Select Committee on European Union Written Evidence

Memorandum by Federation of German Industries (BDI)


  1.   How has the Bank's two-pillar monetary policy strategy worked since the start of stage three of EMU and the introduction of the euro on 1 January 1999?

  Overall the monetary policy strategy has proved effective. The ECB should continue its two-pillar strategy, in which money stock plays a prominent role. Over the middle term it is likely that there will continue to be a close correlation between the money supply and the price level. As the second pillar of the monetary policy strategy, the inflation rate has also generally proved effective. From industry's perspective, it is especially important that the strategy can fulfil the ECB objectives optimally, in particular an adequate and tension-free supply of liquid funds to the euro area. This is currently the case.

  2.   Is the ECB's inflation target too low?

  The ECB must be in a position to react adequately to signs of both inflationary and deflationary trends. The inflation rate defined by the ECB—below 2 per cent over the middle term—provides an adequate safety margin against deflationary risks. From today's point of view this price norm is not set at a too low a level. A too low target level could lead to a deflationary trend in EMU states with below-average price increases. The target level is often influenced, positively or negatively as the case may be, by changes in the Terms of Trade. The ECB must take this into account in their monetary policy.

  3.   As well as inflation target, should the ECB also have a target rate of growth of money GDP?

  No. By explicitly including nominal growth the ECB's scope for discretionary easing would be expanded in a problematic manner. Pressure from interest groups on monetary policy could increase, the ECB would become increasingly politically instrumentalised, This would not rule out that the ECB could also include other price-determining indicators in the monetary analysis.

  4.   What would be the effect of the recent decision of the European Council to amend the voting modalities of the Governing Council?

  The heads of EU states and governments have taken up the ECB's reform proposals which recommend voting in an enlarged Governing Council according to a rotation plan. This is to ensure effective functioning also after enlargement of the economic and monetary union. According to the new voting system, the euro states will—depending on their economic weight—be divided into two groups when there are less than 22 member states and into three when there are over 22 states. The number of those entitled to vote will be limited to 15 central bankers. In addition there are the six Members of the Executive Board with permanent voting rights. The five largest euro states in the first group have a total of four votes, the smaller states have eleven votes. We welcome the fact that there has been a reform at all. Nevertheless, the present solution is not an optimal one. Economically important countries and those large in terms of population, such as Germany, could be outvoted. This could lead to a discrepancy between the stability policy requirements of the euro area and a majority policy decision. However, such a conflict of interests will probably only come about in the short term.

  5.   Should the Banks' communication strategy and its implementation be changed?

  Occasionally elements of the ECB's communications strategy are criticized. We do not share demands aiming, for example, at publication of the minutes of the ECB Council's meetings. This could lead to a potential conflict. The ECB's autonomy must be ensured. As regards a more efficient communications strategy it would be worth considering whether the ECB Council could not vote explicitly on interest rates changes and publish both the arguments and the results of the voting in an anonymous form. This could create more transparency in monetary policy decision-making, both for markets and the general public.

28 May 2003

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