SUERF Colloquia and Colloquia Publications 1969-2003 in Figures and Locations
Colloquium 13: International Monetary and Financial Integration – The European Dimension
Luxembourg, October 1986
President of SUERF and Chairman of the Colloquium: John Richard Sargent Colloquium book
Editors:Donald E. Fair and Christian de Boissieu
Authors:Michel Aglietta, Michael Artis, Gunter Baer, Christian de Boissieu, Ernst-Günther Brưder, Franco Bruni, Rolf Caesar, Paolo Clarotti, Sylvester Effinger, Wietze Eizenga, Richard Freeman, Michel Galy, Francesco Giavazzi, Jean Guill, Rolf Hasse, David Llewellyn, André Louw, Rainer Masera, Jan Michielsen, Marco Pagano, Hans Pfisterer, Jean-Jacques Rey, Jacques Santer, J.R. Sargent, André Swings, Geoffrey Wood.
Publishers:Kluwer Academic Publishers, Dordrecht/ Boston/ Lancaster, 1988, xii, 405 pp.
– Any place for a European dimension in the world of monetary and financial globalisation?
“... Financial phenomena on a worldwide scale tend to blur the European identity. The questioning of the traditional philosophy (of European integration) is so basic that one has to ask whether a European identity still has a place in a global system of interdependent and open capital markets(in italics in the text) ...” (Michel Aglietta, Professor of Economics at the University of Paris X and General Rapporteur of the Colloquium, p. 386) – Evaluating the first years of the European Monetary System (EMS)
“... The area of exchange rates, to which most EMS provisions apply, has performed best. Whatever method may be used for measuring the variability of nominal and real exchange rates, that of intra-EMS rates has been much smaller than that of EMS vis-à-vis non-EMS exchange rates and of ‘intra non-EMS’ rates. The ERM has thus offered the desired protection against volatility and misalignments ... The external policy has consisted mainly of defensive actions which were largely determined by the German authorities.
Notwithstanding positive signs, the exposure of the System to external disturbances remains rather high...Viewed from this angle (of economic and
social welfare) the performance of the EMS could be somewhat disappointing. Growth of real GDP has remained rather depressed and the situation in the field of unemployment and fiscal policy in the EMS has even worsened... However, it would be unfair and probably premature to blame the EMS for the lack of results in these areas...” (Jean-Jacques Rey and Jan Michielsen, respectively Head of Foreign Department and Inspector General, National Bank of Belgium, pp. 81-82)
“There is clear evidence ... of an EMS stabilizing influence on the key intra-EMS bilateral rates and only slightly less strong evidence of a stabilizing effect on wider exchange rate relationships; and this evidence extends to real as well to nominal exchange rates ... It appears that the EMS currencies do not afford experience of a medium-term misalignment on the scale experienced by the dollar or earlier by the pound sterling. In this achievement the EMS has proven a significant success and it is one of the reasons why membership of the System has attracted support in the United Kingdom ... The EMS plainly has afforded to its members the opportunity to pursue counter-inflationary policies based on treating exchange rate adjustments as less than fully accommodating ... But this is in itself weak evidence for the view that the EMS has succeeded in providing a framework for cooperation as opposed to a D-Mark anchor against inflation which member countries have been happy to use. On the latter interpretation the EMS can be viewed as a regional counterpart to the global post-1979 episode in which the theme of ‘putting one’s own house in order’ has been dominant, and its success has been in combining the function of a counter-inflation framework with that of stabilizing intra-System real rates. This achievement, solid enough in itself, unfortunately gives no firm basis for predicting the continuing success of the System in a period when unemployment, rather than inflation, is the issue of the day ...” (Michael Artis, Professor in the Department of Economics, Manchester University, pp. 210-212)
“The EEC should adopt either a system of floating rates, with a monetary rule in each country, or move to a genuine currency union. Consideration of these courses should not be put aside on the grounds that the EMS has succeeded;
for the EMS has been successful only because it has tried to do so little.”
(GeoffreyE. Wood, at the time Professor in Banking and International Finance, City University Business School, London, p. 45)
– Prudent approach to full Economic and Monetary Union (EMU)
“Monetary integration must comprise ... an exchange rate union ... Such an exchange rate union can be either a ‘pseudo union’ or a ‘complete union’ (to
use the term coined by Max Corden in 1972). The first is an agreement to fix exchange rates, the agreement perhaps being accompanied by promises of economic policy coordination; the second involves pooling of foreign exchange reserves, establishment of a central bank for the monetary union, and the issue of a common currency for the union. Only the second has hope of permanence ... Genuine monetary integration requires a common currency.
