Memorandum by Federation of German Industries
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
The ECB must be in a position to react adequately
to signs of both inflationary and deflationary trends. The inflation
rate defined by the ECBbelow 2 per cent over the middle
termprovides 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 willdepending on their economic weightbe
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