European Monetary Union or competing currencies: which way for monetary integration in Europe?

In theAntibes in September, Mr. Laws on perplexed and irritated his fellow European finance ministers by proposing a scheme for allowing currencies to compete one against the other in Europe. It perplexed them because it was presented as a basis for proceeding towards monetary union within the European Community in accordance with the resolve of European Heads of State at the Madrid Summit, whereas it appeared as a recipe for monetary confusion, not fusion. It irritated them because it appeared to them to be yet another British manoeuvre to derail agreed progress towards greater economic and monetary integration in Europe. It especially annoyed the potential allies of the UK on this issue who regard the French and Commission attempts to push rapidly towards monetary union as ill-advised, and who saw the Chancellor's ill-thought out proposal as playing into their hands. Some political commentators have suggested that Mr. Lawson was seeking to play a clever hand. He is known to favour UK entry to the Exchange Rate Mechanism of the European Monetary System, and on this is at odds with Mrs. Thatcher. Professor Alan Walters, adviser to the Prime Minister, is said to favour the idea of competing currencies in Europe. It may be that the Chancellor was not displeased to have this idea knocked down in the Antibes, leaving a strengthened EMS as the only realistic alternative to full monetary union in Europe. Whatever the truth of this, it seems inevitable that UK opposition to ambitious proposals for European Monetary Union will be met with less sympathy in future as a result of the Antibes meeting. This is a pity. For as we suggested in the June Economic Viewpoint, there is a serious case yet to be made in favour of the idea of competing currencies. This idea need not be in conflict with the objective of exchange rate stability, so that it is not incompatible with the EMS. Competition between currencies need not mean exchange rate instability. Rather it may mean competition over responsible monetary policies, encouraging their spread within Europe. An implication is that full monetary union may not be desirable. If the UK advanced this position in Europe, it may well carry the day. In this Viewpoint, we develop this argument about the direction for further monetary integration in Europe.     

Testing the Regulatory Model: The Expansion of Stansted Airport

This paper examines the application of price‐cap regulation to the UK airport industry, with particular reference to the expansion of London‐Stansted. This expansion is relevant to the debate concerning investment incentives inherent in the RPI–X approach and whether the UK style of regulation encourages the ‘sweating of assets’ at the expense of new investment. Stansted's expansion also suggests a willingness of the authorities to accept the leveraging of market power in pursuit of perceived public‐interest goals; it provides an insight into the behaviour of economic agents when capital market disciplines are mute; and it illustrates some unintended consequences that can follow from market intervention.     

Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985

We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks are less willing to bail out poorly performing firms and firms in the more bank‐dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of “creative destruction.”     

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.     

Vote Trading and Information Aggregation

The standard analysis of corporate governance assumes that shareholders vote in ratios that firms choose, such as one share‐one vote. However, if the cost of unbundling and trading votes is sufficiently low, then shareholders choose the ratios. We document an active market for votes within the U.S. equity loan market, where the average vote sells for zero. We hypothesize that asymmetric information motivates the vote trade and find support in the cross section. More trading occurs for higher‐spread and worse‐performing firms, especially when voting is close. Vote trading corresponds to support for shareholder proposals and opposition to management proposals.     

Beyond Performance Measurement

This is the text of a plenary address given to the AFAANZ annual conference on 1 July 2007 on the Gold Coast, Queensland, Australia.