Select Committee on European Communities Twenty-Fourth Report


  28.    This Part of the report summarises evidence received on the major issues arising in the course of the enquiry.



  29.    The architects of the Treaty aimed to ensure that in its essential features the ECB would mirror the Bundesbank which was seen as the epitome of the successful and politically independent central bank. Dr Tietmeyer, President of the Bundesbank, said that the independence of the Bundesbank had been established in practice by the actions and personalities of the first members of the bank's Council. In the early years there were some conflicts with the Finance Ministers of the day; but out of those conflicts had come the acceptance of the independence of the Bundesbank in most matters. He would expect there to be a similar process, at first, of establishing credible independence for the Governing Council of the ECB whose members would come from different countries with different customary relationships with their political authorities. He noted that a tradition was growing up of the political independence of central bank governors even in countries where until quite recently that had not been the case (QQ 251-256).

  30.    Commissioner de Silguy expected the Governing Council of the ECB to be guided in the exercise of their independence by a European sense of responsibility rather than national influences. He likened the position to that in the European Commission where there were twenty Commissioners from fifteen different countries but where, in his experience, the overriding interest was that of the Commission. He had had a similar experience in working with the EMI (Q 141). Dr Duisenberg, President of the European Monetary Institute, thought that the independence of the ECB would make it possible for the Governing Council to take decisions to achieve price stability across the euro zone (Q 199).

  31.    Herr Regling, of the German Federal Ministry of Finance, was adamant that there should be no involvement by the Council of Ministers or the European Parliament with the decisions of the ECB. He thought that everyone who wanted to join EMU agreed that it was a good idea to have an independent ECB. He said: "That is in the Treaty. It cannot be changed and it should not be changed. We are convinced it works—the Bundesbank has demonstrated that" (Q 310).

  32.    Mr Martin Wolf, Associate Editor and Economics Commentator, Financial Times, was alone among our witnesses in striking a somewhat discordant note on the independence of the ECB. He did not like the degree of independence given to the ECB. He described it as "the most independent central bank there has ever been". He contrasted the position of the Bundesbank and the United States' Federal Reserve, which operated under legislative arrangements which could be changed by a legislature, with that of the ECB which operated under a Treaty which he described as "effectively unamendable" (Q 403).


  33.    Asked about the desirability of transparency of ECB decision-making as a way of building support for the single currency and the ECB, Dr Tietmeyer, drawing on the experience of the Bundesbank, said he attached importance to the publication of monthly reports. He also acknowledged the value of public speeches by the members of the Bundesbank Council and he referred to the many informal contacts between the Bundesbank and German Ministers and commercial banks. Given the multiplicity of these informal contacts with the political world and more widely, and given that it was accepted in Germany that the Bundesbank was doing its job appropriately, he thought it right that there were no hearings of the Bundesbank in the German parliament (Q 281).

  34.    Mr Gordon Brown, Chancellor of the Exchequer, said that the days of "a sort of ivory tower approach from central bankers" were over. He said that every central bank and every government now had to look at the way it conducted monetary and other policies "in the light of the pressures for greater openness" (Q 517). He said that the reasons for the actions of the ECB must be understood widely by financial markets and by the general public of the Member States: "transparency in its decision-making will be the key" (Q 496). Mr George, Governor of the Bank of England, thought that it would be in the interest of the ECB to make the thrust of its policy discussions public as a way of trying to gain public understanding of its actions. He saw the situation of the Bundesbank in Germany, with the public confidence it enjoyed, as very different from that of the new ECB. However, he had "a strong impression" that the deliberations of the ECB were unlikely to be as transparent as those of the Bank of England had become (Q 50).

  35.    Asked whether the minutes of the Bundesbank's council meetings should be published, Dr Tietmeyer said that this was not appropriate. He thought that the publication of press releases and other explanations of the reasons for the decisions reached was necessary; but it would be dangerous to publish the details of the discussion which would not explain the reasons for the outcome but would reveal the changing views of members of the council as the argument progressed. Dr Gaddum added that it was important that the discussions in the bank council should be frank and that the members should feel free to change their minds as a result of the discussion. This also helped to build a convincing majority for the eventual decision: publication of the minutes would make it more difficult to reach a convincing majority. Dr Tietmeyer thought that the dangers of publication of minutes would be greater in the case of the ECB Governing Council because arguments occurring between the national central bank governors could be interpreted as national issues. This would bring a national governor under strong pressure to take a "national" line (Q 281).

