being compelled to resist the erosion of their solvency ...” (Pieter Korteweg, Professor, Treasurer-General, Ministry of Finance, The Hague, p. 36)
“The American mix of fiscal and monetary policy, as long as it is keeping US interest rates and the dollar high, is exerting a strong influence on other countries’
interest rates and monetary policies.” (Otmar Emminger, op. cit., p. 26)
– Monetary policy and the policy mix at times of huge government deficits:
“... It is a fact that at the very time when exploding budget deficits became a cause of concern, monetary targeting became a reality, which opened the eyes to a truth: monetary and fiscal policy may be institutionally independent from each other – but as soon as their aims are conflicting or their paces are incompatible, one of them will win. And in this case, perhaps in contrast to the early 1970s, it was, in general, the monetary policy which won. It is, quite obviously, this change of conditions which made crowding-out a star...”
(Christian Lutz, op. cit., p. 418)
“With the decline of Keynesianism and the rise of monetarism the relationship between fiscal and monetary policy has changed in many countries. High public deficits need not inevitably lead to an over-expansive monetary policy. In fact, however, we see that in those European countries where budget deficits are very high in relation to net national savings, central banks are often under irresistible pressure to finance at least part of the deficits by money creation ... Another important aspect is that high structural deficits, and accumulated indebtedness with its high interest burden, are a corset for government policy and severely restrain the room for manoeuvring of fiscal policy.” (Otmar Emminger, op. cit., p. 25)
“It is difficult to isolate the discussion about the financing of the deficit from a discussion about the size of the deficit. In most countries, solving the second problem would also solve to a large extent the first one. It is however probable that policy-makers reason the other way round, by solving the financing problem they probably think they solved both problems ...” (Joseph Vuchelen, Professor in the Free University of Brussels, p. 309)
– The interesting and fairly representative Spanish experience
“... The need to counteract the expansive effect of government borrowing in order to keep the growth of the quantity of money within the established targets has had a double result: in the first place, it has limited the independence of monetary policy itself, preventing it from having the effects that might be foreseen in the struggle against inflation and involving it in a hopeless battle, doomed to failure, to keep up the peseta’s exchange rate;
secondly, obliging the Bank of Spain to create its own version of short-term debt, restricted to financial institutions, has distorted the whole structure of interest rates with the resulting negative effects for an adequate financing of the economy.” (Raimundo Ortega, Director General del Tresoro y Policita Financiera, Ministerio de Economia y Hacienda, Madrid, p. 407)
– Financial system versus Government
“There has always been and there will always be conflict between governments and financial systems ... If in the short run government has many chances of overruling the financial system, the latter has, in the long run, a no lesser chance of gaining the upper hand on government.
Consequently, financial institutions cannot claim that they are always on the losing side, so let me say that financial institutions, rather than longing for the non-existing of conflict with government, should take this for granted and think how to make the best of such a situation ... I can see only one clear way to achieve such a goal and it is by developing to their utmost those features of the financial system that reinforce its role as a power able to counterbalance the unrealistic aspects and results of government economic policy and activity. That is to say, by stressing the role of market forces ...”
(José Ramon Alvarez Rendueles, op. cit., p. 13)