IN THE FIRST CENTURY AD, a merchant setting off from Rome on a journey to Cologne was able to pay his bills with the same coin, the denarius, over his entire journey.
Initially, Rome safeguarded cohesion of its large empire by fire and sword, then increasingly by placing even the most remote provinces under the legal system and administration of Rome.
The precise lessons to be drawn from such historical episodes may not be entirely clear.
"economically absurd", "economically erroneous and politically dangerous", "a scandal", "insane"
Europe’s monetary union is in a deep crisis.
In the context of Greece’s debt concerns and emerging problems in other countries, huge current account imbalances have been identified as a major threat.
But since the adoption of a single currency, devaluation is no longer available to correct an unsustainable current account deficit.
Otmar Issing, FT March 18 2010
Now, following years of divergence between unit labour cost and losses in competitiveness in a number of countries, the idea is gaining ground that the country with the biggest surplus, Germany, should help by raising wages in the interests of deficit countries and the community as a whole.
This idea, presented as a panacea for Europe’s problems, is so economically erroneous and politically dangerous that it would hardly deserve being taken seriously – were it not for the risk that it might actually prevail.
Following years of wage restraint, Germany has reaped the benefits in the form of a remarkable number of new jobs.
Since joining the euro area, a number of countries have allowed unit labour costs to increase at an above average pace, impairing their competitiveness. It is a scandal that the EU tolerated such developments, which were doomed to lead to the current crisis.
However, the idea that unit labour costs in individual countries should be “governed” – or whatever word is used – by a European authority is an economically absurd and politically dangerous concept.
The economics are wrong because balancing current accounts via unit labour costs has no conceptual anchor and would disconnect wages from the situation in the labour market. It would be insane, for instance, for Germany to embark on an expansionary wage policy that led to higher unemployment.
Transferring responsibility to the European level would be politically dangerous because it would create permanent tensions. “Europe”, this time for the right reason, would be held responsible for the negative consequences of its policies
The writer is president of the Centre for Financial Studiesand a former member of the European Central Bank’s executive board
Otmar Issing om Europas ödestimma nu
Otmar Issing är sannolikt, vid sidan av USA:s Volcker, världens mest respekterade centralbanksperson.
Rolf Englund blog 15/2 2010
It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists.
Eric Chaney, Morgan Stanley, 12/6 2006
"This moment is a turning point for Emu, and for the future of Europe."
It seems that quite a number of observers have forgotten what Emu is, and what it is not.
Financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bail-out would violate EU treaties and undermine the foundations of Emu.
Such principles do not allow for compromise.
Once Greece was helped, the dam would be broken. A bail-out for the country that broke the rules would make it impossible to deny aid to others.
Otmar Issing, February 15 2010
Should Greece be left to go bust?
Otmar Issing, a former board member of the European Central Bank, says an EU rescue would be disastrous.
The Economist online Feb 3rd 2010
Europe's monetary union, which launched the euro almost a decade ago,
remains an "experiment" with the outcome "likely to remain uncertain for a considerable time to come"
writes Otmar Issing, who served as the European Central Bank's chief economist for its first eight years
Financial Times, April 16 2008
These developments also raise some questions about the process of selecting members of the MPC.
It might be helpful if its members were a bit more heterodox:
someone with the monetarist views of, say, Otmar Issing, the former chief economist of the European Central Bank, would be helpful.
Martin Wolf June 15 2007
It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing
Eric Chaney, Morgan Stanley, 12/6 2006
Chefsekonomen Otmar Issing vid ECB går i pension
Han har varit den främste försvararen av ECB:s strategi med två pelare
där det inte bara handlar om inflationsbekämpning utan även om kontroll av penningmängden.
Den linjen har varit kritiserad från många håll, men på senare tid vunnit större
erkännande.
DN Ekonomi 2/6 2006
Otmar Issing, Europe's high priest of monetary orthodoxy, has confessed that the euro was launched on flawed foundations and is now threatened by "big tensions" between north and south.
"The proper functioning of a monetary union requires flexible labour and good markets. These conditions have not been fulfilled from the start."
Ambrose Evans-Pritchard, Daily Telegraph 31/5 2006
Otmar Issing, the European Central Bank’s chief economist, steps down in May.
As at /Bundesbank/, Mr Issing has been the guiding spirit behind the monetary “pillar” of the ECB’s strategy, with its focus on monetary aggregates such as M3, the broad money supply measure.
Mr Issing studied classical languages and held professorships in German universities before becoming a central banker.
Financial Times 16/3 2006
Monetary analysis is essential, not old-fashioned
Can any central bank rely solely on developments in money and credit to come to its policy decisions? The answer is clearly “no”. Can any central bank afford to ignore the information in monetary developments in formulating monetary policy? Again, the answer is “no”.
