More by Otmar Issing

The euro-zone does not need political union to avoid economic domination by the US,
according to Otmar Issing, chief economist of the European Central Bank.

Financial Times; Feb 14, 2001

In a forthcoming interview with Central Banking Journal, Mr Issing rejects any notion that the ECB’s lack of a political counterpart means it is destined to live in the shadow of the US Federal Reserve.

“The ECB has responsibility for monetary policy in the second largest area in the world,” Mr Issing says. “We will focus on maintaining price stability no matter what others may choose to do. In this sense we are certainly a leader, not a follower.”

In a recent speech at Cambridge University in the UK, Mr Issing raised some eyebrows with the assertion that European monetary union is part of “a wider economic and political project”.

In the forthcoming interview, he reaffirms that the decision to adopt the single currency “is at its core a political decision”.

But Mr Issing adds: “I do not believe that a stable monetary regime necessarily must have its roots at the level of the nation state. Therefore it need not require a wide-ranging political union - which is anyway not on the cards for some time to come.”

Mr Issing says monetary union can function well as long as the euro-zone countries adhere “in letter and in spirit” to the Maastricht treaty and the stability and growth pact. He says there must be no softening of qualification requirements for new entrants to monetary union from central and eastern Europe.

He says that since the staff, rather than the ECB’s governing council, construct the bank’s projections, it is illogical to base the council’s decision too closely on them.

Otmar Issing: A roof over the European house
FT, September 14 2000

Two speeches, one by Joschka Fischer, the German foreign minister, the second by Jacques Chirac, the French president, have revived an old debate: what should be the future shape of Europe? "Old wine in new bottles," some sceptics say. But I believe we really do need a new debate.

Before the Treaty of Maastricht one of the key questions was the relationship between economic and monetary union, and political union. Many argued that it was essential for political union to precede monetary union.

Today, that question is redundant. Monetary union has become reality. The European Central Bank is conducting a single monetary policy for the euro-zone, the second largest economic area in the world after the United States. At the same time, this monetary area does not represent a single state, but comprises 11 nations with 11 governments. Nothing comparable has happened in history. The new debate about political union must take account of this change. The start of monetary union has created a historically unique asymmetry. On the one hand, there is a supra-national European monetary regime; on the other, predominantly national sovereignty is retained in most other areas. Two crucial questions arise. First, can monetary union still function without political union? Second, how might one go about developing a sustainable political structure?

There can be no doubt that for the foreseeable future monetary union will have to function without political union. So far this has worked. The "change-over" to the euro proceeded almost perfectly. The start of monetary union resulted in the creation of a single money market for all credit institutions in the euro-zone.

This market has performed smoothly from the outset - no minor achievement. Most importantly, monetary union started in an environment of price stability, thanks to the previous efforts of the participating central banks.

The European Central Bank has also won the confidence of investors through its determination to preserve sustained price stability. Financial markets are pitiless judges in this respect. The development of long-term interest rates and other indicators confirm the credibility of the ECB's monetary policy.

Moreover, the economic outlook for the euro-zone is better than at any time in the past two decades.

However, structural reforms are still needed to transfer the remarkable cyclical upswing into a period of strong non-inflationary growth. This will contribute to a reversal of the trend in the exchange rate of the euro, which has thus far been seen as the "black spot" in the overall bright picture of a successful start of the new currency.

All this may not mean much by historical standards because monetary union is only 20 months old. What really matters is that the European "monetary constitution" is built firmly on the mandate of the central bank, which is independent of political control, to deliver price stability.

Other fields of economic policy likewise face huge challenges. Unemployment remains intolerably high. This does not call for supranational, "European" solutions such as a Social Union to complement economic and monetary union. Giving in to such demands would result in higher unemployment and tensions between countries and regions; ultimately, the survival of monetary union would be at risk. Rather than harmonising social standards at the most generous levels in the euro-zone and imposing uniform wage agreements throughout Europe, wages need to take account of sectoral and regional differences in productivity and local labour market conditions. This is all the more important because labour market mobility is likely to play a much smaller role than it does in the US and there is no comparable system of fiscal transfers within the euro-zone.

For the time being, fiscal policy will remain essentially in the hands of national governments. The Stability and Growth Pact has thus far provided necessary discipline. Peer pressure is also helping. Political leaders throughout Europe have finally recognised the need for structural measures in taxation and expenditure policies, as well as moves towards a deregulation of product and labour markets. Although most reforms have yet to be implemented, it cannot be denied that substantial progress has been made.

These positive developments were perhaps not really triggered by the introduction of the single currency. But the euro has certainly increased pressure to speed up reform. Thereby, the euro is contributing to the creation of the conditions it needs for its own success.

So what does all this tell us about the need to create a sustainable political structure alongside monetary union?

For the foreseeable future, any further ambitions for future political integration will have to founded on a sound, successful economy. Above all, monetary union must not fail. The European Union must use the euro as a catalyst for necessary reform. Given the challenge of enlargement, economic success is a necessary condition for progress towards further political integration.

That is not to say that the economy is all that counts. Without a successful economy, however, Europe has no future. Thus, it is vital to allow time for the development of a sustainable political structure which will complement the degree of integration of monetary union. In a rapidly changing world, a grand design would ultimately be difficult to implement anyway.

Instead, it might be better to adopt a search process based on competition - something which would allow us to adapt to change while allowing further co-operation or even centralisation in some areas while retaining scope for greater decentralisation in others.

The euro should be seen as the roof under which the search for best practices is taking place in a creative manner. What applies to markets should also apply to nation states. Competition should also be allowed among countries, within common rules. At the heart of such a "contest" among member states stands the implementation of reforms.

This does not imply a winner-takes-all approach. Rather, every member country will benefit from this common search for success.

Missing the point on Europe's jobless FT, September 17 2000 From Ms Anna Diamontopoulou.

Speech by Professor Otmar Issing
Member of the Executive Board of the European Central Bank
at Brussels Economic Forum,
5 May 2000

"How to achieve a durable macro-economic policy mix
favourable to growth and employment?"

Click here to Know How - Highly Recommended

'Hayek, Currency Competition and European Monetary Union' by Otmar Issing
can be downloaded from IEA

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