Structures économiques et innovations financières
Authors: Aglietta Michel 
Published: April 2013

Economic Structures and Financial Innovation

Financial innovations have been accelerating during the nineteen eighties under the influence of anti-inflationary monetary policies and the repercussions of the debt crisis. They first made their appearance in the world market for financial assets in dollars. They have had an effect on the financial systems of other countries by introducing there new conditions of competition, characterised by high real interest rates and by the strength of the dollar. In the context of constructing a European market in financial services, these developments, which have been more inflicted on us than decided upon, pose problems to achieve what is required. Three types of preoccupation can be identified: the effects on the financing

of industry, the heterogeneity of financial structures as between European countries, and monetary control, including the degree of cooperation which the European national authorities are prepared to accept.

In order to make up for its relative backwardness in technology, Europe must significantly increase its investment in innovation. But these investments, often very specialised, carry high risks and long completion dates and they require supportive and durable relationships between the enterprises and their financiers. This kind of relationship is not encouraged by the orientation of the international financial markets. The anonymity of financial relationships, the overriding concern for liquidity, the search for capital growth through arbitrage, do not encourage a positive evaluation of industrial innovation risks and the financing of small and medium sized enterprises.

Moreover there is no reason why, in an economically uncertain world, the pattern of securization of financial assets should be an ideal towards which all the financial structures should steer themselves. The German choice has emphasised the intermediation of banks, a high level of self-financing by enterprises and close, stable relationships between finance and industry. The British model gives privileges to capital markets open to foreign participants, but largely separated from the national industry. Between these two extreme models, there are several national traditions of financial organisation, with different combinations of intermediation by banks and capital markets. The formation of a European financial space should take into account these structural preferences, which may create more enduring difficulties than the resistance against allowing free movement of capital.

Amongst these difficulties there are the differences between the mechanisms of monetary control, which are closely linked with the various structures of financial organisation. Thus, the effectiveness of monetary policy in Germany owes much to the part played by the banks in its transmission and to a mechanism based on both money supply and rates of interest. Conversely a policy which relies entirely on rates of interest, in a setting of open markets where banks can always borrow to finance an increase in their assets, can lead to a conflict between the objectives of exchange rates and internal aggregates.

It may therefore be that the greater monetary coordination implied by the movement towards European financial integration might encounter some obstacles due to the loss of effectiveness in monetary control in certain countries. Care will have to be taken lest these conflicts should result in greater volatility of exchange rates, and thus in a step backwards from the achievements of the European Monetary System.