The Per Jacobsson Lecture 2006 : Competition Policy and Monetary Policy: A Comparative Perspective

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2006
• eBook ISBN: 9781451980783

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Opening Remarks

Malcolm Knight

Ladies and gentlemen, let me welcome all of you to a key event of this weekend, the Per Jacobsson Foundation Lecture to be delivered this morning by our distinguished speaker, Professor Mario Monti.

It is a great honor that we have been permitted to hold this lecture and panel discussion here in the splendid setting of the National Council Chamber of the Swiss Parliament. Just to dispel any misunderstanding: the temporary fences behind which we left our buses have not been placed there for reasons of security. They are there because this historic building will undergo a major renovation in the coming months, starting from tomorrow morning.

The Swiss National Council is made up of 200 elected members, and it represents the voice of the Swiss people. It is therefore most appropriate that the room is dominated by the magnificent fresco behind me, depicting the Rütli meadow in the foreground, representing the cradle of the old Swiss confederacy and the roots of democracy in this country that extend back more than 700 years. In the picture, the Angel of Peace emerges from a cloud and hovers over the meadow. To your right of the picture is a statue of Wilhelm Tell, the legendary Swiss national hero of liberty. I don’t need to remind you of the story of his being forced to shoot an apple off his son’s head with a crossbow.

The Rütli meadow is situated on the western shore of Lake Lucerne, where in 1291 the people of the three Swiss cantons Uri, Schwyz, and Unterwalden swore an oath—with an eye on their powerful Habsburg neighbors—to stand with each other against anyone trying to oppress them. Perhaps there is an analogy here to the regular meetings of central bank governors in Basel. While central bank governors have not yet been obliged to meet in an open meadow to swear their solidarity and independence from politicians, I hope that the regular discussions and exchanges in the Bank for International Settlements (BIS) Tower in Basel and elsewhere help to reaffirm the shared goals, the cooperation, and the independence of central banks in pursuing their monetary and financial stability policies. The mural behind me reminds us, perhaps, that similar ideals and goals to ours are shared with other domains.

In the spirit of peace and cooperation in confronting the challenges facing the central bank community, it gives me great pleasure to welcome you to this event and also to welcome Mario Monti on behalf of the BIS.

Andrew Crockett

Governors, ladies and gentlemen, good morning and welcome. It is my great pleasure, on behalf of the Per Jacobsson Foundation, to introduce and welcome our lecturer, Mario Monti. I have known Mario for a number of years, and he is well known to you, including through his contributions to monetary economics and, more recently, his work for 10 years as a European Commissioner, with responsibility, first, for the internal market, financial services and financial integration, customs, and taxation (1995-99) and later for competition (1999-2004). Before joining the Commission, he was Professor of Economics and Rector at Bocconi University, where he has been President since 1994. His background clearly makes him the ideal speaker on the subject of his lecture, which is Competition Policy and Monetary Policy. Without more ado, Mario, I will hand over to you.

Competition Policy and Monetary Policy: A Comparative Perspective

Mario Monti

Ladies and gentlemen, Governors, I should first say, I am deeply grateful to the Per Jacobsson Foundation and to the BIS for providing me with this opportunity. I am honored to have been invited to deliver this Per Jacobsson Foundation Lecture, and by the presence of so many distinguished guests.

It is, of course, a special privilege to take the floor in this Na-tionalrat at the heart of the Swiss Confederation, which has been working smoothly as a Confederation for the last 715 years, which is a bit longer than most of our own home countries. And I believe this Parliament is a symbol of democracy, and this Confederation is also a symbol, as one would Say today, of subsidiarity.

We honor a man, Per Jacobsson, who was not only a statesman of the international economy as head of the Monetary and Economic Department of the BIS, and subsequently as Managing Director of the IMF, but was also gifted with an outstanding ability to communicate complex issues in a straightforward language and in a lively, persuasive style—a challenging benchmark indeed for those called to deliver lectures in his name, especially if such lectures take place early on a Sunday morning, and are delivered to a distinguished audience who in order to take part decided to indulge in a train excursion very, very early in the morning.

Why have I selected for my remarks the rather unusual topic, “Competition Policy and Monetary Policy: A Comparative Perspective?” For two reasons. There is first an objective reason. Monetary policy and competition policy are two key components of public policies needed for a market economy to function well, and indeed to exist, just as money and the market are two defining elements of such an economy.

