Symposium „Central Banking: Where are we headed?“ in Honor of Stefan Gerlach

On 7 February 2013, the Institute for Monetary and Financial Stability (IMFS) and the House of Finance honored Stefan Gerlach, Deputy Governor of the Central Bank of Ireland and former Managing Director of the IMFS, for his contributions to the IMFS. The celebration was held in the form of a symposium – „Central Banking: Where are we headed?" –, which took place in Goethe University’s casino building and which was followed by an interested audience from the financial and central banking sector as well as the media.

In the first part, Sabine Lautenschläger, Deputy President of the Deutsche Bundesbank, Patrick Honohan, Governor of the Central Bank of Ireland, and Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), discussed current topics of the European Central Banking System. The main focus was on the proposed single banking regulatory authority for the Eurozone which should be established at the ECB.

Sabine Lautenschläger and Benoît Cœuré said that it is essential to strictly separate off monetary policy from banking supervision when implementing such an authority within the ECB. Thereby, they addressed the concerns of many critics who fear a conflict of interest between these two areas. Sabine Lautenschläger said that according to the current proposal the ECB’s Governing Council will have the final say on decisions in the banking supervision and not the authority’s board. In her view, this would complicate the strict separation between monetary policy and banking supervision. On the other hand, if the authority’s decisions were binding for the Governing Council, the ECB’s independence would be jeopardized.

Patrick Honohan fundamentally questioned if the ECB should be responsible for the banking supervision in the long run. Moreover, Benoît Cœuré said that the decision to establish a European supervision within the ECB was primarily due to the urgent need for a solution in the middle of the European debt crisis.

Despite these reservations, the central bankers described the single banking supervision as an important step to adapt the institutional framework of the Eurozone in response to the crisis and to prevent that future national banking crises spread across borders. Sabine Lautenschläger pointed out that an advantage of the European banking supervision is that it operates on the basis of more comprehensive information compared to a national supervision. Therefore, it will be possible to detect risks that affect the banking system or emanate from it more easily and at an earlier stage. Benoît Cœuré said that more information will also help to better design monetary policy.

Patrick Honohan stressed the importance of breaking the links between sovereigns and banks by implementing a supranational banking supervision. According to Sabine Lautenschläger, national supervisors often run the risk of being overprotective towards domestic banks for national concerns. Finally, Cœuré called for quickly implementing the European banking supervision in order to be able to continue with the development of the other elements of a European banking union, such as the bank resolution mechanism.

After a discussion with the audience, Athanasios Orphanides from the MIT Sloan School of Management and Michael Burda from the School of Business and Economics of the Berlin Humboldt University spoke about monetary policy, fiscal policy and the politics of the European Monetary Union.

Orphanides compared the ways European governments acted in former crises with the current crisis. In the past, politicians usually worked towards a solution that also advanced the European project. Today, they do not immediately address problems even if these were recognized. According to Orphanides, the reason is a crisis of European political leadership. Governments prefer to postpone decisions that involve political costs - especially shortly before elections. With always having an election in one country of the Eurozone, there is risk of a permanent blockade. Only the threat of an imminent collapse could encourage politicians to incur the political costs. He regrets in this regard that during the current crisis interventions of the ECB diffused the pressure on political leaders to solve upcoming problems.

In the end, Michael Burda presented three scenarios of how Europe could look like in ten years. He gave an optimistic, a pessimistic and a realistic outlook. He considered as realistic that the Euro remains the common currency in all Euro countries, but transfer payments will continue to be made within the EU. Furthermore, Burda assumed that Greece receives a debt reduction but doesn’t continue with its reform efforts. Finally, he warns the European governments that they should go back to the no bailout principle and be no longer liable for the debt of other member countries.

As last speaker, the honored Stefan Gerlach took the opportunity to stress the importance of the interdisciplinary research conducted by the IMFS. The symposium was closed by the Managing Director of the IMFS, Volker Wieland.