A brief note on the Euro Symposium

"I would prefer not to"

Bartleby, the Scrivener: A Story of Wall Street", Herman Melville

Tonight representative of the 27 members of the EU will sit together around a dinner table to discuss a report, appropriately titled for the occasion "Towards a Genuine Economic and Monetary Union". The report was prepared by the four presidents of the European council, the Eurogroup, the Commission and the ECB; it identifies four essential building blocks for a "stable and prosperous" EMU to be put in place over the next decade (decade: a period of ten years).

They are, 1) An integrated financial framework, 2)An integrated budgetary framework, 3, An integrated economic policy framework and 4) ensuring the necessary democratic legitimacy and accountability.

 Let me focus on the first and most urgent block to be put in place over the next semester (semester: a period of six months), namely the integrated financial framework (from now IFF). For all practical means it consists in the creation of EZ-banks. The steps to transform euro-members banks into EZ-banks are to institute a single European banking supervision and a common deposit insurance and resolution framework. The motivation found in the report is totally correct: "the financial crisis has revealed structural shortcomings in the institutional framework for financial stability" and the IFF will "ensure financial stability in the euro area and minimize the cost of bank failures". Many commentators agree that the IFF will sever the incestous links between euro members banks and sovereigns, will increase confidence and stop deposits outflows, will help relax the consequent credit tightening. Fundamentally I think adopting a IFF goes beyond checking a list of shortcomings.

A while ago (the analysis is outdated and today would probably be more focused) I came to the conclusion that the architects of the Euro had focused on the necessary conditions to make it work. For example think of the competitiveness problems of the periphery from the financial angle. As long as the euro-members commercial banking system was working as one, the current accounts were intermediated. Then came the crisis and what was necessary turned out to not sufficient to make the Euro work. There are other important parts of the euro institutional infrastructure that can work with euro-member banking and financial sectors, and they worked before the crisis, but are likely to work less well, to say the least, than with a IFF. In normal times, we are entitled to think that the ECB would want to achieve a quasi-uniform transmission of its monetary policy across the EZ and along the EZ yield curve.

I really hope the room is green.