Otmar Issing, Financial Times, December 15 2005
"What has Happened to Monetarism?
Europe: Political Union Through Common Money?
By OTMAR
ISSING
IEA, THE INSTITUTE OF ECONOMIC
AFFAIRS, 1996
Boken kan beställas här:
http://www.politicos.co.uk/item.jsp?ID=4566
Background:
A lesson from Issing
FT Observer 98-12-14
Want to know what’s going through the mind of Otmar Issing? The learned chief economist at the European Central Bank drops regular public hints about the future direction of monetary policy. But for real insight, buy a copy of his economics textbook.
Issing, 62, has just published a new edition of his tome on monetary theory, a standard text in the economics departments of German universities. The 11th edition of Introduction to Monetary Theory contains one intriguing change: the chapter on price instability — which was previously heavily weighted to the discussion of inflation — now includes a far bigger chunk on deflation.
Issing denies there is any likelihood of deflation in the euro-zone. The change of emphasis merely reflects the drift of recent public discussion. In the inflationary 1970s, he says, he thought hard about removing the section of deflation altogether because no-one was interested. The chapter on inflation, we are reliably informed, is there to stay.
Otmar Issing: Monetary Theory as a Basis for Monetary Policy: Reflections of a Central Banker
It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing
Eric Chaney, Morgan Stanley, 12/6 2006
Last Thursday, for the first time in its nine-year history, the Governing Council of the ECB met without Pr. Otmar Issing, whose term had expired one week before. In my view, Issing was remarkably and, to some extent unexpectedly, successful in building the credibility and the intellectual franchise of the ECB, a central bank that he and other pioneers such as Alexandre Lamfalussy and Jean-Claude Trichet built from scratch. Together with several friends and colleagues, I had the privilege to attend the ECB colloquium organised in honour of Otmar Issing three months ago. It was an intellectually exciting conference, with top-notch academics and central bankers talking freely about monetary policy — ‘a journey from theory to practice’ was the banner of the conference. It was also a moving event, with a rich human dimension heralded by the ten-minute-long standing ovation Otmar Issing received at the dinner, not exactly what you would expect from a gathering of grave central bankers and distinguished economists. I want to pay my own tribute to Pr. Issing and draw a couple of lessons from conversations I had with him over the years, as well as from exchanges during this conference.
See also:
Economic and Monetary Union in Europe: political priority versus economic integration?
By Professor Otmar Issing, Member of the Executive Board of the European Central Bank, Paper for the Conference 2001 of the European Society for the History of Economic Thought
http://www.ecb.eu/press/key/date/2001/html/sp010223.en.html
IN THE FIRST CENTURY AD, a merchant setting off from Rome on a journey to Cologne was able to pay his bills with the same coin, the denarius, over his entire journey.
1,600 years later, anyone departing from what was then the Prince-Bishopric of Würzburg and heading for the same destination faced a host of hitherto unknown problems. More than 300 independent German territories, which had been left as a legacy by the Peace of Westphalia, levied taxes and customs not only at their borders but also within their boundaries, on roads and rivers, city gates and market-places...
Relationship Between Political and Currency Systems
What lessons can be drawn from these two periods of European and German history? In the days of the Roman Empire, a common monetary system with a single currency existed in Europe. However, the conditions on which the system was based were:
Initially, Rome safeguarded cohesion of its large empire by fire and sword, then increasingly by placing even the most remote provinces under the legal system and administration of Rome.
The precise lessons to be drawn from such historical episodes may not be entirely clear.
But it does seem that the interrelationship between the political and currency systems is of particular significance.
Any historical process of integration involving previously independent states, whatever its singularities, possesses a political as well as an economic dimension. Any blueprint for an integration process must determine the right mix between the degree of common political order and the extent of economic unity.
It remains an open question whether there is an optimal solution or a number of different options each having its strong and weak points.
In implementing the integration strategy a hypothetical demiurge would have to consider the correct sequence of the individual steps, take into account the extent to which each intervention might trigger other adjustment processes and what the end-result would be.
He would also have to decide whether the final result is best found through a process of search or by strictly adhering to a previously determined path of development.
3. The Role of Monetary Policy in the Integration Process
IN ThE MAASTRICHT TREATY, the Heads of State and Government decided to adopt an institutional arrangement which, by design, clearly departs from qualitative as well as chronological conformity between political union and monetary union.
Do resolute courage in monetary policy and timid hesitation in the area of general politics complement each other to produce a promising integration strategy?
