The discussion was based on
two presentations: ECONOMIC POLICY COORDINATION IN EMU, by Charles Wyplosz and
FINANCIAL SUPERVISION IN EMU, by Karel Lannoo.
ECONOMIC POLICY COORDINATION IN EMU
Charles Wyplosz recalled that the context of economic policy has changed since the 1980s: it is now admitted that Europe is not an optimal currency area, and the unemployment has become the prime preoccupation.
He next presented two reaction functions each estimated on a panel of future members of the EMU, for the period 1980-1997. These estimates are aimed at analysing the interaction between monetary policy and fiscal policy. The reaction function of the central banks indicates that the interest rate reacts to inflation and to the output gap, but only very little to primary budget balances. The reaction function of the fiscal authorities indicates that primary budget balances are slightly pro-cyclical, and that the authorities seek to stabilise public debt. Lastly, primary budget balances fall when interest rates rise. As a result, the fiscal authorities seek to compensate the impact of monetary policy on demand, while the central banks react somewhat to fiscal policy.
Mr Wyplosz went on to explain that the adoption of the Stability Pact and the appointment of European Central Bankers were made in view of the predictable changes in the policy mix, fiscal policy becoming more effective and externalities across countries stronger.
According to Mr Wyplosz, the interaction of fiscal and monetary policies will be stronger if Member States coordinate their fiscal policies. For its part, the Stability Pact will limit ineffectiveness if there is no coordination of fiscal policies, but will strengthen the power of the ECB with respect to the fiscal authorities. Lastly, the ESCB will also have to tackle the issue of the balance of power between the Board of Governors (who are sensitive to national opinions) and the Executive Board (which will be more effective). Each national government has the possibility of nominating an "extreme" national governor in order to move the balance of voting within the Board of Governors, or alternatively to nominate a "median" governor likely to determine the balance of voting. This possibility will allow national government's weight to be felt indirectly in the conduct of monetary policy.
FINANCIAL SUPERVISION IN EMU
Karel Lanoo explained that monetary unification automatically raises the question of prudential supervision: though financial markets are highly interdependent, supervision remains national, but monetary powers have been transferred to the federal level.
A trend in Europe towards the separation of supervision and lender-of-last-resort responsibilities is to be observed. Furthermore, supervision is centralised at the level of a "mega-authority" in four European countries. A mega-authority is coherent with the trend to financial conglomerates. It allows for economies of scale and limits the number of interlocutors for financial institutions. However, Mr Lannoo did not think that recourse to such an authority should be systematic, because separate bodies are more effective, being closer to financial institutions, and possibly subject to competition. In addition, insurance activities are fundamentally different from banking activities.
According to Mr Lannoo, it is necessary to set up a European code of conduct relating to supervision responsibilities, to encourage the circulation of information between the various supervision agencies, and to ensure transparency vis-à-vis markets. Excessive ambiguity concerning the distribution of responsibilities could lead to an excessive tolerance on behalf of different actors. More transparency is therefore needed. Transparency with respect to markets could be ensured by a monitoring body of systemic risk, which would aggregate and control risk exposure in European financial markets (in collaboration with the ECB, which cannot be kept aside). Institutional transparency would consist of a harmonisation of the lender-of-last-resort function at the national level, the application of Treaty rules, and the establishment of a certain hierarchy.
In his conclusion, Mr Lannoo was unfavourable towards the centralisation of supervision, but in favour of coordination across the various supervisory agencies as well as with the ECB and the national central banks, at the national and European levels.
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