Author(s): Lorenzo Bini Smaghi, Harvard University
Date published: Sep 2012
The 2012 SUERF Marjolin Lecture on “Money and banking in times of crisisˮ was given by Lorenzo Bini Smaghi, Harvard University. He compared Europe with a journey. The Common Market, EMU and maybe a forthcoming fiscal union are bringing people closer together. The journey entails further political integration. In the US, Alexander Hamilton convinced the Congress to merge the debts of the states. This was vital for the formation of the United States of America. Perhaps something similar could happen in Europe. In solving the current European problems the key questions are: What shall be done? Who should do it? And how? The ECB can only aim at the average economic situation in the euro area as a whole, but there is wide dispersion in the Eurozone. Seventeen governments are accountable to their citizens. The ECB has adapted its monetary policy during the crisis. The move to a system where counterparties can apply for liquidity was intended to be temporary. The unlimited provision of liquidity allowed banks to postpone needed structural changes. With the benefi t of hindsight, the ECB Governing Council underestimated the full extent and long-lasting nature of the crisis and initially insisted too much on the temporary nature of non-conventional measures. Cross-border money market fl ows have declined. Banks refrain from placing funds in stressed countries. We no longer have a single euro area money market. The ECB plays a large role as intermediary in the money market. Claims are safe if channelled through the ECB. More supervisory powers should be transferred to the ECB. In the bond markets, the prevailing spreads are out of line with equilibrium in the Euro area. The monetary policy transmission mechanism needs to be fi xed. Markets must be convinced that the ECB and governments will do what is needed. Politicians cannot at the same time ask for more “Europeˮ and more “sovereigntyˮ. The euro area crisis has reached a stage where member states must commit themselves to deeper European integration and transfer of sovereignty. During the discussion the issue of the exit strategy from unconventional monetary policy was raised. The speaker answered that the ECB will exit from the market, once market functioning and the functioning of the monetary policy transmission mechanism have been re-established. The precautionary demand for liquidity by banks must come down fi rst. When interest rates are raised, the incentives of banks to use the Eurosystem's facilities will fall. The ECB should not, however, communicate that it is ready to exit tomorrow. Another participant questioned whether we can just wait and see. The speaker agreed that the ECB and governments do not have plenty of time left: There is an urgent need to act.In line with SUERF's tradition, a considerable part of the Colloquium work took place in three parallel commissions, which refl ect three key areas of interest in the current crisis: the role of monetary and fi scal policy, the role of markets and fi nancial institutions, and the role of regulation and resolution rules.
Lorenzo Bini Smaghi is currently Visiting Scholar at Harvard's Weatherhead Center for International Affairs. He is Chairman of the Boards of SnamReteGas and of Fondazione Palazzo Strozzi. He also chairs the Italian Chapter of the Alumni of the University of Chicago. From June 2005 to December 2011 he was a Member of the Executive Board of the European Central Bank. He started his career as an Economist at the Research Department of the Banca d’Italia (in 1983) and became Head of the Policy Division of the European Monetary Institute (in 1994) and then Director General for International Affairs in the Italian Treasury (in 1998). He has been the Chairman of the Board of SACE Spa, and member of the Boards of Finmeccanica, MTS, the European Investment Bank. He holds a Bachelor’s Degree in Economics from the Université Catholique de Louvain (Belgium), a Master’s degree from the University of Southern California and a Ph.D from the University of Chicago. He is author of several articles and books on international and European monetary and financial issues. He is married and has two children.