The other reason is subjective. In my own professional life, it so happens that I first devoted 25 years as an academic economist to money, as a student of monetary and financial economics, and then 10 years to the market, with policy responsibility for the development of a single market in the European Union (EU), and for the maintenance of competitive conditions in that market. So it occurred to me that in addressing distinguished personalities who have key responsibilities in the handling of national and international monetary affairs, I might reflect on these two policies, money and competition, in a comparative perspective.

I should complete this premise by two brief observations. One, in my education as a monetary economist, I owe a lot to the country that is hosting us this morning. Although I was a student of James Tobin at Yale, I benefited from the strong influence of Karl Brunner of the University of Berne and also Rochester. Beginning in 1972, I attended for a number of years his Konstanz seminars on monetary theory and policy not far from here, and I recognize faces who were key actors when I was a young and naive economist on that mosquito-plagued lake at the end of June each year.

Also, it was with a small group of economists chaired by Karl Brunner that I had the unusual experience in September 1980 of having tea with Prime Minister Thatcher at No. 10 Downing Street and discussing what the Bank of England might—she would have said should—have done differently at the time in order to keep some order in a rather messy monetary situation. Of course, the Governor at the time was not invited to that seminar, in the characteristic No. 10 style of those days.

Apropos independence of central banks, the second and last observation of my premise is that when I was a monetary economist, I devoted my best efforts to asserting the intellectual case for the independence of central banks—particularly, of course, starting close to home since the early 1980s in the case of the Bank of Italy, which I must say at that time was not very keen itself to make the case for a form of independence, and then again in 1993 as a member of Eric Roll’s panel pleading the case for the independence of the Bank of England. ¹

As you will soon recognize, I have since lost a lot of confidence in my knowledge of monetary policy, so it is with humility that I approach it, even though it is just one of the two key words in the headline of today’s presentation.

My first reflection on monetary policy and competition policy compared is that they both serve in different ways the same objective, or at least they have one objective in common, even though their practitioners may not always realize it, and that is price stability. Monetary policy, of course, has the fight against inflation as its paramount objective. One might ask the question, as a recent BIS paper did, is price stability enough? What are the dimensions of stability to be cultivated by a central bank? Price stability may refer to output prices, or asset prices, and so on, but certainly the objective of some price stability is at the core of monetary policy. Also, competition policy, although it is not primarily designed to achieve this, may indeed make an important contribution to price stability by helping to avoid price increases.

I believe that monetary policies in most countries have been largely successful in recent periods in achieving their objectives, and I believe that in some parts of the world, maybe in Europe specifically, this has been facilitated by a number of positive supply shocks, including the setting in motion of conditions in the real economy of greater flexibility and also the creation of the single market, the tearing clown of barriers, and the creation and maintenance of competitive conditions. If we put together the creation of the single market, a number of liberalization initiatives, the enforcement of competition rules, plus, of course, the opening up to greater Chinese and other competition, this is a set of supply shocks that probably has helped the monetary authorities in their difficult task.

In this context, one question also comes to my mind: what about the response to cycles of both policies? For monetary policy there was in the past the ambition of fine-tuning it in order to be precisely countercyclical, but at those Konstanz seminars the early experience of the Swiss National Bank, looked at very carefully by the Deutsche Bundesbank, suggested to many that maybe it was wiser to adopt a longer time horizon for monetary policy decisions. I believe that this is now established practice, in different ways and modalities, although one could hardly say that monetary policy has completely forgotten the objective, or at least side objective, of trying to moderate the business cycle.

You may be aware that a similar discussion has been going on for a while with regard to competition policy. It comes up and down like the Loch Ness monster, as Professor Tobin used to say about his own Tobin Tax. Because when conditions in the real economy become really tough, generally for specific industries, the voice is always there—that competition policy should for a while become more “reasonable,” that enforcement should become less tough.

Take the case of the telecommunications industry in Europe, but not only in Europe, after the bursting of the bubble in the early years of this decade. I was then Competition Commissioner in Brussels, and there were huge pressures from the telecommunications industry to have a sort of a pause in the application of competition rules to that industry—otherwise the industry could suffer too much—and rather daring ideas were coming up to this effect.