Only then would there be a convincing demonstration that the union was complete, not pseudo ...” (GeoffreyWood, op. cit., p. 40)
“The liberalization of capital movements and the broader concept of financial integration now seem to be the most important item on the agenda of the further strengthening of the EMS. Assuming it succeeds, it may also turn out to be a major challenge of the EMS ... This new stage of European economic and financial integration should be a transitory stage to a more stable situation where political responsibility for economic policy and welfare throughout the Community is exercised at Community level. This is what economic and monetary union is about; the shorter the transition, the better ... It may be useful to have a new round of thinking on the transition process and minimum requirements of the final stage of the economic and monetary union. While the end of the road will be regarded as politically out of reach and may remain so for long, it is increasingly the case that proposals for further strengthening the EMS are gauged in relation to their ability to move the system forward in the direction of this goal ... A ‘Werner Report revisited’ might help in focusing action on the next most useful steps, be they monetary or non monetary.”
(J.-J. Reyand J. Michielsen, op. cit., pp. 85, 87-89)
“... Il est bien connu que l’utilisation privée de l’Ecu s’est développée plus vite que son usage officiel par les Banques centrales. Ce déséquilibre et l’absence de passerelle entre l’usage privé et l’usage officiel de l’ECU suscitent la plupart des interrogations actuelles ... L’ECU au niveau du SME comme dans chaque pays membre, reste aujourd’hui une monnaie partielle.
Ceci apparaỵt dans la non-utilisation de l’ECU comme monnaie de facturation et monnaie de règlement des opérations commerciales courantes et dans la dualité de l’ECU traduite par la juxtaposition de ses formes publique et privée ... La question de la ‘réunification’ de l’ECU reste avant tout politique: un règlement satisfaisant de ce problème signifierait que l’Ecu est devenu une monnaie complète, ce qui suppose un degré d’intégration monétaire pour l’instant hors de portée ... Apparaỵt ici un paradoxe de l’intégration monétaire européenne: la logique de cette intégration a fait surgir une hiérarchie en faveur d’une monnaie (le DM) et d’un pays (la RFA) par principe hostile à l’utilisation domestique et à la promotion internationale de l’ECU ...”
(Christian de Boissieu, Professor of Economics at the University of Paris, pp. 189, 191-192)
– International monetary cooperation and/or, perhaps versus European integration?
“Les économistes et les responsables politiques ont souvent tendance à surestimer les inconvénients des systèmes en place et à exagérer les avantages des systèmes alternatifs. Ainsi, lorsque le régime de Bretton Woods était encore en vigueur, avait-on tendance à mettre en exergue les avantages censés découler du passage à des changes flottants ... Aujourd’hui, devant les inconvénients de l’instabilité des taux de change (en particulier du dollar) la tentation est grande de prơner un retour à des changes sinon fixes, du moins soumis à de moindres fluctuations (cf. la proposition de zones-cibles pour les grandes monnaies) ... Le succès indéniable du SME encourage sans doute la vague de propositions tendant à accroỵtre la stabilité des taux de change ...
... (Le) scénario de trois blocs monétaires (le dollar, l’ECU ou le DM, et le yen, chacun s’appuyant sur une monnaie complète, est séduisant parce qu’il rétablit de la symétrie dans des systèmes fondamentalement asymétriques.(Cependant, il) a toutes les chances d’être transitoire. A un moment donné, les opérateurs établissent une hiérarchie entre les monnaies. La hiérarchie n’empêche pas la diversification des portefeuilles, sauf lorsqu’elle marquée au point d’être représentable par un ordre lexicographique ...” (Chr. De Boissieu, op. cit., pp.
187, 201)
“... It appears that support for target zones must rest on attributes other than their capacity to induce cooperative outcomes ...” (Richard T. Freeman, Senior Economist, Division of International Finance, Federal Reserve Board, Washington, p. 182)
“Closer international monetary co-operation between the United States, Japan and Germany – if in fact, proved feasible over time – may indirectly have some favourable effects on the evolution of the EMS ... The positive contribution would be that closer co-operation between the three major currencies would establish a framework for the EMS countries to conduct a common policy vis-à-vis third currencies ... By contrast, there appears to be little scope for promoting the official ECU as an international reserve asset ...” (Gunter D. Baer, Assistant Manager for International Economy, BIS, Basle, p. 163- 164)
“It is clear that the EMS has certain achievements to its credit which a reform of the world system might make more generally available. But an awkward
feature here is that the control of exchange rates established within the EMS has been purchased to a degree by restrictions on capital movements and it seems clear that the removal of these restrictions will confront the System with a new learning curve ...” (Michael Artis, op. cit., p. 217)
– The new learning curve of liberalization of capital movements and of financial integration...
