The Director of Global Currencies

The death of Tommaso Padoa-Schioppa was not only reason for sorrow. It was symbolic of the crisis of exisiting economic and political arrangements concerning the Eurozone and the international monetary system, to which he dedicated his generous intelligence.

He was one of the architects of the euro. In a 1987 conference (The European Monetary System: a long-term view, October 17, Perugia) he had presented the single currency as the most natural solution to the problem of the "inconsistent quartet", i.e. the fact you can't have at the same time a unified market, fixed exchange rates, international capital mobility, and national autonomy in monetary policy: one has to give. The euro cut at the root of the last element of the quartet. By 1992, Europe had set for itself a quantum leap in achieving the single market, as well as full financial and commercial integration. If monetary policies had diverged from one another, thereby setting differing interest rates, freedom in capital movements would have led them toward currencies having higher interest rates, less accommodating monetary policies, or which were expected to appreciate, thereby fueling speculation and undermining any existing stability in the monetary system. The single market for goods and services would have ended up hurt by it. In 1992, Europe got the Maastricht Treaty, which set the goal and the date of the single currency. Immediately afterward, a major currency crisis showed even more starkly that, absent the defense of a single central bank, capital mobility leads to exchange rate instability, which attracts avoidable speculative turbulence.

In that conference of 1987, Padoa-Schioppa added coordinated discipline of government deficits and debts to the elements of the quartet, as a required support for a common monetary discipline. This was introduced in the Treaty and reasserted by the Stability Pact. But is has shown its weakness, and its lack of bite is a cause of the current crisis of the Eurozone, which has hit the most indebted governments. The quintet is playing out of tune. But the orchestra has vastly increased in size. Padoa-Schioppa was among the most engaged in devising a sixth pillar of stability: common financial regulation and oversight. Without this, financial integration, accelerated by the common currency, favors opportunistic behavior and fiscal competition, so that capital flows toward the most permissive regulator, takes on excessive risk, thereby engendering financial instability. The segmentation of European financial supervision along national lines is another root cause of the crisis. As Minister of Finance, Padoa-Schioppa asked the European Council to focus more urgently on the issue. We were late, but we are moving now. At the start of 2011, European authorities of financial oversight have been finally instituted.

To the orchestra playing for financial and monetary stability in the euro area, the crisis has added a pressing task: financial and economic solidarity among member countries. In his last months, Padoa-Schioppa worked toward finding the technical solution to give such solidarity and help the Greek government pursuing the extraordinary effort of macroeconomic adjustment it has undertaken.

All the elements seem to be falling into place for the orchestra to start playing well. The health of the 17-country-strong will get better than how Tommaso was forced to leave it. He, in a conference held a year ago (The Ghost of Bancor, Louvain-la-Neuve, 25 February 2010) reminded those present that the European currency is not alone in the world. For its success, it is "vital", he said, to insert it in an ordered global monetary system. A extremely hard endeavor, which must alter the role of the dollar. In his last months, he followed attentively the discussions on the role of China in the international monetary order. Over the next few years, he and his network of friends and colleagues with whom he discussed all over ther world might have been engaged by the design of a "new Bretton Woods". To this global construction, he was sure, Europe was able to offer its "great repertoire of experience" accumulated in the search for an internal monetary order.