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European monetary policy-making and economic governance in Europe.

1. Introduction

Borio and Toniolo focus primarily on the process, rather than the ultimate outcomes of cooperation, and they do so from a positive rather than normative perspective. Borio and Toniolo are interested in understanding what factors shape cooperation and in its immediate results, considering cooperation effective simply to the extent that its proximate goals are achieved, and do not address the trickier question of whether those actions promote the ultimate goals. Howarth and Loedel argue that the ECB can act as a solid foundation to political union in Europe. European monetary cooperation among nation states has often been analysed in terms of the prisoner's dilemma. The ECB fulfills much of the Hobbesian approach to understanding the behaviour of humans. European monetary policymaking and economic governance in Europe are in a state of transition. de Haan et al. say that the ECB's primary objective is price stability. The monetary policy strategy of the ECB consists of three main elements: a quantitative definition of price stability, a prominent role for money in the assessment of risks to price stability, and a broadly based assessment of the outlook for price developments. The ECB has not been very successful in explaining its policies to financial market participants. Transparency may enhance the credibility of the policy maker. Countries in the euro area sometimes have different inflation rates and business cycles.

2. The intensity of central bank cooperation

Borio and Toniolo define cooperation broadly to include both purposeful exchanges of information and joint decisions and implementation. Borio and Toniolo outline the main targets, tools, and determinants of central bank cooperation and their evolution over time, deal with cooperation in the context of the pre-1914 "classical" gold standard, and trace developments from the wartime regime to the creation of the BIS. Borio and Toniolo define "monetary stability" as either stability in an aggregate price level (index) or in the relative price of two units of account (that is, the exchange rate between national currencies or between a given currency and gold), and define "financial stability" as the avoidance of widespread defaults, typically associated with either banking or sovereign debt crises. Changes in the operational conception of monetary and financial stability against the background of an evolving monetary and financial environment have affected the targets and instruments of central bank cooperation. Borio and Toniolo write that the intensity of central bank cooperation vary over time according to three main factors: (i) the overall conditions in international relations, (ii) the prestige enjoyed by central banks with the public at large, which also affects their institutional relationship with the political authorities (i.e., the allocation of tasks in monetary policymaking, including provisions for central bank independence), and (3) the technical nature of the problems requiring cooperation. (1)

3. The institutional structure and operation of the ECB

Howarth and Loedel provide a detailed analysis of the institutional structure and operation of the ECB, and reasonably speculate on the Bank's future operation, seeking to understand why the ECB was designed the way it was, how it fits into the overall EU policymaking system, and the debates about its institutional structure. Howarth and Loedel explore the prevailing attitudes of the three leading member states of the European Union--Germany, France and Britain--towards European monetary authority and the EMU project more generally, in addition to the distinct national traditions of monetary policy-making that have largely shaped these attitudes. Howarth and Loedel describe the European System of Central Banks (ESCB) and the interaction of the ECB with other EU institutions, evaluates the institutional structure of the ECB through the analytical lens of political independence, and evaluates the ECB in action--the actual monetary policy during its first years in operation. Howarth and Loedel focus on the interest rate debates, exchange rate politics and the role of ECOFIN in more detail and evaluate the ECB's "successes" and "failures". The ECB is establishing itself and exerting its power more effectively, especially since the introduction of euro notes and coins in 1 January 2002. Howarth and Loedel introduce a structural perspective of international political economy which explains both the move to EMU and central bank independence in term of changes in global capitalism. Liberal institutionalism emphasizes the importance attached to the role of institutions and norms in the process of European integration. EU decision-making institutions have produced a sustained pattern of cooperation and integration based on the choices and preferences of state actors. The ECB possesses its interest rate weapon to encourage member states to modify their economic polices. Globalization and the deregulation of the financial markets increased convergence in national financial structures in West European countries. (2)