  36.    Sir Nigel Wicks also thought it would be very important for building public confidence in the new currency that the ECB should go out and "explain, explain, explain, convince, convince, convince" parliaments, the press and the people at large what they are doing and why. He quoted Governor Latsis, governor of one of the new Baltic central banks, who said "a new currency must be loved and trusted". Sir Nigel said that the euro would be loved and trusted if it retained its domestic value and, over a period of time, its value against other major currencies. He thought that if EMU were seen to deliver more jobs and prosperity that would help the acceptance of the currency (Q 118). Herr Regling, too, said that the ECB should be transparent and explain what they were doing and why they were doing it (Q 310). He sometimes said "half-jokingly" that the most important department of the ECB would be the public relations department (Q 314).

  37.    Mr Adair Turner, Confederation of British Industry, saw the need for openness of the ECB from a slightly different perspective: he emphasised the need for the ECB to be well-informed about the real economy. He expected the CBI to continue to express their views on interest rate policy to the Bank of England and, if the United Kingdom joined the single currency, directly to the national central bank or through the EU's employers' organisation, UNICE, to the ECB. Both routes would probably be desirable (Q 410-411). This listening function of the ECB could be carried out, as was done in this country at the moment, through a system of regional bodies. It was not really important whether the mechanism for gathering information and listening to views was a committee explicitly established for this purpose, perhaps described as an advisory or consultative body, or some other mechanism. The important matter was that the mechanism was widely-known and transparent about how the information was used (QQ 414, 426).

  38.    Mr Paul Volcker, former chairman of the United States Federal Reserve Board, said that he did not think that a central bank would survive or conduct appropriate policies over a long period unless it could command public support (Q 436). He explained that he meant popular support for the ECB in the sense of it having respect and a feeling of authority rather than it "winning a popular vote" (Q 452). He thought that this need for public support applied even to the ECB which was a central bank "without a government to oversee it" (Q 436). He expected that there would have to be "a lot more communication" than the "bare bones" required in the Treaty. This would require strong leadership in the first years from the President of the ECB (Q 436).

  39.    M Trichet rejected Mr Volcker's view that the ECB was independent from a government which did not exist. M Trichet said it was not correct to say that there was no political power at the European level. It was true that there was neither a federal government nor a federal budget, but there were the institutions of the Council, the Commission and the European Parliament. He saw the equivalent in Europe of the federal government as the Council: that is the college of the legitimate democratic governments of the European Union (Q 467).

  40.    Dr Duisenberg thought that, although the ECB would inherit some of the credibility of its participating members, this inheritance would be insufficient: in order to build support and credibility the ESCB would have to be as transparent as possible. It would have to explain "to the European Parliament, to governments and towards the public at large its targets, why it takes, or does not take, measures and why its targets have, or have not, been met" (Q 199).

  41.    Commissioner de Silguy recognised that for the euro to gain the confidence of the people of Europe was difficult. He observed that citizens who did not know about monetary policy had to place their faith in someone: in Germany it was Dr Tietmeyer of the Bundesbank. He noted that publicity—not propaganda—had a positive effect: he observed that there was a correlation between the level of knowledge and the level of commitment to the single currency project. Once decisions had been taken at the beginning of May 1998 by the Heads of State or of Government on which countries were to go ahead with the single currency there would be a very powerful positive political message going out to the people (Q 138).


  42.    Sir Nigel Wicks and Herr Regling both drew a distinction between accountability and control. Sir Nigel saw it as the essence of an independent central bank that it was not within the power of the political authorities to fire the president or other members of its council, in this case the Governing Council of the ECB.[12] They both thought that the requirements for the ECB to produce reports and to appear before the European Parliament did ensure accountability (Q 98). Herr Regling said that the independence of the Bundesbank in its job of deciding monetary policy was not jeopardised because the government might reject its advice on other policy matters (Q 316). He was also firm in his opposition to the suggestion that the independence of the central bank, be it the Bundesbank or the ECB, constituted some sort of "democratic deficit". He said that there could not be a democratic deficit because the independence of the Bundesbank had been decided by parliament and that of the ECB was written into the Treaty which had been duly ratified (Q 333). He was equally dismissive of the idea that a lack of public understanding of the implications of EMU should be regarded as a democratic deficit (Q 336).

