How to deal with the reality of the business cycle is an area where Europe -- with its tradition of social safety nets -- and the United States -- with its tradition of flexible work arrangements -- can perhaps learn something from each other. To date, neither of us seems yet to have found the optimal way to cope with the unavoidable reality of the business cycle to enable us to avoid both high unemployment rates and too skewed a distribution of income. My last general observation about the implications of EMU for the United States has to do with the dramatic changes in macroeconomic policies that will accompany the creation of monetary union in Europe. Naturally, the main change will concern monetary policy, and it is in this area that the similarities between Europe and the United States will ultimately be the greatest. The first similarity is that, with EMU, the formulation of monetary policy in both Europe and the United States will be highly centralized and the European central bank will enjoy, as the Federal Reserve does, a considerable degree of independence. These institutional features will reduce the scope for national governments to bend monetary policy to the needs of their country’s business cycle and will help keep the focus of the European central bank on the objective of price stability.
It will also have to pay for the retooling of information management and delivery systems, as well as face increased uncertainties in its core deposits. At the same time, however, the larger single market will create new opportunities for banks, particularly in the areas of investment banking and the cross-border sale of deposits, mutual funds, and other savings products. On balance, it seems fair to conclude that the commercial position and earnings of many European banks are likely to come under pressure. This may accelerate the ongoing restructuring of Europe’s banking industry, a process that has been confined, to date, primarily to developments within each country. More broadly, there can be no doubt that the implications of the growth of a more efficient and cost-effective market for euro-denominated capital would extend well beyond Europe. The availability of a new, low-cost channel for portfolio investment, for example, could help reverse the traditional reluctance of households and many institutional investors worldwide to invest internationally -- a reluctance that has long puzzled academics and policymakers. Moreover, a well-developed market for euro-denominated capital would encourage institutional investors from the United States and elsewhere to acquire diversified European portfolios offered in a single currency. In fact, this development could be accelerated if member governments chose to deepen the euro market by increasing the available range of bond maturities, which in some countries is somewhat limited at the short and long ends.