TPS - On the eve of the euro

Lecture by Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank, Brixen Summer School, European Academy, Brixen, 3 September 1998

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Tommaso Padoa-Schioppa:

"Thank you very much. I am happy and honoured to be here tonight. The assumption underlying your applause is that to be liked by the European Parliament is a good sign for a central banker. I am not sure that this is always the way central bankers feel, and so I may, in fact, have to recover from that vote, rather than build upon it! I am particularly happy, Duncan, to see you again after so many years. If I may, I should like to make a personal reference. Duncan Foley was my teacher at MIT 30 years ago. He was then teaching a very different kind of economics from that which he has taught subsequently, if my information is correct, but he was an extraordinary teacher for me. When I came back to Italy, I remember giving some seminars on Foley's Sidrauski model. These gave me the reputation of being almost a reactionary in an Italian intellectual environment that was thinking along very different lines from that model. Well, many things have now changed. 30 years have seen many, many changes, and I am very happy to see you here.

The title of this lecture - although I think of this talk more as of a kind of conversation - that Professor Schefold and myself have chosen is "On the eve of the euro". First, I shall elaborate upon this title by recapitulating the steps involved in reaching this eve. I shall then go on to say something about what, in my view, is special about EMU. Third, I shall describe what is happening during this eve.
How did we get here?

"Eve" refers to the period in which the European Central Bank is already in existence, but has not fully assumed its monetary policy functions. It will do so on 1 January 1999. It is a period of several months, of which we have just about reached the middle.

Thus, how did we arrive at the inception of the European Central Bank? It has been a long process. Indeed, I could say that it started with the Treaty of Rome in 1957. I do not know how many of you are familiar with this extraordinary book that every economist should read, because it contains, in legal language, many implicit and some explicit propositions about the way in which the economy should function and economic policy should operate. The Treaty has proved, over a period of 40 years, to be extremely powerful and flexible in many ways.

One of the implicit propositions is that, in order to have a Common Market (as it was called at the time), it is necessary to have a corresponding monetary order, in other words, I would suggest, some kind of monetary union. This proposition is only implicit because, in the mid-1950s, this kind of system existed in reality. At the time, the system of fixed exchange rates created at Bretton Woods was such a key component of the world economic order that it was taken for granted that it would last. In fact, it was not even the subject of much discussion, except for a few references to exchange rates. Most of the efforts in the early years following the birth of the European Community in 1958 were devoted to scaling down tariffs, which were of a much smaller order of magnitude than the fluctuations on foreign exchange markets in the present floating situation. If it was considered such a difficult task to abolish tariffs while nothing was said about exchange rates, this is because exchange rates were taken as being fixed...."

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Source: http://www.ecb.int/press/key/date/1998/html/sp980903.en.html

[Mrt: Hat tip to Jeff for this link.]