Academic journal article Atlantic Economic Journal

Introduction to a Symposium on Central Banks after the European Monetary Union

Academic journal article Atlantic Economic Journal

Introduction to a Symposium on Central Banks after the European Monetary Union

Article excerpt

ALLAN H. MELTZER [*]

The start of the European Central Bank in 1999 is often compared to the start of the Federal Reserve System in 1913. There are similarities. Both started as federal systems with substantial operating responsibilities at the regional or national levels. Both left important responsibilities to the regions or nations.

There are many differences, not the least of which is that the European system incorporates national central banks with long histories of successful operations. In contrast, the Federal Reserve System created de novo regional banks, several of which were too small to be efficient. The designers of the Federal Reserve System believed that each Reserve bank would operate as a semi-autonomous institution, setting its own discount rates and cooperating in portfolio decisions only when it chose to do so. This feature survived on paper, but only partly in practice, until 1936 when legislation centralized control and authority. Nevertheless, as late as 1932, individual Reserve banks declined to participate in open-market operations.

The designers of the European system did not repeat this mistake. Decisions are taken collectively, but they are binding on the members. The members--currently 11 countries--implement the common policy within their nations, but there is only one common short-term interest rate for the region.

The Federal Reserve Act tried to provide for regional differences by permitting limited regional autonomy. The European Monetary Union (EMU) makes no provision for regional differences. It remains to be seen how large these differences become and how they are resolved.

Although the original Federal Reserve System was a looser federation for policy purposes, membership was not optional. The U.S. then, as now, was a single country with a single language and a common national law. The European system, in contrast, brings together countries with different traditions and different laws regulating banking, finance, payments, and other relevant features. Further, countries can choose not to join the new system, and some European Union members have. However, even those that do not join are affected by the new arrangement.

The symposium brought together three experts from central banks that are affected very differently. Germany has ceded some of its authority over monetary policy to the other members of the EMU. Previously, the Bundesbank kept its eyes and ears open to the problems of its neighbors, but it was not obligated to alter its policy or listen to its neighbor's complaints. The Bundesbank controlled the inflation rate. It was for the others ultimately to decide whether to accede to the Bundesbank's policy or to let their exchange rate adjust.

Heinz Herrmann's comments bring out how the new system has changed some internal operations of the Bundesbank. …

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