More a regulatory order than a market order?

The below essay represents a section of my latest assignment (the other section was an analysis of a data table, and there’s not much point posting that without posting the data itself!).

‘More a regulatory order than a market order.’ Assess this view of Economic and Monetary Union and European financial integration.

This essay will begin by defining what is meant by a regulatory order and a market order. It will then define what is meant by the EMU and EFI, and assess the relative dominance of a regulatory order compared to a market order.

It is the assertion of this essay, that a regulatory order remains dominant in both of these areas, though there have been some changes in this balance of power in recent years.

A regulatory order is a mode of governance, which allows political intervention in a given area of activity, allowing political control of the scope or nature of that activity. In relation to the economic activity of the European Union, a regulatory order encompasses activities such as monitoring, market interventions, management of economic activity, public scrutiny and the creation of EU institutions (Thompson, Ed. 2001, p. 20). A regulatory order of governing economic activity allows political forces within the EU to manage economic activity to stimulate desired economic situations and outcomes. A regulatory order asserts that economic activity requires political intervention to prevent economic disorder, and to achieve desired economic outcomes.

In direct contrast to a regulatory order, a market order is a passive mode of governance, which seeks to remove public influence from economic activities. A market order seeks to be self-regulating, using only the price mechanism and competition to spontaneously generate economic order (Thompson, Ed. 2001, p. 19). In relation to EU economic activity, a market order is much more simple to define than a regulatory order, as it is much more limited in scope than a regulatory order. A market order represents a system of non-governance, and as such does not have the same number of types of activity as a regulatory order. The market order asserts that it is regulatory activity which creates economic disorder and instability.

European Monetary Union (EMU) represents a supranational EU political project, seeking to deepen the union between member states by introducing a common currency (euro) and a centralized institution to govern monetary activity within the EU – the European Central Bank (ECB). EMU was formally established by the Maastricht Treaty to create a common currency for EU countries, in order to ease governance of EU monetary policy. The ECB was then established in 1998, and is an independent public body given responsibility to define and implement a common monetary policy for EU members (Guibernau, Ed. 2006, p. 4-5). The defined political goal of the ECB is to achieve price stability, representing a lack of political trust in the ability of a market order to achieve this objective. It most clearly strives towards this objective by setting interest rates, and using policy stances to control the monetary policies of member states, most notably in relation to inflation.

Despite the clear political intent and institutional frameworks which have driven the EMU, it is important to also acknowledge that the market order does retain some control over monetary affairs. Most notably, the ECB has no control over the exchange rate value of the common currency, and the value of the euro is driven purely by the market assessment of the strength of the currency (Guibernau, Ed. 2006, p. 4-25). It could also be argued that the market order successfully limited the scope to the ECB to price stability without any link to employment. However, this is just as likely to have been a political failing on the part of the regulatory order.

Given the above, EMU must be viewed primarily as a regulatory order, defined more by the political objectives imposed on it than by any fluctuations of the market, and despite the rise of neo-liberal thinking in European politics (leading to proposals such as the Bolkenstein Directive so vociferously opposed by Jacques Chirac [Guibernau, Ed. 2006, p. 4-15]), the market order does not seem to represent any short-term threat to this dominance.

European Financial Integration (EFI) must also be seen as a supranational EU project, seeking to deepen the union between member states by increasing the level of financial integration between the states. EFI sought to integrate three specific areas of financing – Money Markets, Equity Markets and Bond Markets, as well as integrating retail financial services.

EFI can be viewed as a regulatory order by acknowledging the foundations of this project in the Financial Services Action Plan (FSAP) published as part of the Lisbon Summit in 2000. The creation of this plan to complete financial integration by 2005, shows a clear political objective had been established for the project. The creation of two pan-European payment systems (TARGET AND EURO1) also displays a public willingness to intervene to help stimulate the desired outcome of complete European Financial Integration. It’s worth noting as part of any assessment of EFI, that this regulatory order has been partly to blame for the failure to fully integrate retail financial services – as Central Banks, notably that of Italy, have acted to prevent takeovers of banks by larger European banks. However, in contrast, the regulatory order of the EMU has allowed almost complete integration of money markets and government bonds. The President of the ECB, Jean-Claude Trichet, stated in 2004 that the core elements of EFI are: “regulation, supervision and financial infrastructure” (Trichet, 2004), and all three can clearly be identified as being part of the regulatory order.

Clearly, the market order has a significant role to play in EFI also. Integration of retail financial services cannot occur without mergers and other activity between banks based in various nations. Similarly, a market order must have an enormous role to play in integration of equity and corporate bond markets. However, the dominance of the regulatory order is once again visible in this example, as it has allowed national stock exchanges to remain independent and avert threatened takeovers.

Prior to the publication of the Financial Services Action Plan, any attempted financial integration was almost entirely regulatory in nature (creation of the EMU and ECB, for example). However, the publication of FSAP has greatly increased the power of the market order in relation to EFI. While the market order continues to rise in this area, it is clear from the above that the regulatory order remains dominant in the area of financial integration.

In the case of both European Monetary Union and European Financial Integration, it is clear that both of these terms refer to defined political projects. In both cases, there are publicly-desired political outcomes, and public institutions have been created to monitor or manage these projects. While it is important to acknowledge that a market order continues to have a role to play (and a growing role in the case of EFI), this role continues to be dominated by the regulatory order.

References

Guibernau, M (Ed.) 2006, Governing Europe: the developing agenda, Milton Keynes: The Open University.

Thompson, G (Ed.) 2001, Governing the European Economy, London: Sage Publications/The Open University.

Trichet, Jean-Claude, 2004, Speech to International Banking Event, Frankfurt am Main, http://www.ecb.eu/press/key/date/2004/html/sp040629.en.html

Bibliography

Thompson, G & Venters, G 2005, Module 3 Study Guide: Governing the European Economy (2nd Ed.), Milton Keynes: The Open University.

EMU: A historical documentations, retrieved 30th June 2008, http://ec.europa.eu/economy_finance/emu_history/index_en.htm