4. The role of the external value of the euro in the monetary policy strategy of the ECB

de Haan et al. examine the degree of business cycle synchronization in the euro area, the inflation differentials among the euro countries, and (the persistence of) differences in monetary transmission across these countries, and discuss business cycle synchronization, inflation differentials, and monetary policy transmission in the accession countries. Central bank independence and an explicit mandate for the bank to restrain inflation are important institutional devices to ensure price stability. An independent central bank can give full priority to maintaining low levels of inflation. de Haan et al. discuss inflation forecasts, the role of the external value of the euro in the monetary policy strategy of the ECB, the questions of whether asset prices should play a role in the ECB policies, and whether interest steps should be small or large. de Haan et al. analyze the development of forward market rates on a daily basis, as well as newspaper reports. Financial market prices are often used for measuring market expectations. In de Haan et al.'s view it would be better if the two-pillar strategy of the ECB were replaced by explicit inflation targeting. The euro-dollar exchange rate is one of the indicators of future inflationary developments in the monetary policy strategy of the ECB. There is always a risk that actual exchange rates may be out of line with "fundamentals." the international role of the euro will become more important in the medium and long run (the euro will be accepted more often in international payments, in particular as a vehicle currency). The sensitivity of the European consumer prices to fluctuations in the exchange rate has been reduced. de Haan et al. define an exchange market intervention as a sale or a purchase of foreign currencies by the monetary authorities with the aim of changing the exchange rate of their own currency vis-a-vis one or more foreign currencies. Estimating the portfolio balance channel requires proxies for the risk premium between domestic and foreign assets. The ECB uses asset price developments in its broadly based assessment of the risks for price stability. The ECB has been quite successful in its monetary policy so far (3,4), and cannot reasonably be said to have been overly aggressive in pursuing its primary objective to the detriment of other considerations. (5)

5. Conclusion

Borio and Toniolo consider sequentially the forms of central bank cooperation during the wartime period, those during the subsequent years, and the specific factors leading to the establishment of the BIS. When considering central bank cooperation in the new context of the BIS, the period can best be divided into three parts: the Great Depression, autarky, and war. The origins of the evolution incentral bank cooperation can be traced back to the changes that took place in the international monetary and financial environment. The presence of the BIS has facilitated and deepened cooperation, ensuring a degree of continuity and effectiveness that would otherwise have been harder to attain. Howarth and Loedel examine the history of European monetary authority in terms of the construction of a powerful epistemic community. The influence of central bankers in the lead up to EMU and the reinforcement of their power in the Maastricht project point to concerns regarding the democratic deficit. Although the central bankers clearly played an important role, politicians played the crucial role in the move to EMU. Only a combination of different theoretical and analytical approaches provides a thorough explanation of the creation of the ECB. The creation and operational principles of the ECB must be understood in structural and ideational terms. de Haan et al. believe that the ECB can improve the transparency of its monetary policy strategy: (i) it should drop altogether the first pillar and concentrate, exclusively, on a more explicit inflation targeting strategy, and (ii) it should provide a midpoint inflation target that includes a symmetric band or range around it. The ECB should abandon the monetary analysis as a dominant navigation system for its monetary policy. The consequences of the zero bound are negligible for target inflation rates as low as 2 percent. de Haan et al. feel that the ECB should abandon the monetary analysis as a dominant navigation system for its monetary policy but use the relevant information in the economic analysis.


(1.) Borio, C. and Toniolo, G. (2008), "One Hundred and Thirty Years of Central Bank Cooperation: A BIS Perspective", Borio, C. et al. (eds.), Past and Future of Central Bank Cooperation. New York: Cambridge University Press, 16-75.

(2.) Howarth, D. and Loedel, P. (2003), The European Central Bank The New European Leviathan? Basingstoke: Palgrave, 5-24.

(3.) Ionescu, L. (2009), "The Political Dynamics of Corporate Crime Legislation", Economics, Management, and Financial Markets 4(3): 196-200.

(4.) Zaharia, C. et al. (2009), "The Improvement of Agricultural Marketing Systems in European Countries", Economics, Management, and Financial Markets 4(3): 313-317.

(5.) de Haan, J. et al. (2005), The European Central Bank. Credibility, Transparency, and Centralization. Cambridge, MA: MIT Press, 5-81.


PhD C., University of Craiova
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Author:Gradinaru, Cristian
Publication:Economics, Management, and Financial Markets
Date:Dec 1, 2009
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