Stability and Prosperity in Monetary Union

The International Monetary Fund (IMF) reported that countries in this interim stage encountered difficulties in maintaining macroeconomic stability.4

Global coordination of economic policies was also essential for the promotion of macroeconomic stability, especially in the monetary and financial markets.

Monetary policy needs to look beyond its core focus on low and stable inflation and pay much greater attention to financial stability. The debate now is how, exactly, to factor this imperative into monetary policy, and how to coordinate the work of monetary and regulatory authorities.

The IMF s management shares many strategic considerations repeatedly raised by the Bundesbank, which has argued that the Fund should limit its activities to its core mandate promoting monetary and financial stability. Thus, the IMF s role in the international monetary system should not go beyond applying its key instruments for promoting macroeconomic stability surveillance and economic policy advice.

At the heart of the debate currently being conducted within leading economies treasuries and central banks, as well as in supranational bodies such as the International Monetary Fund and the BIS is the relationship between monetary policy and financial stability. The BIS, for example, has suggested that financial stability is closely connected with monetary policy, and has advised policymakers to start weaning their economies off of easy money sooner rather than later.

We continued to guide monetary policy by our assessment of the risks to price stability over the medium term. This medium term orientation paid off.

The International Monetary Fund continued to assist the Government, through a close policy dialogue, in maintaining macroeconomic stability, especially in the area of fiscal policy.

In October 1998, just before the start of the European Monetary Union, the Governing Council of the European Central Bank (ECB) adopted a stability oriented monetary policy strategy. This strategy comprises three elements First and foremost it contains a clear commitment to the primary goal of the ECB, which is to safeguard price stability. Price stability was defined as an annual increase in the price level of below two percent over the medium term.

The question is not whether or not to include monetary analysis in the monetary policy strategy, but how to reconcile the results from the monetary and the economic analyses to achieve a comprehensive and consistent assessment of the risks to price stability. In the strategy of the ECB this is the role of crosschecking.

Contrary to those who regard the discussion of an alternative monetary framework as premature, there are good reasons for China to begin right now to build the institutional foundation for the transition to an independent monetary policy. Indeed, early adoption of a low inflation objective would help secure the monetary and financial stability that China needs as it allows greater exchange rate flexibility.

But this will require a shift in the ECB s attitude. Europe needs a monetary policy that views aiding employment growth in northern Europe as more important than continental price stability.

The price stability mandate has been trumped by concerns about growth. The fear is that tightening monetary policy to bear down on inflation could snuff out the faltering economic recovery.

10. At the domestic level, it was necessary to restore macroeconomic stability through monetary and fiscal discipline, mobilize domestic resources, diversify exports and production and design and implement adjustment programmes.

In addition, to ensure price stability, it will be necessary to further reduce the need for domestic financing of Government deficits through reduced recurrent spending and sound fiscal and monetary policies.

5. Also stresses that implementation of sound domestic monetary, fiscal and structural policies over the medium term, including ensuring sound banking systems, is required to promote financial and exchange rate stability

Monetary Mystification

But reality has shown that this approach is not tenable. Problems might originate at the national level, but, owing to monetary union, they quickly threaten the stability of the entire eurozone banking system.

A normal monetary union, which is what the eurozone aspires to be, requires a normal central bank to carry out the entire range of central banking functions. This starts with ensuring price stability.

The establishment of monetary and exchange stability enabled the financial system to recover credibility and deposits to climb back up to levels well above those that prevailed at the beginning of the crisis.

Back in 1997 1998, during the Asian crisis, the G 7 flatly rejected Japan s proposal for an Asian Monetary Fund. Now the IMF has even accepted a minority lender role, with the bulk of assistance coming from the European Stability Mechanism (ESM), a new institution often viewed as an embryonic European Monetary Fund.

The Monetary Cosmopolitans

China s Monetary Sterilization

International Monetary Fund

International Monetary Fund

International Monetary Fund

International Monetary Fund

But the UK government could and undoubtedly would veto any such adaptation of the Bank of England s responsibilities for monetary policy, financial stability, and banking supervision. Any other conceivable model of monetary union including one based on a central bank as unaccountable as the European Central Bank would be subject to the same rejection.

Macro economic stability had to be replaced with micro stability.

Price stability.

In conclusion, I reaffirm that global stability derives from regional stability.

China s Monetary Policy Surprise

China s Monetary Policy Choice

The New Monetary Disorder

IMF International Monetary Fund

International Monetary Fund (IMF)

N. International Monetary Fund

3. International Monetary Fund

(h) International monetary law

International Monetary Fund 13

M. International Monetary Fund

N. International Monetary Fund

Monetary policy and institutions

The new banking union, however imperfect, and the European Central Bank s vow to save the euro by doing whatever it takes, are essential to sustaining the monetary union. Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality.

The Central Bank, The Bermuda Monetary Authority, was established by the Bermuda Monetary Act 1969.