Year XXXIII, 1991, Number 3 - Page 242
ON THEQUESTION OF A STRATEGY FOR THE ECU: A COMMENT
The publication of a summary of the results of a recent investigation promoted by the Association for the Monetary Union of Europe and conducted both by Ernst & Young and the National Institute of Economic and Social Research of London, formulates an operational programme which has the aim of making the Ecu the single currency of a finally and completely united Europe, by 1997.
It is a highly detailed report (indeed it resembles, not incidentally, in this historic phase which is still to a great extent “constituent” for the European unification process, one of those monumental specialized monographs produced by the Economic Commission of the Ministry for the Constituent, since it is similarly organized in its investigations and hearings) and therefore it is difficult not only to outline, albeit briefly, its complex architecture (and even more so its specific contents) but also to stress its many original conclusions. One of the pre-eminent and most basic of these issues seems to be the systematic and precise, even meticulous, analysis of the microeconomic aspects of the issue and the related project. This analysis identifies the obstacles which hinder a more widespread private use of the Ecu, as they seem to be perceived by its users (incidentally, with regard to Italy, the report actually states that “The use of the Ecu was perceived as an unnecessary burden which obliges the commercial partner and oneself to deal in an extra financial currency which will eventually have to be exchanged for another currency”. The elimination of these obstacles is identified as an undoubtedly necessary (but by no means sufficient) condition for the “self-sustained” development of this use, at this delicate moment when, although the satisfactory performance of the European Monetary System makes the Ecu progressively less “attractive” as store of value with respect to a past period of much higher monetary instability, this same performance increases the Ecu’s relevance as a unit of account (at present extremely limited) and also as a true means of payment.
Referring to the statement of the European Council during the establishment of the EMS in 1978, in which “a European Currency Unit (ECU) will be at the centre of the EMS”, the Delors Report on the other hand acknowledges the “considerable popularity”3 of the Ecu in private markets as a denomination unit for financial operations (the market share in international issues of bonds was 6 per cent at the time of the Report) in view of its advantageous characteristics as an instrument for diversifying portfolios and as insurance against exchange rate risks. Yet at the same time it stresses both the progressive reduction of the use of the Ecu in international banking activity, especially in the field of direct transactions with non-banking counterparts, and the negligible share (1 per cent of the foreign trade of EEC countries) of the Ecu for the invoicing and payment of commercial operations. On the other hand, experience in the “official” use of the Ecu also seems to be orientated in a reductive sense with respect to the extensive range of cases contemplated by the Brussels Resolution, which envisaged the use of the Ecu as the denominator of the exchange rate mechanism, as the basis for determining the divergences among Community currencies, as the denominator of operations contemplated in the intervention and credit mechanism, and finally as the regulatory means between the Community’s monetary authorities. In fact, the operative scope of the Ecu was found to be limited to the still significant functions of official reserves and of means for financing and regulation in the very short term; which however is also limited due to the predominance of interventions made in dollars (2/3 of the total) and of the marginal role of marginal interventions (indeed those which produce debit and credit balances in Ecu) in favour of inframarginal ones (approximately 90 per cent of the total) which are preferred (since the March 1983 realignment) in order to avoid the tensions deriving from the attainment of bilateral intervention margins. These interventions, performed in eurocurrencies or in activities denominated in foreign currency, are characterized by the existence (according to the terminology used by Rainer S. Masera in the monograph on Monetary unification and the EMS) of “asymmetrical effects in terms of monetary base”. In other words, their repercussions in terms of monetary base only affect the central bank which carries out the intervention and are therefore preferred by the monetary authorities of strong-currency countries, which have a marked inclination toward keeping the tightest possible control over domestic monetary policy.
Despite the re-sizing operations in itinere in the private and public sectors, the Delors Report nonetheless stresses “... the role of the Ecu in connection with an eventual move to a single currency”, the latter being considered a “desirable feature”, but not an indispensable requirement for monetary union. The Ecu in fact has “the potential to be developed into ... a common currency”: thus, it is no longer a currency basket, but a true currency in its own right. The Report also considers the so-called “parallel currency strategy” not advisable (as a potential cause of inflationary tensions, as well as jeopardizing any efforts to co-ordinate national monetary policies). According to this strategy, the new currency which would arise from the transformation of the Ecu and which would maintain its denomination, would operate alongside the other currencies in an additional and competitive manner.
Thus, if the various types of public and private Ecu use are ranked, in both cases this would produce two markedly decreasing curves, with a peak: in the public sector in relation to the functions of official reserves and of very short term financing instruments and with a peak in the private sector in relation to the function of denominators of financial operations, which are in any case (at least initially) to the advantage of payees who also belong to the public sector of the various economic systems. The motivation for the use of the Ecu is thus concentrated in the latter sector and in its choices. It is not surprising, therefore, that the target of the investigation, and therefore the research in question, refer to the sphere of political decisions seeking the conditions for a more extensive, systematic and “institutional” use of the Ecu, especially as the solution of problems such as the legal standing of the Ecu and those arising from the current lack of end uses, indicated as second-and third-ranking (after “inertia”) in the list of obstacles reported by operators, is necessarily dependent on the above-mentioned sphere. In similar fashion, A strategy for the Ecu states that “... the private sector is unlikely to act as an initiator in increasing or encouraging greatly increased use of the Ecu” and that “The degree of permanence which the Ecu will enjoy within the European Community is a political question and requires a political solution”. Consequently, we can conclude that “Official stimulus is needed”, without which no removal of administrative obstacles would achieve the desired effect: the recommendation that “... there should be a credible announcement that the Ecu will be the single currency of Europe” is based on these grounds.