  43.    Herr von Wogau, chairman of the Economic and Monetary Committee of the European Parliament, said his committee thought that the ECB had to be independent in taking decisions on interest rates, but that it had a duty to explain its decisions to the citizens and that this should be done, "among other possibilities" before the relevant committees of the European Parliament. He foresaw "a very satisfactory dialogue" with the President of the ECB (QQ 153-155). He expected the Parliament to hold a hearing with the President of the ECB as soon as he was nominated. This hearing would be similar to the hearings of the newly nominated Commissioners: it would concentrate on the professional experience of the person unlike the more personal questions that tended to be asked in hearings on appointments held in the United States Senate (Q 155).

  44.    Mr Gordon Brown said he had personal experience of appearing before the European Parliament's Economic and Monetary Policy Committee. He knew that the Committee took a full and detailed interests of all economic policy. He did not expect there to be from them "any failure to enquire or to scrutinise what the ECB does" (Q 525).



  45.    Dr Duisenberg said that the ECB would have to publish and explain its definition of price stability (Q 199). As to what that definition would be, he did not know, but he said that there already existed a consensus among central bankers that if inflation was between zero and two per cent they would call that a situation which was consistent with price stability (Q 200). Mr George said that a definition of price stability of between one and three per cent was very common and that if the ECB was not aiming for something like that it would be questionable whether it was meeting its mandate (Q 46). He expected that the attitude of the ECB would be that deflation or declining retail prices were potentially at least as disruptive as unpredictably rising prices (Q 49). Sir Nigel Wicks, HM Treasury, speaking personally, said that he thought price stability meant price stability: it did not mean price deflation (Q 107). Professor Goodhart noted that, in principle, the ECB could decide on a target of zero inflation which would, during the transitional period, increase unemployment and could lead to conflict with the various political authorities. In this situation the Treaty provided no route for the Council to intervene (Q 3). In practice he expected the ECB to adopt a range of 0-2 per cent inflation as consistent with price stability (Q 7).


  46.    Professor Goodhart pointed out that there were technical issues about the choice of price index used to measure inflation. He said that the harmonised index used by Eurostat produced figures lower than those derived from the United Kingdom's own index. Under the Eurostat index[13] inflation in the United Kingdom was currently around 1.8 or 1.9 per cent compared with the figure of 2.8 per cent given by RPI X and the even higher figure given by headline RPI. He saw the British inflation figure as already falling within the target range that the ECB was likely to set itself (Q 35).


  47.    The Bundesbank, on which the ECB was modelled, has a proclaimed attachment to using monetary aggregates as indicators of inflationary trends and, therefore, as guides to its interest rate decisions. In the United Kingdom experiments with using various monetary aggregates for this purpose in the '70s and '80s proved unsuccessful. The present Government and its immediate predecessor opted to set explicit inflation targets as the goal of monetary policy. In the light of 50 years of British experience, from 1947 to 1997, some of our British witnesses were understandably anxious that there should be no excessive reliance by the ECB on monetary aggregates. We were told that, in practice, the Bundesbank had not slavishly followed monetary targets but had shown itself willing to override them if this seemed conducive to its ultimate goal of price stability. Dr Tietmeyer and Dr Gaddum saw monetary aggregates as valuable in providing "an anchor" but they said explicitly that the Bundesbank had taken other factors into account when setting interest rates. They said that the ECB, in a new situation where there would be no experience of the behaviour of monetary aggregates across the whole euro zone, would have to use other indicators, in addition to monetary aggregates, on the basis of "something like a trial and error process" (QQ 271-274). They saw problems in following inflation targets alone as inflation could be influenced by fiscal policy and other matters beyond the control of the ECB. They saw advantage in the use of monetary aggregates as they operated as a leading indicator of inflation. Dr Tietmeyer expected monetary aggregates to be used by the ECB "as one anchor but of course not following it as an auto-pilot" (Q 272).

