Select Committee on European Communities Report


79.  THE EUROPEAN CENTRAL BANK: WILL IT WORK? (24TH REPORT, SESSION 1997-98)

Letter from the Rt Hon Gordon Brown MP, Chancellor of the Exchequer, to the Rt Hon the Lord Barnett, Chairman of Sub-Committee A (Economic and Financial Affairs, Trade and External Relations)

  Thank you for your letter of 9 June, enclosing a copy of your Committee's report on the European Central Bank. I am very glad to have the opportunity to respond to the Committee's main conclusions.

  As I said when I gave evidence in April, the test of a successful single currency will be whether it delivers growth and high employment. In delivering its Treaty objective of price stability, the European Central Bank will play a vital role in ensuring the success of EMU; low inflation is an essential building block for sustainable long-term growth and employment.

TRANSPARENCY

  Turning to the Committee's conclusion on transparency, I agree that to work effectively, the ECB's actions must be understood by financial markets and the European public. I am pleased that the Committee emphasise the need for the ECB to foster transparency in its operations. This will be a key element in ensuring the ECB gains the trust of the public and the financial markets and the credibility that will help them deliver a more effective monetary policy. I am sure that the members of the ECB Executive Board and Governing Council understand this link between transparency and the credibility and effectiveness of the institution.

  As the Committee recognise, the Treaty contains a number of provisions designed to deliver this transparency. I hope that the ECB will work within the terms of the Treaty to ensure that it is as open as possible about its decisions. I agree with the Committee that, while this could extend to the publication of the minutes of Governing Council or Executive Board meetings as the Committee suggest, it would be important, in this case, to take full account of national sensitivities, in particular in revealing voting patterns. I also agree with the Committee's conclusion that the ECB must be as open as possible about its definition of price stability in the euro area.

  Transparency was a key principle underlying the Government's recent reform of the Bank of England. Of course there will be differences between how the ECB operates and the framework we have chosen for the Bank of England, which reflects our history and domestic policy objectives. The ECB's framework is based more on the example of the Bundesbank which has provided the model for most of the central banks of the single currency area.

ACCOUNTABILITY

  The Committee emphasise the importance of accountability in monetary policy decision-making. I have no doubt that the ECB and the European Parliament must cooperate to ensure that there is proper scrutiny of monetary policy decision-making by a democratically elected authority while at the same time respecting the necessary independence of the central bank. I agree with the Committee that the framework set out in the Treaty for this purpose, provided it is used effectively, is a sound basis on which to establish this accountability.

  The Committee stressed the importance of national Parliaments in complementing the role of the European Parliament in scrutinising ECB decisions. In Stage Three of EMU national Parliamentary Committees will be able to take evidence from their Central Bank Governors, though this will, of course, be subject to the Treaty provisions on disclosure and to the independence requirement on members of the ECB governing bodies. European leaders agreed at the recent Cardiff European Council further to examine ways in which EU institutions and policies could be brought closer to Europe's citizens.

  I would also emphasise the importance of ensuring there is a continuous and constructive dialogue between the ECB and the ECOFIN Council of Finance Ministers. This was underlined at the Luxembourg European Council and is essential to the smooth functioning of EMU. The Treaty contains a range of provisions for ensuring that there is an ongoing exchange of views between Member States and the ECB. The President of the ECB is required to present the annual report of the ECB to the Council and can be invited to participate in Council meetings. Similarly, the President of the Council may participate in meetings of the Governing Council of the ECB. The Economic and Financial Committee, which will bring together senior officials from the national central banks and the ECB as well as from Finance ministries, provides the framework in which this dialogue can be prepared. I believe it will be important to make full use of these provisions in the run up to and beyond the start of Stage Three.

THE STABILITY AND GROWTH PACT

  I was pleased to see that the Committee recognised the impressive progress made by Member States in recent years in reducing deficits in line with the requirements of the Treaty. Continued fiscal discipline, building on the success of recent years, will be essential if the benefits of monetary union are to be realised. The level of commitment among all Member States to maintain fiscal discipline and improve their public finances was demonstrated again recently by the declaration agreed by the ministers of ECOFIN on 1 May, explaining how the Stability and Growth Pact will be implemented in the early years of EMU.

  The Committee raised the issue of flexibility of national fiscal policies within the Stability and Growth Pact. Fiscal policy will remain the responsibility of Member States in EMU. The Stability and Growth Pact does constrain deficit levels but provided Member States pursue sound fiscal policies over the medium term, I believe there should be room for fiscal policy to operate over the cycle. Those Member States with high debt ratios will need to continue their consolidation efforts to ensure they have the necessary flexibility. If managed prudently, this national fiscal flexibility suggests that there should be no need for a centralised system of fiscal transfers in EMU.

ECONOMIC REFORM

  As the Committee emphasise, it is also crucial that Europe's economies become more adaptable and better able to cope with the changing economic circumstances that EMU will bring. Structural reform of Europe's labour, product and capital markets has been at the heart of the Government's agenda throughout our Presidency of the European Union. Real progress is now being made on this front. The declaration agreed by Ministers in May underlined Member States' commitment to economic reform and job creation. More recently, at the Cardiff European Council, Member States reached agreement on four more essential elements: developing the Broad Economic Guidelines to put more emphasis on structural reforms, modernising the single market, promoting entrepreneurship and competitiveness, and taking concrete action on employment through the implementation of Employment Action Plans.

  The final section of your report considers the prospects for the euro and the ECB. As you say, the ECB's task is a challenging one, but they will benefit from the excellent preparatory work of their forerunner, the European Monetary Institute. EMU itself is unprecedented and one of the most significant developments of the European Union to date. What is clear is that although Britain is not joining in the first wave, it is vital for all of us that EMU is a success. Working with our EU partners to ensure this was a priority during our recent Presidency of the EU and will continue to be a priority for the Government in the future.

  Finally, I would like to thank you, as Chairman of the Committee, for affording this important issue the attention it deserves. I wish you and your Committee well in your future work. I have no doubt there are many more issues which would benefit from your Committee's rigorous investigation.

24th July 1998


 
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