“Il n’est pas évident de concilier la mobilité des capitaux, la discipline des taux de change et l’autonomie des politiques nationales ...” (Jacques Santer, Prime Minister of Luxembourg, p. 9)
– Two conflicting views on financial integration
“There are two quite different approaches to the role of finance. The first has Anglo-Saxon origins and rules international financial markets. It is symbolized by the ‘big bang’ in the City of London. It sees finance as an independent industry, having no particular link with the real economy of the host country. Conversely, the second approach puts finance at the service of financing the real economy, above all industry. This is the dominant concept in continental Europe. It favours financial structures which allow the establishment of permanent relations between industrial firms and financial institutions ...
... To make further financial liberalization in Europe compatible with the stability of the EMS, it would be possible to make financial assets denominated in European currencies more attractive to residents of EMS states than those denominated in other currencies. European financial integration would then be characterized by the size of a large financial market and by lower risks, without the necessity of capital controls erected at the borders of Europe ...” (Michel Aglietta, op. cit., p. 390-391)
“Although the bulk of world financial intermediation is conducted through national mechanisms, financial intermediation is becoming increasingly global. National financial systems are losing some of their tradition(al)
‘efficiency’ and ‘imposed’ competitive advantages and as such are becoming sub-sets of a global financial system ... In the process, a two-tier structure of banking is emerging in which the corporate sector increasingly has global options while the financial intermediation of the retail/personal sector is still limited mainly to within national financial systems.
It is a combination of interactive factors that has produced these trends. But none of the explicit factors identified (competitive pressures, financial
innovation, technology, de-regulation, abolition of exchange control, structural change within national frontiers, and international objectives of financial institutions) have a specifically European dimension.
... The EEC has made some, though limited, progress in terms of free trade in financial services. It must be said that global rather than European factors dominate and any European dimension is swamped by factors that operate at a global level. In this sense, the European dimension to international financial integration is largely irrelevant, or at least of second-order importance.”
(David T. Llewellyn, Professor, Loughborough University Banking Centre, pp. 258-260)
“Although free capital mobility may produce substantial welfare gains, it may also have non-negligible costs in terms of increased volatility of domestic interest rates and/or of need for more frequent realignments of nominal parities.
But since the increased interest rate volatility tends to die out as the maturity of the assets lengthens, there exist relative simple ways to reduce these costs.”
(Francesco Gavazzi and Marco Pagano, Professors, respectively at the University of Venice and at the University of Rome, p. 282)
“L’efficacité du contrơle des changes n’est sensible que dans le court terme et agit moins sur les mouvements de capitaux que par l’imposition d’une taxe sur les mouvements des capitaux des résidents. Son élimination devrait se traduire par une plus grande variabilité quotidienne des capitaux et des taux de change mais ne modifierait pas durablement l’équilibre de la balance courante...” (Michel Galy, Directeur Adjoint, Direction Générale des Services Etrangers, Banque de France, p. 378)
“La libéralisation des mouvements de capitaux, même si elle aura plus d’impact sur les pays qui ont une réglementation restrictive, aura aussi des conséquences heureuses dans les pays qui ont déjà procédé à une large libéralisation de ces mouvements ... Mais cette libéralisation ne sera pas suffisante pour réaliser une intégration complète des marchés financiers en Europe et ... à cet effet, il sera nécessaire de supprimer toutes les entraves
‘techniques’ à l’échange des services, et notamment les distorsions fiscales ...” (Paolo Clarotti, Head of Division, Banks and Financial Establishments, CEE Commission, p. 325)
“A well-known source of difficulties for monetary targeting comes from the instability of the demand for monetary assets, caused by structural changes in the financial system and financial innovation.
Capital mobility seems helpful to cope with this type of difficulty, provided that the authorities control the domestic component of money expansion and are ready to cushion the shocks to the demand for money with changes in reserves. But this help is limited by the fact that capital mobility and financial integration are themselves among the major causes of financial innovations and of instability of the money demand function.” (Franco Bruni, Associate Professor, Bocconi University, Milan, p. 236)
Colloquium 14: The International Adjustment Process –