The Making of Monetary Union. Monitoring European Integration 2

This Report examines the monetary unification of Europe and the creation of a European Central Bank. It deals first with the macroeconomics of monetary union and highlights four issues. What monetary constitution is required to deliver price stability, and do the draft statutes of the European Central Bank (ECB) meet these conditions? Are fiscal rules a necessary adjunct to such a constitution? Is convergence of inflation rates a precondition for embarking on monetary union? Finally, how should the transition be managed? The second section of the Report analyses the vital but neglected question of the supervision and preservation of the stability of the financial system. It highlights the possible conflicts between the ECB's responsibility for financial stability and its commitment to stable prices. The authors argue that the ECB should be responsible for authorization of banks and the lender of last resort function. Closure of banks and administration of deposit insurance may, however, be kept separate from those of the ECB. Centralization of regulation does not require harmonization: differences in the functions of banks across countries impose different risks on depositors and therefore require different regulatory responses.