Historical experience shows that national territories and monetary territories normally coincide. In the age of paper currencies, the relevant legislation, as a rule, defines monetary sovereignty in relation to a national territory.
Neither the crowding out of inflation-eroded national money by a foreign currency nor a Currency Board System is a genuine deviation from this rule. The first reflects a pathological condition of the monetary system. In the Currency Boards case, a country voluntarily places itself in the care of the monetary policy of another country which has a stable currency, while in principle retaining its monetary sovereignty.
In contrast to the normal rule, the Maastricht Treaty implies a clear discrepancy between the intentionally rather modest political integration and monetary integration.
For those member-states qualifying for monetary union the ultimate goal is unrestricted participation in a common monetary system and a single currency, whereas a step on such a scale is not even remotely planned for the government system.
The attitudes of politicians and academics towards this discrepancy are ambivalent. For some, the agreements reflect the political compromise between those who wished to take European integration much further and those who were essentially interested in the free exchange of goods and capital.
Others argue the imbalance will almost certainly set off a process of progressive integration extending to the very heart of politics.
There is no denying that introduction of a single currency would change the nature of the integrated system. The architecture of the European house is being re-arranged.
Do the other parts of the blueprint need to be adjusted in line with the establishment of the monetary union or is a structure so diverse in terms of currency and politics able to weather the storms of the future? In his speech to the Italian Senate on 11 April 1995, Bundesbank President Hans Tietmeyer addressed the problem:
After a certain point, economic integration cannot realistically be expected to advance further without the prospect of further progress in the field of politics. The transfer of an elementary sovereign right such as monetary policy to a European Central Bank is likely to mark that point.
4. Common Currency as Pace-setter for Political Union
IF MEMBER-STATES ARE unable to agree on parallel progress towards integrating major areas of policy, a widely-held view is that nevertheless monetary union does not have to be shelved, at least not for the time being; quite the contrary.
The notion that monetary union should take the lead, and serve as a pace-setter for political union, was already succinctly expressed by Jacques Rueff as early as 1950: LEurope se fera par la monnaie, ou ne se fera pas.
Since then, this belief has been espoused in various forms. Recently, the former President of the Federal Republic of Germany, Richard von Weizsacker, was asked whether it was right to begin with monetary union if a common foreign policy was the actual objective. He replied:
Its the other way round: if this common foreign policy is to be realised, it will only come about through monetary union. Such monetary union will of course be implemented only with some delay. And it will not be cheap. Compensation payments will have to be made if the exchange rates of areas which are at different stages of economic development are no longer able to fluctuate in relation to each other. Getting used to monetary union is for me the only discernible route by which a common foreign policy can ultimately be achieved.
Among economists the idea of the pace-setter role of a single currency has found few supporters. Perhaps that is because economists have only a limited understanding of the winding paths of politics. They are even less in a position to predict all the unforeseeable events triggered by the creation of a single currency - a radical move likely to transform relationships between the coexisting peoples.
The economists role is confined to analysing the mechanisms which might become operative in such a situation.
The symbolic power of a single currency should certainly not be underestimated when trying to explain the pace-setter function of monetary union. During a debate in the European Parliament on 30 November 1966, it was characterised as follows by a member of the European Parliament, Hans Dichgans:
When everyone is holding in their hand a European coin showing a shapely young lady riding on a bull ... the graphicness of this coin would provide an impetus to strengthening the idea of Europe.
It is difficult to tell to what extent allusions to Greek mythology will have this effect now that classical languages have long been on the retreat in schools; in principle, however, the uniting power of a single currency through everyday experience cannot be denied.
There is no universally valid answer to the question of how far experience of a single currency will promote integration in other areas. However, it is safe to say that community-enhancing strength can come only from money which carries conviction on account of its stability and ensures that the former national currency is not missed.
Public statements stressing the importance of price stability for the future European Monetary Union are, quite rightly, unanimous on this matter.
It is difficult to perceive how a single currency could generate community-building developments in other fields of politics. A particularly relevant case is Europes frequently criticised failure in major policy areas, as experienced after the opening of the Iron Curtain.
If, for whatever reasons, agreement on effective joint action and on state-building constitutional arrangements is not possible, how can the desired result be expected to emerge simply through the catalyst of a single currency?
Both the labour market and public finances will undoubtedly be affected by monetary union. But we cannot reasonably be optimistic about the results: indeed, because of major loopholes in the Maastricht Treaty, Europeans sense of community may even be impaired.
WITH THE TRANSITION to stage three, exchange rate parities will be irrevocably fixed. The exchange rate change option will be removed from the list of economic policy instruments.
The burden of adapting to exogenous shocks, such as major changes in supply and demand conditions in the global economy, will then have to be borne in other ways.
