Summary of July 2012 Monthly Report

The euro as an anchor currency and the core of a currency bloc

The global monetary system is marked by a wealth of exchange rate arrangements. These range from flexible exchange rates to more or less fixed exchange rate pegs to the use of a single currency, such as in a monetary union. However, the official exchange rate regime does not always correspond to that which is actually practiced. Two major currency blocs have emerged in the global monetary system. In addition to the US dollar, it is above all the euro that is used in many countries as legal tender or as an anchor currency. Both currency blocs have a similar number of member states and dependencies (around 60); however, measured in terms of gross domestic product, the euro bloc is slightly smaller. Yet, in terms of its composition, the euro bloc has proved to be exceptionally stable.

The article gives an overview of the exchange rate systems in common use and discusses a number of those consequences associated with selecting a concrete regime. It also analyses which economic determinants govern membership to the euro (and the US dollar) bloc. In this context, the article also examines whether the tasks of an existing monetary policy regime may be derived from a country’s economic structure. This turns out not to be the case for any of the European countries in the euro bloc.

However, the underlying structural suitability for using the euro or for being pegged to the euro alone is not sufficient to ensure the smooth maintenance of an exchange rate regime. Instead, this requires national economic policies to be stringently adapted to the conditions of a fixed-rate system or a monetary union.

The new CPSS-IOSCO principles for financial market infrastructures

In April 2012, the Basel Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) published principles for financial market infrastructures. These principles are designed to make financial market infrastructures more stable and more resilient to financial crises in future. In this respect, the principles support the G20 countries’ agreements on reforming the financial markets. The principles are targeted at systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories. From the German perspective, this means, above all, the TARGET2 payment system operated by the Eurosystem, the central securities depository Clearstream Banking AG and the central counterparty Eurex Clearing AG.

The international standards currently in effect will be harmonised and tightened considerably, and new aspects will be added to them. The financial markets will be expected to implement these principles in their infrastructures as soon as possible. Central banks and supervisory authorities are to integrate them into their supervisory regimes by the end of 2012. Financial market infrastructures and regulatory authorities are currently looking into the need for adjustment. The investments that will be necessary and the resultant cost increases for infrastructures and market participants are the price for the improved security. Besides the reasons for revising the principles, the article in the Monthly Report discusses the main elements as well as the supervisory authorities’ role. The new principles will further strengthen the role played by the Bundesbank with regard to monitoring payment and settlement systems.

The Deutsche Bundesbank’s 2012 Spring Conference – monetary policy, inflation and international linkages

This year’s Bundesbank Spring Conference, co-organised with the Federal Reserve Bank of Philadelphia, dealt with the interplay between inflation, international macroeconomic linkages and the resultant challenges for monetary policy. The contributions to the conference showed clearly that welfare gains created by the steadily increasing globalisation of goods and financial markets depend heavily on the characteristics of those markets. Existing market imperfections need to be eradicated to the greatest possible extent in order to capitalise on increasing international interdependencies.

Constantly growing international linkages also have feedback effects on monetary policy. For instance, highly volatile prices in the energy and commodity markets or contagion effects in interlinked financial markets are presenting new challenges for monetary policy. At the same time, however, monetary policy setters also have access to additional information, and thus can make sounder judgements. Changes in nominal and real exchange rates, for instance, provide information that is important for monetary policy that is oriented to price stability.

The papers presented at the conference also looked at various ways in which monetary policy impacts on international capital markets. The conference showed ways in which central banks can better underpin their forecasts in a situation in which many observers are highly unsure which way the international goods and financial markets will move. An additional decisive factor in this context is the contribution that monetary policy can make towards stabilising market participants’ expectations regarding future inflation in an environment of heightened uncertainty.