The EMI must use its independence to define its roles.The European Monetary Institute (EMI) was created by the Maastricht Treaty as a step in the transition towards monetary union (EMU). Now the EMU project is in grave difficulties and its precursor, the European Monetary System, is barely operative. Has the EMI lost its raison d'être at its moment of birth?

It is a difficult time for EMU because the foreign exchange crises of 1992-93 have led many to believe that the gradual transition of the Maastricht Treaty is doomed to failure and that the only successful monetary reforms are sudden. Others even claim that the Treaty might have been a major independent cause of the 1992-93 foreign exchange crises.

The EMI also comes to life at a difficult time for the EMS itself. Two of its large members, Italy and the UK, are still out of the exchange rate mechanism of the EMS, while the others are subject to extra-wide 15% fluctuation bands. One of the tasks of the EMI is to monitor the functioning of the EMS. It seems that at present, there is little to monitor.

Yet the EMI is by no means irrelevant. Through an often tortuous ratification process, the Maastricht Treaty has gained tremendous political significance. Its critics, who point to the narrow margins in some national votes too easily forget that in a democracy it is the result that counts. Every key reform is passed after often bitter and contentious public debates.

How should the EMI spend its first year? There is more than enough to do! The EMI's problem is the multiplicity of its roles, not the absence of any - and that is compounded by their political complexity and sensitivity. The EMI effectively replaces the Committee of EC Central Bank Governors and assumes many of its functions. These include strengthening cooperation among national central banks and managing the European Monetary Cooperation Fund.

The EMI has a bigger role to play in implementing the transition to EMU. It is supposed to prepare the instruments and procedures necessary to carry out a single monetary policy in Stage Three of monetary union. It must also promote the harmonization of monetary and related statistics and prepare the rules for operations to be undertaken by the national central banks in the framework of the European System of Central Banks.

These are very demanding tasks. Even leaving aside political considerations, it is difficult to identify the best technical solutions. Once they are elaborated, it will be even harder to obtain the unanimous agreement necessary to pass such measures. Finally, the EMI will have to ensure that its proposals are actually implemented by member states, so that the `instruments' and the `rules' mentioned above are really in place at the start of Stage Three.

The EMI is therefore charged with serious responsibilities. Failure to fulfil its mandate will block the next step in the transition to EMU, the establishment of a single monetary policy, and hence the introduction of a single currency.

As currently structured, the EMI is the creature of national central banks, which sit on the EMI Council and vote on all decisions including those preparatory tasks which require unanimity. There is a sense as well in which the EMI is accountable to the European electorate, which either directly or through national referenda ratified the Maastricht Treaty, thus calling for monetary union.

In recent months, many official pronouncements on the Treaty have come from governments as well as national central banks. The latter have perhaps been the more powerful, since national central banks can signal their resolve to complete the transition to monetary union - or not. These signals may significantly affect the credibility of foreign exchange parities.

The EMI is the first institution to have been endowed with some power to affect financial markets, while at the same time representing in embryo the post-monetary unification institutions. It has no vested interests, both because its mandate has a deadline, and because it does not represent any one individual central bank.

Therefore the EMI might want to consider using its genuine political independence to build political support for the Maastricht Treaty and its own mandate, through regular statements on developments in financial and foreign exchange markets. This activity could indirectly promote the consensus necessary to build the institutions required to begin Stage Three of the monetary union.

The EMI could contribute to macroeconomic policy formation in Europe. The room for interest-rate decreases is there only if fiscal policy is corrected. Ironically only Italy among the large EMS members has consistently retrenched in its fiscal stance over the past two years. EMI is an ideal conduit for the message of the necessity for more fiscal consolidation as a precondition to further interest-rate cuts.

Because the key innovative tasks of EMI have to be voted unanimously by its members, the Institute will find it very difficult to strike the balance that is required to implement its preparatory work for Stage Three. Such difficulties can be overcome if the Institute's management maintains a pro-active attitude with its constituencies. The EMI, to be successful, has to gain an independent status.

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