CONVERGENCE CRITERIA AND INSTITUTIONAL UNDERPINNINGS

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The monitoring and assessment of convergence criteria needs frequent and effective multilateral surveillance, which in turn requires suitable institutions and fora to

52 See Buti, Franco and Ongena (1997).

53 The rationale for using reference values for convergence criteria, despite some unavoidable arbitrariness, can be compared to the rationale behind a speed limit on roads. Few will doubt that a speed limit is a useful and necessary tool to control traff ic and to avoid accidents. However, there is no theoretical or empirical case to limit speed to a specif ic threshold. The 50 km/h speed limit imposed in cities in most European countries, for example, is completely arbitrary, and it could indeed be argued that 40 km/h or 60 km/h would do just as well. No one could plausibly argue that driving 60 km/h is always and on any inner-city road endangering traff ic, whereas 40 km/h is always safe. However, the 50 km/h value can be seen as broadly reasonable. By contrast, a limit of 10 km/h would obviously choke traff ic, and 100 km/h would represent no effective restriction at all, making them unreasonable choices. It is also logical that despite the arbitrariness of any concrete speed limit, violations have to result in sanctions, and that exceptions must be made under special circumstances, e.g. for ambulances/the f ire brigade. 54 See EMI (1996a) on the statistical requirements for monetary

exchange information and discuss the relevant economic developments and policies. Prior to monetary union and the establishment of a supranational monetary authority, it is crucial that the national central banks participating in the monetary integration process closely cooperate and develop intensive working relationships as well as an institutionalised framework for the exchange of information and for policy discussions. The need for close interaction between central banks applies not only to Governors but also to senior management and experts. In the European context, the Committee of Governors of European Community (EC) central banks, which was established in 1964 (including its substructures and secretariat), was decisive in laying the groundwork for European monetary integration. It was the core body for monetary cooperation and policy dialogue and was instrumental in developing a policy consensus, and formed the nucleus of later European monetary institutions (the European Monetary Institute (EMI), founded in 1994, and subsequently the European System of Central Banks (ESCB) and the Eurosystem in 1998, with the ECB at its core).

As well as having the necessary institutions in place for central bank cooperation, it is crucial to establish appropriate institutions and fora for the exchange of views and policy discussions among finance ministers and senior finance ministry officials. In the European context, the EU Council of Ministers of Economic Affairs and Finance (ECOFIN) (and, since the introduction of the euro, the Eurogroup) is the platform for such

interaction.55 Furthermore, given the wide

number of issues in a process of monetary integration (and later on in a monetary union) that are of mutual interest to central banks and finance ministries, appropriate institutions for a confidential exchange of views between central banks and finance ministries are of great importance. In the EU, the role of a platform for an exchange of views between high-level representatives of central banks and finance ministries is primarily fulfilled by the

Monetary Committee and, since the introduction of the euro, by the Economic and Financial Committee (EFC).

The necessary structures for central bank cooperation can be replaced by a supranational monetary authority, at the latest when the single currency is introduced (see Chapter 6). The institutions for cooperation between finance ministries and for an exchange of views between finance ministries and central banks have an important role to play in the run-up to monetary union in monitoring the convergence process, but must also remain in place, and might even have to be strengthened, after the introduction of a single currency.

With regard to the institutional underpinnings of multilateral surveillance, a key issue relates to enforcement mechanisms in case national policies deviate from commonly agreed convergence criteria. Peer pressure is an important instrument for disciplining national policies, and for ensuring that national policymakers refrain from actions which may be detrimental to objectives pursued at the community level. Peer pressure can be reinforced by public pressure (“name and shame”). This requires the process of multilateral surveillance to be transparent to the public, as well as the commonly agreed convergence criteria. This is a precondition for the public to be able to monitor the compliance of national policies with the supranational community’s interests. Apart from peer pressure, further enforcement mechanisms may be contemplated to ensure compliance with commonly agreed objectives, rules and standards, such as fines. If such financial or legal sanctions are deemed useful, it is crucial to clarify the exact nature of a sanction, the circumstances under which it would be imposed, and the process leading to the imposition of a specific sanction.

55 See ECB (2001) for an overview of the economic policy framework of EMU.

5 SOME CONSIDERATIONS ON CONVERGENCE CRITERIA FOR THE GCC In the context of the GCC, the nucleus for

appropriate institutions to be assigned the task of multilateral surveillance and policy coordination is already in place. The Committee of Governors of Monetary Agencies and Central Banks is, with its substructures, the natural body to supervise monetary and exchange rate policies in the run- up to a GCC monetary union and the necessary harmonisation of legislation on banking supervision and financial markets, given the responsibility of GCC monetary agencies and central banks for banking supervision and the oversight of financial markets in the respective member states. The task of monitoring and coordinating national fiscal policies and other areas of economic policy where surveillance and coordination is required would naturally fall to the Committee for Financial and Economic Cooperation, which is composed of ministers of finance and economics.

So far there is no permanently established institution comparable to the EU’s EFC that would allow senior central bank and finance ministry officials from all GCC member states to exchange views on issues of mutual interest. The GCC’s Technical Committee, which was formed in 2001 to prepare for monetary union at the technical level, is a forum which brings together officials from central banks and finance ministries of GCC member states, and competent officials from the GCC Secretariat General. Given this composition, it could provide a forum for an exchange of views between central banks and finance ministries on all monetary and financial issues in the run- up to monetary union, including surveillance of the convergence process and policy coordination. Furthermore, it seems sensible that such a Committee should be transformed into a permanent forum after the establishment of monetary union, which would then include representatives of a new supranational monetary authority.

For multilateral surveillance to be effective, it is also essential to have sufficient staff at the supranational level to prepare the meetings of

the competent bodies and to conduct the necessary background analytical work, such as analysing economic developments in member states and, in particular, monitoring budgetary policies. Assigning the staff involved in this work to a supranational institution at the GCC level is crucial to guarantee that analysis and assessments are conducted from the angle of the Council as a whole and not impeded by national points of view. Simply entrusting staff working for the national authorities with these tasks and trying to foster cooperation in committees and working groups may not be sufficient to ensure that the necessary supranational perspective is given due consideration.

5.5 APPROPRIATE FISCAL CRITERIA AS A

SPECIFIC CHALLENGE FOR THE GCC

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