2 June 1998
By the Select Committee appointed
to consider Community proposals, whether in draft or otherwise,
to obtain all necessary information about them, and to make reports
on those which, in the opinion of the Committee, raise important
questions of policy or principle, and on other questions to which
the Committee considers that the special attention of the House
should be drawn.
The European Central Bank: will it work?
1. In the summer of 1998 the European
Central Bank (ECB) will come into existence. It will be a powerful
institution in the world economy. It will determine the monetary
policy for the countries that adopt the euro and give up their
separate currencies on entry to Stage 3 of Economic and Monetary
Union (EMU). That stage will start on 1 January 1999. Under the
terms of the EC Treaty ("the Treaty"), it will be endowed
with an extra-ordinary degree of political independence. The ECB
will exert a major influence on the economy of the euro zone and,
therefore, on the rest of the EU, including the United Kingdom.
The euro, the dollar and the yen will form the three principal
international currencies. The ECB will be a major player in the
world league of central banks.
2. The primary objective of the ECB,
which the Treaty declares to be "price stability", is
undefined in the Treaty and its interpretation left to the discretion
of the members of the ECB. As the early months of 1998 passed,
the identity of the President of the ECB and the membership of
its Governing Council not only remained undecided but became the
subject of prolonged dissension among the countries to constitute
the euro zone. The manner of the appointment of the President
of the ECB at the beginning of May was regrettable because it
showed the force of national pride in connection with the ECB.
However, both Wim Duisenberg and Jean-Claude Trichet who, it seems,
will in succession hold the Presidency for the next 12 years,
are central bankers of impeccable orthodoxy. The financial markets'
early reaction suggests that there may be no damage to the perception
of the ECB's independence.
At the beginning of our enquiry, although only a few months remained
before the ECB was due to come into existence, the strategy for
monetary policy likely to be adopted in pursuit of its primary
objective of price stability, the arrangements for its accountability
and the mechanisms for achieving coherence of economic policy
between the elements of monetary policy, fiscal policy and microeconomic
measures affecting labour and product markets remained wrapped
in uncertainty, if not largely unknown, or even unconsidered.
This degree of public ignorance seemed unhelpful for the successful
launch of the new currency and the ECB.
3. One of our witnesses quoted to us
the central banker of a newly independent Baltic country who said,
"A new currency must be loved and trusted." We agree,
particularly where the new currency is an international one to
replace old ones associated with cherished national identities
focused on perceived past national glories, as is the case with
the French franc and the pound sterling, or on more recent economic
success, as is the case with the deutschmark. Clearly, knowledge
and understanding of the ECB and its decisions must be successfully
promoted among the general public if love and trust of the euro
are to grow.
4. The aim of our enquiry was not to
consider, once again, as so many other bodies have already done,
the merits or otherwise of the decision, embodied in the Treaty,
to proceed to Stage 3 of EMU and the adoption of the single currency.
Our aim was to consider how and whether the ECB would work. We
did not consider whether the United Kingdom should join the single
currency. In pursuing this aim we enquired into what had already
been decided about the operation of the ECB and, where decisions
were still to be taken, identifying the factors which should influence
them. This important task seemed capable of realisation, to a
worth-while extent at least, because the building blocks of the
ECB had for some time been under intensive consideration by its
forerunner body, the European Monetary Institute (EMI), which
was also established by the Treaty and came into existence on
1 January 1994. Many of the decisions which must be taken before
and at the start of Stage 3 cannot legally be taken until the
ECB comes formally into existence on the appointment of its Executive
Board in mid-summer 1998. However, the EMI and the Council of
Ministers, particularly in the form of Ecofin, national governments
and the European Parliament, had already had time to give thought
to their relationship with the ECB and to the ways in which the
ECB might operate.
5. The enquiry was carried out by Sub-Committee
A in the first months of 1998. In addition to hearing evidence
in the House, the Sub-Committee took evidence in Bonn, Brussels
and Frankfurt. This last city is the seat of the German Bundesbank
and the EMI and is the intended home of the ECB.
6. The membership of the Sub-Committee
during the enquiry is listed at Appendix 1. Those who gave evidence
are listed at Appendix 2. Appendix 3 is a glossary of acronyms.
We are most grateful to our witnesses and to all those who assisted
us in the course of the enquiry.
1 Dr Duisenberg told us in evidence (Q 219) that he
would not accept appointment for a limited period. See Footnote