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The Karst Phenomena of Law in Action

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Monetary Policy Normalization

Part of the book series: Contributions to Economics ((CE))

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Abstract

The chapter explores the differences between civil law and common law systems, focussing on their impact on legal systems, financial structures and economic growth. The author discusses how civil law systems are based on rules and the idea of sovereign states, while common law systems prioritise individual rights and property protection. The chapter suggests that common law systems have been considered more efficient and adaptable to economic changes, leading to deeper financial markets. However, it also highlights that the efficiency of legal systems is subjective and depends on various factors. The chapter proposes further research to examine how civil law and common law systems react differently to monetary policies and their influence on output and prices. It also discusses a shift in Italy towards a legal system resembling common law, with an increasing reliance on case law, and the transfiguration of the Roman system. The chapter concludes by emphasising the value of precedent and the potential impact of this trend on the Italian legal system, referring to recent EU law judgements as an example.

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Notes

  1. 1.

    For a brief overview of the differences between the two legal systems, please see: Glendon et al. (1999), Dainow (1966), Pejovic (2001), Bailey (1978).

  2. 2.

    Studies linking the development of the rule of law to the economic and political well-being of a country are numerous and have different perspectives: Chang (2023), Besley and Ghatak (2010), De Soto (2000), North (1981), Norton (2000), Knack and Keefer (1995), North and Thomas (1973), Engerman and Sokoloff (1998), Mahoney (2001).

  3. 3.

    Rubin (1994), (1977). On the other hand, some supporters of civil law criticize the Anglo-Saxon legal system for being «relatively crude and unorganized». See Merryman (1985, 3). The response given to this criticism is similar to those who see the market as disorganised simply because they are not accustomed to the mechanisms of Smith’s invisible hand.

  4. 4.

    La Porta et al. (1997), (2008), (1998). As noted by Stephen G. Cecchetti: «The premise of their work is that investors provide capital to firms only if the investors have the ability to get their money back. For equity holders, this means that they must be able to vote out directors and managers who do not pay them. For creditors, this means that they must have the authority to repossess collateral. In addition to having nominal legal rights, these groups must also have confidence that the laws will be enforced» (Cecchetti 1999, 18).

  5. 5.

    According to Allen and Gale (2001), financial structure refers to the components that make up the financial system: financial institutions, financial markets, central banks, regulatory authorities, political system, legal system, customs, accounting systems and the nature of the incentives to generate and distribute information.

  6. 6.

    The Scandinavian and German civil law systems lie between the two extremes.

  7. 7.

    «Countries with a common law tradition, strong protection for shareholder rights, good accounting standards, low levels of corruption, and no explicit deposit insurance tend to be more market-based, even after controlling for income. Countries with a French civil law tradition, poor accounting standards, heavily restricted banking systems, and high inflation generally tend to have underdeveloped financial systems, even after controlling for income» (Demirgüç-Kunt & Levine, 1999).

  8. 8.

    Cecchetti (1999) according to which: «Countries with many small banks, less healthy banking systems, and poorer direct capital access display a greater sensitivity to policy changes than do countries with big, healthy banks and deep, well-developed capital markets». According to Cecchetti, the increase in interest rates has a greater impact on output in civil law countries compared to common law ones. More recently, he was echoed by Zakaria (2007).

  9. 9.

    On the “separation principle” within the ECB, please see: Bindseil (2014, 11–12).

  10. 10.

    The thought goes to compound interest in current account credit facilities (Italian Supreme Court, Joint Divisions, 21095/2004), the validity of the single-signature bank contract (898/2008), usury in its many nuances (16303/2018, 19597/2020), partial nullity of omnibus guaranties compliant with Italian Banking Association’ scheme (41994/2021), the overcoming of the financing limit of the land mortgage (33719/2022) and the non-derivative nature of the exchange risk clauses contained in currency-indexed and interest-rate-indexed leases (5657/2023).

  11. 11.

    Law, 18 June 2009, no. 69.

  12. 12.

    They treat it in these terms Zweigert and Kötz (1998).

  13. 13.

    I have completed, on behalf of the Alma Iura Study Center, the Quaero project, a machine learning software for the probabilistic estimation of the outcome of judgments in banking matters (so-called predictive justice), based on the jurisprudential precedents of lower courts and the Italian Supreme Court. The Court of Milan has entered into an agreement with the University of Milan for a study project of the so-called predictive justice according to a statistical-jurisprudential approach, i.e. attempting to predict future decisions of individual courts based on the study of precedents. Other Courts have set up similar projects. Predictice has been operating in France for some time (https://predictice.com/fr).

  14. 14.

    Article 65 of Royal Decree no. 12 of 30 January 1941.

  15. 15.

    Royal Decree no. 2626 of 6 December 1865. Article 122 provided that «The Supreme Court is established to maintain the exact observance of the laws».

  16. 16.

    Among many others: Italian Supreme Court no. 6628 of 24 March 2006.

  17. 17.

    Among the examples: Naples Court, 4 June 2022; Milan Court, 9 January 2023.

  18. 18.

    I thank my colleague Andrea Pellizzaro for sharing his observation with me.

  19. 19.

    Italian Supreme Court, May 11, 1999, no. 12310.

  20. 20.

    Session no. 39 on Thursday, 19 January 2023: «Unlike what I did yesterday, I would like to start this report by speaking about the aspect that, at this moment, is closest to my heart, even if it is the one that has received less media attention and has generated fewer discussions and controversies, which is the efficiency of justice, especially civil justice».

  21. 21.

    Please see the insightful comments, on this and other topics touched upon in my brief writing, by Scarsellini (2022).

  22. 22.

    Italian Supreme Court, order no. 34993, 17 November 2021.

  23. 23.

    Italian Supreme Court, no. 1591 of 20 February 2023.

  24. 24.

    Also on this, one could debate, considering the way in which money is produced in our economy: Bermejo et al. (2018).

  25. 25.

    https://archive.doingbusiness.org/en/doingbusiness.

  26. 26.

    The paradigmatic example of such legal parroting can be seen in the followers of the Italian Supreme Court no. 18781 of 28 July 2017 (rapporteur Tatangelo), in which the acronym IRS (Interest Rate Swap) was repeatedly translated (due to an evident mistake) as Interest Risk Swap. What is surprising, however, is that other different judges have propagated the mistake, not once and I do not know how knowingly (Italian Supreme Court no. 493 of 10 January 2019 - rapporteur Falabella; Italian Supreme Court no. 7574 of 18 March 2019 - rapporteur Tricomi; Italian Supreme Court no. 24014 of 6 September 2021- rapporteur Nazzicone).

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  1. Managing Partner RR&P, President of the Scientific Committee of the Alma Iura Study Centre, Verona, Italy

    Marco Rossi

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  1. Emeritus LUISS Guido Carli University, Chairman Consob, Rome, Italy

    Paolo Savona

  2. Economics Faculty, Marconi University, Rome, Italy

    Rainer Stefano Masera

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Rossi, M. (2023). The Karst Phenomena of Law in Action. In: Savona, P., Masera, R.S. (eds) Monetary Policy Normalization. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-38708-1_8

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