franz - christoph zeitler : the stability and growth pact speech by professor franz - christoph zeitler, member of the executive board of the deutsche bundesbank, at the forum for discussion of the friends of europe, the hanns seidel foundation and the konrad adenauer foundation, brussels, 16 february 2004. * * * ladies and gentlemen i extend my thanks to the organisers - the friends of europe, the hanns seidel foundation and the konrad adenauer foundation - for cordially inviting me to speak at this forum. i thank you for drawing attention to one of the fundamental elements of, and pillars of confidence in, monetary union : the stability and growth pact! i if we look more closely at the short and snappy term “ pact ” and analyse it from a legal standpoint, we see that it is an umbrella term that covers three legal instruments. – a council regulation on speeding up and clarifying the implementation of the excessive deficit procedure ( regulation ( ec ) no 1467 / 97 of 7 july 1997 ). – a council regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies ( regulation ( ec ) no 1466 / 97 ). – a european council resolution taken at the amsterdam summit on 17 june 1997. naturally, the “ mother of all rules ” remains the treaty on european union ; article 104 ( 1 ) states clearly that “ member states shall avoid excessive government deficits. ” article 104 of the treaty also regulates the monitoring and infringement procedure. what the above regulations and the council decision do is merely specify and expedite the procedure. i think that one thing deserves to be emphasised. contrary to contemporary popular usage, the “ pact ” is not just an intergovernmental agreement, but rather an instrument to apply and implement primary and secondary european legislation. ii maybe this relatively complicated legal construction, which the general public is not widely aware of, is why the stability and growth pact is wittingly or unwittingly described as “ rigid ”, “ too legalistic ” and “ too economically inflexible ”. this is also why it is our job, as central bankers, to communicate the economic and fiscal policy aims of the pact. the stability and growth pact does not exist for its own sake, nor is it the “ hobby horse ” of some central bankers ; rather, it is a requirement for the long - term effectiveness of monetary union. i would like to

to achieving the goal of market control and supervisory and adminstrative board control in the case of smaller regional institutions. in addition, we need to make sure that the disclosure reforms which were debated by the basel committee and are now being discussed in the eu bodies do not introduce any intrayear disclosure duties. the third area is probably the most far - reaching of all. what i have in mind is the creation of separate regulatory regimes for smaller institutions on the one hand and large multinational banks on the other. this two - tiered proposal has met with a rather muted response so far, and i don ’ t think it has much hope of being adopted at the political level. but i nonetheless think it is worth considering as a fundamental approach – one that would systematically address the excess burden placed on smaller institutions ’ operational capacities. a two - tiered system could be put into practice by grading the basel standards for institutions that are neither multinationals nor large in size. a broadly similar set - up has been up and running in the united states ever since the basel ii regime was implemented. any institution that exceeds a balance sheet threshold is subject to the basel rules. however, it would only be possible to do the same here in germany by creating rules at the european level. in that scenario, only banking multinationals would be subject to the fully loaded basel iii requirements in the eu. that would be appropriate from a risk perspective : global banking institutions would be regulated according to a harmonised set of global rules, while smaller institutions and those operating within a certain region would be governed by graduated rules which do justice to their different business models and risk profiles by setting less complex requirements. now there are some who claim that transitioning to that kind of system is a flight of fancy. what these doubting thomases mainly ask is where exactly the line should be drawn. i ’ ll be the first to admit that this is a challenge, but it ’ s anything but impossible. one way of tackling this problem would be to use a smart combination of selection criteria – for instance, combining a balance sheet threshold below which institutions would be subject to the simpler regime with a prudential decision based on the institutions ’ risk profiles. but there are still many crucial details and potential pitfalls that need to be addressed before we can even begin devoting serious thought to an option of this kind. this is something i think bis central bankers ’ speeches we should consider with an open mind. a systematic approach, assuming it ’ s