EMU, Monetary Policy and Capital Markets
DANIEL GROS AND KAREL LANNOO
The introduction of the euro will lead to common monetary policy for the participating countries. This will have profound consequences for capital markets as well. This chapter provides therefore a general description of the environment in which monetary policy of the euro area will be conducted. The Treaty obligations together with the Stability Pact for fiscal policy will produce an environment conducive to sustained low inflation and interest rates.
The details of the instruments that will be used by the European Central Bank (ECB) have not yet been decided, because it was not possible to reach a consensus on these detailed technical issues within the European Monetary Institute (EMI). The final decisions will thus be made only by the ECB once it is established, which win happen immediately after the final decision to start EMU has been taken by the Council. However, what is known today is already sufficient to discern two broad tendencies: first, it will take some time before a really unified European capital market emerges, and, secondly, the ECB will be an 'incomplete' central bank. We will come back to these two points at the end after a detailed description of the framework for monetary policy under EMU.
This chapter is organized as follows: we start in Section 2 with a description of the remaining steps that have to be taken to make EMU happen, namely the decision on the convergence criteria and the fixing of the conversion rates. Section 3 describes the framework for the common monetary policy, including the structure of the E(S)CB, its likely monetary policy instruments and targets. Section 4 then discusses other central banking tasks that are not related directly to monetary policy. Section 5 concludes with some reflections on the implications for capital markets.
The final go-ahead by the European Council came in May 1998 at a special meeting of all the fifteen heads of state and government. At that meeting, the European Council