CEPR has played a pioneering role in research on European economic
and monetary union (EMU). CEPR researchers have recently been examining
the issues likely to arise in the period immediately after the euro has
been launched. Some of the results of this research are presented in
this special issue of European Economic Perspectives, kindly
sponsored by the Banca Nazionale del Lavoro.
Of central concern are the challenges facing the newly constituted
European Central Bank (ECB). In the latest issue of Economic Policy,
Rudi Dornbusch, Carlo Favero and Francesco Giavazzi argue that the Bank
will have three key tasks – all connected to the fact that it must
conduct a monetary policy that is ‘European’.
First, the ECB must tread the narrow path between an institutional
revolution and continuity with the Bundesbank. The capital markets are
likely to prove unforgiving if they see anything less than Bundesbank
policy. But the political community will be unforgiving if they do not
see a genuine concern with being European, creating a language and
constituency that goes beyond German savers and monetary hawks. The
legitimacy that the ECB must build depends on understanding that its
constitution in no way guarantees political effectiveness. Successful
communication will be crucial.
Second, the ECB must conduct a European policy and should not
attempt to solve every local problem by excessive regionalization of its
policy. It must work on the broad picture of stabilizing European
prices, not putting a lid on German inflation or a floor under French
deflation.
Third, the ECB must develop an understanding of how interest rate
movements are transmitted through the European economy. That task will
be complicated since financial structures and wage-price processes
differ significantly across countries and are sure to evolve in response
to the changing focus of European monetary policy. Shooting at a moving
target in the fog is no easy task, Dornbusch and his colleagues
conclude.