04 February 2014

OENB/Nowotny: Future perspectives of the EMU

Nowotny looked first at the foundation of the current EMU which was laid down by the European Monetary Institute under the presidency of Alexandre Lamfalussy. He then concentrated on future institutional perspectives of the EMU.

It is quite interesting to see that Alexandre Lamfalussy already at a very early stage referred to the problem that a lack of fiscal coordination could lead to substantial policy inefficiencies with regard to macro-economic disequilibria - and could overburden a European single monetary policy in the long run: "The combination of a small Community budget with large, independently determined national budgets leads to the conclusion that, in the absence of fiscal coordination, the global fiscal policy of EMU would be the accidental outcome of decisions taken by Member States - As a result, the only global macro-economic tool available within EMU would be the common monetary policy implemented by the European Central Bank" (Lamfalussy, 1989).

What about the future perspectives of the EMU? This, of course, is a huge field full of uncertainties, so let me concentrate on a single issue: future institutional perspectives. We see a wide set of proposals to strengthen the political foundations of EMU. Basically, these proposals go into the direction of creating a "European economic government", a "fiscal union" with, as Jean-Claude Trichet emphasised, a European finance minister. All this would involve substantial transfers of national sovereignty and thus Treaty changes. We are all aware of the immense political problems involved in achieving such changes. 

So any such institutional discussions have to concentrate on the Eurogroup countries, strengthening the already existing perspective of a two- or three-speed Europe. I am fully aware that this is a very sensitive issue not only for Europe in general, but especially also for the newer EU Member States. In the very long run, a Europe of different speeds may converge again, but at least for the medium term, I consider a closer cooperation of the EU members able and willing to engage in more advanced levels of political and economic integration the only way to achieve the desired future political foundations for EMU. In fact, the present EU Treaty may already allow for far-reaching changes of this type without the need to change the Treaty.

So basically, we have not advanced very far since the discussion we had before starting EMU. This historical perspective should make us wary of frequent warnings that there cannot be a lasting monetary union without a closer political union. Now as then, a stronger political foundation would be preferable. But now as then, this stronger political foundation is extremely difficult to achieve. And now as then, an admittedly imperfect monetary union is still preferable to a situation without a monetary union and without a strong European Central Bank, that has proved to be one of the most important and efficient European institutions.

So in concluding my presentation, let me turn to Alexandre Lamfalussy who once warned against relying on the US as "consumer of last resort" and made a number of proposals for "domestically propelled growth in Europe". And he ended his speech then with some very characteristic remarks. The proposals, and now I quote: "will bring sizeable benefits to most of us, but not without throwing up new challenges. You may say that this remark is just the usual manifestation of a central banker's innate caution. Well, it may be. But that does not mean that I am necessarily wrong". I see this as a way of thinking with which every central banker can - and should - agree.

Full speech

© BIS - Bank for International Settlements