Without underestimating in any way the importance of such a statement, which would be simultaneously the cause and effect of a further contribution to the unification process in the form of the additional administration of “converging thrusts”, it should be stressed that some important operative proposals can be found in recent literature, which aim at reinforcing the role of the Ecu precisely through the promotion of communication channels between the official and the private market and thus overcoming (or starting to overcome) the separation which has so far characterized their operation, even though there are no conceptual incompatibilities between the two fields of use.
A particularly clear statement on this synergy can be found in the above mentioned essay by Masera: “Market interventions in Ecu, invoicing and price setting in Ecu and the keeping of reserves in Ecu are three aspects of a single process which would lead to the assertion of the Ecu as a fully-fledged currency in the private and official sector, enhancing its properties as means of payment, as unit of account and store of value”. The principle of linkage between the private and public circuit indeed inspires the proposal (similar to the one made some time ago regarding Special drawing rights) to link, by interposing a clearing house (specifically, the BIS) acknowledged as a “third holder” of official Ecu, central banks which purchase currencies for inframarginal interventions and official Ecu sellers and commercial banks which sell currencies in exchange for the acquisition of instruments of deposit activated by giving the received Ecu to the “third holder”. This mechanism for mobilizing the official Ecu would be essential in reinforcing, by the very use of the Ecu, a European monetary dimension without making this development conflict with the already mentioned inclination of strong-currency countries toward interventions characterized by asymmetrical effects in terms of monetary base.
This same range of objectives also includes the proposal to link the promotion of the Ecu and the co-ordination of monetary policies, specifying in more detail the operative content of the second phase outlined in the Delors Report. Paragraph 57 of this Report in fact states that “In the monetary field, the most important feature of this stage [indeed the second one] would be that the European System of Central Banks would be set up and would absorb the previously existing monetary arrangements ...” and subsequently that “The key task for the European System of Central Banks during this stage would be to begin the transition from the co-ordination of independent national monetary policies by the Committee of Central Bank Governors in stage one to the formulation and implementation of a common monetary policy by the ESCB itself scheduled to take place in the final stage”. Thus, in phase two the ESCB would already be operating, but intra-community exchange rates would not yet be irrevocably fixed: this would lead to an unusual distribution of powers between national levels and the community level, concerning which the Report provides no specific indications as to the quid commune of monetary policy or rather of the monetary policies.
It is in this context that the proposal to authorize the ESCB to establish a compulsory reserve constraint denominated in Ecu for the commercial banks of the Community is put forth. The mandated banks would acquire these resources by purchasing activities which can be likened to federal funds, provided exclusively by the ESCB. The allocation of these activities among countries and banks would be assigned to a “federal fund market” in which the commercial banks would exchange funds in order to meet the Community’s reserve obligation. This obligation should initially be additional and independent with respect to national ones (as well as small and non-remunerated), but with the prospect of gradually replacing them as monetary integration progresses. This instrument would in turn accelerate and strengthen integration and would commensurately enhance the role of the Ecu.
As a conclusion to these notes, we can return to the hope for a political announcement, formulated by this report, of the intention to make the Ecu the single currency of a united Europe at a fixed date. This hope not only does not seem to conflict with the financial engineering projects to which reference has been made, but is fully in tune with the most recent developments of that powerful analytical tool for the strategic approach to the theory of economic policy in conditions of international interdependence represented by the dynamic theory of international co-operation games. One of the results obtained in this analytical frame work is indeed the acknowledgement of the crucial impact of the behaviour of private operators who “rationally” define their expectations regarding the choices of policy makers and thus also regarding credible statements concerning these choices. Although the presence of rational economic agents (made rational also by statements such as the one hoped for) on the one hand theoretically undermines the dynamic consistency of economic policy choices, characterized nonetheless by optimality ex ante, it can for the same reason help to determine a considerable “discipline effect” on “coexisting” economic policies, to the full advantage of the aim of stability; the spread (or rather, the generalized acceptance) of which still seems to constitute an absolutely unavoidable political condition for any further progress toward European economic unity.
A Strategy for the ECU (A report prepared by Ernst & Young and the National Institute of Economic and Social Research on behalf of the Association for the Monetary Union of Europe), London, Kogan Page, 1990.
A Strategy for the ECU, op. cit., p. 104.
Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the European Community (mentioned hereafter as Delors Report), pp. 12-13.
Ibid. p. 9.
R.S. Masera, L’unificazione monetaria e lo SME. L’esperienza dei primi otto anni, Il Mulino, 1987, p. 199 (see in any case all of Chapter V, pp. 197-259, entitled L’Ecu: problemi e prospettive).
Delors Report, op. cit., p. 33.
A Strategy for the ECU, op. cit., p. 32.
Ibid. p. 26.
Ibid. p. 27.
R.S. Masera, L’unificazione monetaria e lo SME. L’esperienza dei primi otto anni, op. cit., p. 233.
See D. Gros, The ECU in the Common Monetary Policy in “ECU Newsletter,” April 1990, pp. 14-19.
Delors Report, op. cit., p. 38.
For a recent overview on the subject, see C. Montagna, Interdipendenza economica internazionale e coordinamento delle politiehe eeonomiche: una rassegna in “Rivista internazionale di Scienze sociali,” January-March 1990, pp. 57-82.