  48.    Herr Regling favoured the use of monetary targets when the demand for money was known to be stable; but initially the ECB would need to look at different indicators including inflation targets. He saw no alternative to "a period of trial and error" in which the stability of the demand for money in the euro zone could be assessed (Q 308).

  49.    Dr Duisenberg said that the EMI had concluded that there was a choice between two major strategies: one of gearing policy directly towards the inflation target, as was currently the policy of the Bank of England; and the other of trying to achieve price stability by steering by an intermediate target, the money supply under some definition, as was currently the policy of the Banque de France and, he said, the Bundesbank. The EMI had concluded that in practice the difference between these two approaches was "not all that important". He explained that a central bank that was said to have an inflation target also looked at other indicators of economic development, the general economic situation and the causes of inflation. On the other hand, a bank that was said to follow an approach based mainly on money supply figures "by no means ignores the general economic situation in the country and even in other countries" (Q 199). Mr George, too, saw similarities between the two approaches. He said that in practice the Bundesbank interpreted the movement of monetary aggregates in much the same way as the Bank of England did, in an attempt to see their implication for the underlying rate of inflation (Q 72).

  50.    The CBI, too, thought that the difference between money supply targeting and inflation targeting might be less important in practice than appeared in theory, although they noted that, particularly in the early years of EMU when the interpretation of euro zone-wide measures of monetary aggregates would be untested by experience, the risks of policy mistakes would increase if the primary emphasis were placed on achieving a money supply objective (p 1).

  51.    Mr Volcker was "very sceptical" about whether in the early days of the ECB it would be possible to define a sensible monetary aggregate for the euro zone which would comprise what had been a number of different banking systems with their own types of deposits (Q 442).

  52.    Mr Gordon Brown thought that people had moved from the days when some rigid adherence to a particular monetary target or targets was felt to be of value (Q 507). Sir Nigel Wicks did not express a view explicitly on the choice, or the appropriate combination, between inflation targeting or monetary aggregate targeting but he said that the key was that the ECB should achieve its objective of price stability. He conceded that if the United Kingdom decided to join the single currency at some time the country would have to accept the arrangements which would be built up over the next few years (Q 94).


  53.    Several witnesses emphasised the importance of the ECB allowing reasonable time-scales for its policy decisions to act. The CBI said that monetary policy should aim to smooth rather than exacerbate fluctuations in output. It saw no contradiction between the aim of smoothing fluctuations around the long-term trend rate of growth and the aim of maintaining a reasonable degree of price stability. It noted that following a supply-side shock, such as an imported commodity price increase, inflationary pressure might increase and, at the same time, output growth might be impeded. In such circumstances too sudden a change (upwards) in interest rates (to counter inflationary pressures) could lead to a permanent negative effect on productive capacity. The monetary authority would, therefore, need to take a judgment about the length of time over which inflation should be brought back down (p 2).

  54.    Mr John Monks, General Secretary of the Trades Union Congress, said there was a problem about whether the 2 per cent figure for price inflation was to be taken as an average over the whole cycle or was it a figure not be exceeded at any stage of the cycle. He said the TUC favoured looking at measures across the whole of the cycle (Q 190).

  55.    Professor Goodhart said that Bank of England research had shown that there was a particular speed for the return to target inflation which minimised both the volatility of output on the one hand and the volatility of inflation on the other (Q 38). Consequently the question of the appropriate speed at which to get inflation back on track was largely a technical one rather than a political one.


  56.    Dr Tietmeyer spelt out his perception of the proper relationship between monetary policy and the other levers for achieving a successful economic policy. He saw the purpose of monetary policy as the creation of a sound and stable monetary environment which would, in his view, provide the best conditions for economic growth and reducing unemployment. He added that a stable monetary environment also had positive effects for social justice: the losers from inflation were always the poorer people and those whose salaries were fixed. Price stability promoted both economic development and social justice; but it was only one of the conditions for a successful economic policy: fiscal policy, wage policy, labour market conditions and other factors were also important. But within a monetary union there was and could be only one single monetary policy. He did not think that in the end this would create damage: the ECB's policy decisions would be taken in the light of the situation across the whole of the euro zone. In the long run the cycle would be more or less the same for the whole area and, in any case, structural problems could not be solved by monetary policy. He contrasted the experience in the United Kingdom, which, he said, had had excessive variations in monetary policy with that in Germany which had followed a steady longer-term orientated policy which had proved successful. He hoped that this longer-term orientation would be the policy of the ECB (QQ 248-249, 287).

