European monetary system and european currency

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Notwithstanding the intergovernmental debates at a European level and the stated intention to undertake common initiatives, the instruments of employment policy remain in national hands, although only partly in the hands of governments. I regard this as appropriate because competition should not be suppressed from the labour market.

Adopting the appropriate policies of structural reform has proved extremely difficult in many key European countries, including my own and this one. Other countries, such as the Netherlands and the United Kingdom, have been more successful. Even the most successful experiences, however, have shown that reducing unemployment is a long and gradual process. Although some countries started labour market reforms in the early 1980s, they only reaped the benefits in the 1990s.

Unemployment will thus remain with us in the years to come and I am convinced that it should be regarded as the greatest policy challenge not only by governments and labour organisations, but by the Eurosystem as well. Let me explain why.

An economy in which unemployment drags above 10 per cent for years is a sick economy, just like one in which public finances or inflation are chronically destroying savings. To operate in a sick economy is always a risk for the central bank and for the successful fulfilment of its primary mission. In the case of prolonged unemployment, the risk arises both on a functional and an institutional ground.

On a functional ground, i.e. from the point of view of the relationship between economic variables that models usually consider, a chronically weak economy is one in which expectations deteriorate, investments stagnate, consumption declines. Structural unemployment may increase the risk of a deflationary spiral because a longer expected duration of unemployment may imply that households respond more conservatively (in terms of increasing savings) in the face of a deflationary shock. Today, we see no signs of deflation. Markets and observers who pay attention to communications by the Eurosystem know that the monetary policy strategy of the euro area is symmetrical, equally attentive to inflation and deflation. Thus, they know that if that risk became reality, the Eurosystem would have to act, and would act. But we know that monetary policy is much less effective in countering deflation than it is in countering inflation.

A more insidious threat, however, may arise on the institutional ground. It comes from a chain of causation involving social attitudes, economic theory and policy, actual economic developments and institutional arrangements. Attitudes of society respond to economic situations and policies, which in turn depend on the state of development of economics. Institutions, on their part, are influenced by attitudes of society. Both the course of economic thought and the practice of policy were lastingly altered by the Great Depression. The epitome of this historical event was the Keynesian revolution. In many countries the strong consensus about the primacy of price stability and the independence of the central bank was the outcome of the prolonged inflation suffered in the 1970s and 1980s. Here in Germany, it is rooted in the experience of hyperinflation. Would such a consensus survive if high unemployment remained a chronic feature of key European economies for many more years? And how would the position of the central bank change if that consensus faltered?

As central bankers primarily concerned with price stability, what can we do to cope with this challenge and to reduce the risks? My answer may seem disappointingly partial, as I do not think there is a miraculous medicine that monetary policy can provide. I would phrase it as follows.

Firstly, the central banker should be aware of the danger. He should know that in the future his principal objective may not receive, from the public, governments and parliaments the same strong support which has been the outcome of the two decades of high inflation. Since unemployment is what concerns the voters and the youngsters most, it may be increasingly necessary for him to play an educational role in explaining the benefits of a stable currency to those who have not directly experienced the costs of inflation. This is very much like the case of the post-war generations in Europe which, being fortunate enough not to experience the horror of World War II, need now to be reminded about the human costs of that terrible conflict.

Secondly, the central banker should avoid mistakes. It may seem obvious, but he should never forget that independence does not mean infallibility and that the likely new environment will offer no forgiveness for mistakes. A mistake would be the attempt to provide a substitute for the lack of structural policies by providing unnecessary monetary stimulus: it is not because the right medicine is neither supplied by the pharmacist nor demanded by the patient that the wrong medicine becomes effective. Another mistake would be to give the impression that the central bank has a ceiling in mind for growth, rather than for inflation. On the contrary, the central bank should make it clear that any rate of non-inflationary growth is welcomed and would be accommodated, the higher the better.

Реферат опубликован: 12/08/2008