For the labour market, this implies a need for greater flexibility, in particular with regard to the wage bargaining process. The more quickly nominal wages and salaries respond to changing labour market conditions, the less likely is a negative shock to result in increased unemployment.
Undesirable trends arising from the labour market itself, such as excessive wage and salary increases or a decrease in the flexibility of the work-force, will be directly reflected in a decline in employment in the monetary union. However, it is only within the labour market that the necessary corrective action should be taken.
Calls to supplement monetary union by a social union, therefore, are on the wrong track. Social union in the European debate essentially means a harmonisation of social standards - what is more, at the highest possible level.
Social union demands a greater number of and more stringent regulations in the labour market. Monetary union requires the opposite: considerably more flexibility in the labour market.
Harmonisation of social standards, together with monetary union, would significantly reduce the ability of national (and regional) labour markets to absorb asymmetric shocks. As a consequence, there would be mounting pressure to adjust through higher labour mobility.
In effect, increased labour mobility would be politically enforced. It is questionable whether that would increase the welfare of the labour force.
DIFFERING LIVING CONDITIONS, and, above all, distinctly diverging rates of unemployment would inevitably produce political pressure for compensation via transfer payments from the wealthier or less indebted to the poorer or more indebted areas.
A currency area which is not optimal from a purely economic point of View can be held together in a single state through political solidarity reflected in a willingness to make transfer payments.
Studies of the United States, for instance, conclude that the transfer system - which is significant in quantitative terms - is a major factor underpinning the common currency area. (See e.g. Barry Eichengreen, One Money for Europe? Lessons from the U.S. Currency Union, Economic Policy, Vol.5, No.10, April 1990, pp.1 17-87.)
The notion of a single currency as pace-setter stands this idea on its head: common money produces a transfer requirement which, in turn, is expected to establish political structures.
At this point, it is important to prevent two possible misunderstandings. First, it is not a valid argument, in this context, simply to refer to the existing European Union transfer system.
Transfer payments necessitated by monetary union would have to be based on quite different criteria from those adopted under the existing system. Currently, financial transfers are focused on preserving existing structures and are biased towards agriculture.
Under a monetary union the transfers necessitated by external shocks and national developments would have to be designed quite differently, and would be on a much larger scale.
If the Community wishes to keep open the option for the European countries in transition to join, reform of the existing transfer system will be required. It would be disastrous if enlargement of the Community were hindered by failure to meet this need for reform, or if new members entered the union with financial illusions which could not be realised.
Decisions about enlargement of the Community should be taken on the basis of general political and economic considerations and not through the dictates of a badly designed transfer system. Reform of the existing system should perhaps be undertaken before the need for a new and additional one is created.
MORE FUNDAMENTALLY, a single currency which acts as pacesetter opens up the possibility that member-states political solidarity would be seriously undermined as a result of such transfer requirements.
Although it is sometimes argued that the solidarity which manifests itself in willingness to accept transfer payments is a major argument in favour of creating a European sense of community, it is more than doubtful whether transfer payments will have such a positive effect.
More likely the exact opposite will happen.
Even now, the burden carried by the net contributor countries has not helped the EUs popularity. Any kind of expansion would increase ill-feeling and possibly even encourage populist and extremist tendencies in some countries - perhaps even in those member-states that are net receivers, where allocations from the Community might be regarded as too low in comparison with the amount of assistance the recipients thought necessary.
Sizeable payments between member-states would inevitably cause tension and could ultimately even jeopardise the existence of the Community.
The existing framework of the Maastricht Treaty offers some protection against these dangers, but only if very strict conditions are fulfilled - for example, if developments within and between the member-states progress so harmoniously that no large-scale macro-economic imbalances occur.
The number of member-states participating in the monetary union and their degree of homogeneity also play a crucial role. It is not only a question of the economic and political structures at the time of accession, but also of their future development.
The probability that all these favourable conditions will be met is not very high, especially given the possibility of further asymmetric exogenous shocks or radical changes in Central and Eastern Europe.
Monetary union, therefore, not only represents a great opportunity for Europes future; it also embodies a great risk. The transfer issue is at the heart of the problem. /RE: För mer härom se Lindsey och Nils Lundgren/
To avoid political discontent and, if the worst comes to the worst, the break-up of the union, specific guarantees are required so that no transfer quarrels will arise at a later date.
Hayek, Currency Competition and European Monetary Union
Otmar Issing, IEA, April 2000
Ännu är ingen stolt
över att vara europé
Sylvia Asklöf, politisk
redaktör
Barometern, Onsdag 18 December 2002
Highly
Recommended, with many links