Normally, the view of the competition authorities is that it would not be a good idea to insert a cyclical element into the handling of competition policy, precisely because when an industry is in difficulty, if it is an industry characterized by high concentration and incumbents—maybe former monopolists—who still enjoy a dominant position, it is particularly for the (potential or actual) small new entrants that it is difficult to secure financing conditions in those difficult years. And if a competition policy were put in place that was particularly understanding to the needs of the large operators, then it would make entry by potential new entrants even more difficult, leaving as the result a worsening of competitive conditions.

In the financial sector, one way in which monetary and supervisory authorities are linked to competition issues, is, I believe, in their attitudes toward competition. I think it would be fair to say that in most countries, until 15 or 20 years ago—and I want to try to be a bit provocative—monetary authorities had toward competition a similar attitude to the one that you find in business circles; namely, competition is excellent, especially if it concerns the others.

Monetary authorities on average were not particularly keen, and supervisory authorities as well, on having a high degree of competition in the financial sector. But unlike those businesses in the private sector that may not like a high degree of competition in their industries because of their vested interests, in the case of monetary and supervisory authorities, it was because of their belief that if there were overly competitive conditions in place in the financial sector, or even the same degree of competition as in most other sectors of the economy, then the achievement of the public interest objectives of monetary policy and of prudential supervision, financial stability in particular, might be made more difficult.

It is obvious that there is for the financial sector, and each of you knows this better than I do, special justification to look at stability concerns. But of course, if the stability-competition trade-off were too heavily biased in favor of stability, the overall performance of the financial sector in terms of efficiency and the allocation of resources would suffer. And I think it is one of the most interesting developments of the past 15 or 20 years that without renouncing the objectives of price stability and stability of the financial system, monetary and supervisory authorities have implemented monetary policy and supervisory policy in ways that are more compatible with competitive conditions. So in most countries, the time has passed when, for example, monetary policy was largely based on credit ceilings, portfolio constraints, or, in some cases, on central banks openly facilitating cartels among banks. Indeed, monetary authorities have turned, and this is extremely helpful for the overall soundness of competitive conditions, into very strong and authoritative advocates of more competition.

I would like now to say a word on the exercise of the responsibilities of a competition authority in Monetary and financial markets. In a number of countries, there are no sectoral exemptions from the competence of the competition authority. Certainly, there are not at the EU level, where competition policy applies equally to all industries in the economy, including the financial industry. No instrument of competition policy is a priori to be left inoperative as regards the financial system. There have been cases where powers against restrictive practices or against cartels have been used: a case in Austria a few years ago comes to my mind. There have been cases where the rules against abuses of dominant positions have been used: a case concerning clearing and settlement comes to my mind here. And, of course, the normal instruments of merger control apply also to mergers between financial institutions.

There are two facets that I would like to underline as regards the interaction between the enforcement of competition policy and the financial services industry. One is specific to Europe, and I am sorry if I have a bit of European bias in my presentation, but I will try to compensate for this in the last few minutes. At any rate, it is not a home bias, as we are speaking about the EU from this Parliament.

One aspect is that at the EU level, but nowhere else in the world, the competition authority has the power and responsibility to control what the governments and the parliaments do in the area of subsidies to companies. This is the control of state aid. You will not find this in the United States or elsewhere, simply because you need a supranational element for a competition authority to be able to tell a government or indeed a parliament, sorry, you cannot do this.

And this state aid control, I want to underline as far as the EU is concerned, also fully applies to financial institutions. Well-known examples here are the actions in which the European Commission recently achieved the elimination of the state guarantees to the German public banks, the Landesbanken and the Sparkassen, or the abolition of certain tax privileges for Italian banks. State aid control will apply also in the case of rescue or restructuring aid, so Monetary and supervisory authorities will be well advised to consider that they do not have full room for maneuver in coping with the consequences of a difficulty or an insolvency, because any state aid, also in those circumstances, is subject to scrutiny by the European Commission. One recent complex case, again involving Germany, was the case of the Bankgesellschaft Berlin.

The other observation that I would like to make in relation to government intervention in the markets is not confined to Europe, even though it is in Europe that it may find its greatest manifestation. This is that the competition authorities may find ways to intervene agai...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword.
• Opening Remarks
• Footnotes