  57.    Dr Gaddum amplified Dr Tietmeyer's view by making explicit their position that in a monetary union it remained a national responsibility to provide the flexibility to deal with structural problems and asymmetric shocks. This would be done partly by means of national fiscal policy but more especially by the flexibilities of the labour and product markets—by what in German was called ordnungspolitik (Q 250).

  58.    Dr Duisenberg, too, was clear that dealing with problems of high or rising unemployment or of lagging economic growth "is not and cannot be a primary concern of the monetary authorities" (Q 200). He said that the central bank community and academia were agreed that the unemployment problem, which he recognised as the major problem facing the larger economies in Europe, was very much a structural one: it had to do with the rigidities of the product and labour markets and "simply could not be solved by monetary measures" (Q 202).

  59.    Mr Wolf emphasised that the view of economic policy embodied in the Treaty was that the best thing the ECB could do was to deliver price stability: if it concerned itself too much with stabilising the real activity of the economy as well as prices it would deliver neither. He said this view was central to the Treaty and was also the basis for the United Kingdom's present macro-economic policy (Q 392). Mr Gordon Brown made a similar point by saying that "to pursue policies for low inflation is also a means of pursuing policies for high growth and employment" (QQ 515, 518).

  60.    In response to a suggestion that flexibility of labour markets was sometimes a euphemism for a reduced share of GNP going to labour, Dr Tietmeyer said that this was not his view: for him labour market flexibility meant wages in line with changing productivity and, where structural change introduced new industry, finding the appropriate labour costs for that new industry (Q 289). Mr Gordon Brown, took a similar line when he explained his view of labour market flexibility. He said he did not mean just "tearing up every set of regulations that exist, whether they are good or bad. What I mean is preparing the economy for the future challenges, giving people the skills that are necessary to enable them to get jobs wherever these jobs are, allowing people to make the transition from jobs in older industries to jobs in newer industries" (Q 506).

  61.    Challenged on the possibility for the ECB to respond appropriately to a contractionary situation, given its obligation to pursue price stability, Sir Nigel Wicks pointed out that if economic activity was lower it would be expected that inflationary pressures would also be lower and that this might produce "some monetary response" from the ECB. More generally, he, too, subscribed to the central bankers' view that the pursuit of price stability was in no way inimical to growth and employment—"indeed, the reverse", he said, and he claimed that this was "not just an article of dogma" but that studies demonstrated the usefulness of price stability for economic activity generally. He pointed out that the Member States which had had good economic performance over a long period were those which had geared their monetary policy to price stability: Germany, with its monetary policy run by the Bundesbank, was an example (Q 101).

  62.    Mr Volcker expressed what he said was "the general sense of economists today" and "the general drift of politico-economic thinking": that central banks had better give priority to price stability or their growth objectives would be thwarted over a period of time (Q 459).

  63.    Mr Monks expressed similar views when he said, "the emerging consensus which has embraced not just the banking community but others as well, and increasingly a fair slice of the European trade union community, [is] that monetary policy pursued responsibly is an important part of laying the conditions for long-term growth" (Q 179). He added that the ECB would have to be sensitive to the implications for employment of their interest rate decisions (Q 179).

12   Under Article 11(4) of the protocol if a member of the Executive Board no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct, the Court of Justice may, on application by the Governing Council or the Executive Board, compulsorily retire him. Under Article 14(2) a governor of a central bank, who is a member of the Governing Council, shall have a term of office of no less than 5 years and may be relieved from office only on the same two grounds which apply to the removal of a member of the Executive Board. Back

13   The Eurostat index, the Harmonised Consumer Price Index (HCPI), covers a slightly different basket of goods and weights them together in a different way from the RPI. Economic theory does not give unambiguous answers about what is the best price index. Back

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