Memorandum by UNICE
The Treaty on European Union states the objective
of the ECB in the following terms: "The primary objective
of the ESCB is to maintain price stability. Without prejudice
to the objective of price stability the ESCB shall support the
general economic policies of the Community (. . .)".
Furthermore, the ECB defined price stability "as a year-on-year
increase in the Harmonized Index of Consumer Prices for the Euro
area of below 2 per cent" over the medium term.
To assess the success of the ECB so far, one
has to bear in mind this objective as well as the fact that the
ECB, as such, is a fairly new institution. The two-pillar strategy
built on the legacy of the ECB's predecessors and is meant to
lead to a comprehensive assessment of the economic situation and
the long and short-term trend in prices. This framework has also
proved flexible enough to permit some adaptation.
Inflation performance: After four years of existence,
it seems that the inflation performance of the Eurozone is satisfactory.
Indeed, in a period marked by several supply and demand shocks
the ECB has succeeded in achieving a moderate inflation outcome.
Inflation was 1.1 per cent in 1999, 2.1 per cent in 2000, 2.4
per cent in 2001 and 2.2 per cent in 2002. The latest figure in
May 2003 shows a year-on-year increase of 1.9 per cent while expectations
for 2004 are below 2 per cent.
Critics of the two-pillar strategy argue that
it is too opaque: In particular, for the first pillar, the link
between money growth and inflation is strong over the long term
(ie more than eight years) but it appears to be much weaker over
the short-term events as well as the impact of the business cycle.
With the prominence given to the first pillar (ie the least related
to short-term movements), the ECB's decision could appear, at
times difficult to explain. In fact, the ECB itself acknowledged
that there was a "communication gap". This is important
since predictability of monetary policy helps to smooth interest
rates fluctuation by leading markets to anticipate and prepare
for the decision.
The recent decision of the ECB to put more emphasis
on the second pillar in explaining its decisions without abandoning
the first pillar is intended to address this issue.
Choice of target: the definition of price stability
differs from a proper inflation target in the sense that it is
not binding in the short run and aims to shape expectations in
the long run. In that regard the ECB strategy is more precise
than the one followed by the US Fed (which does not give a quantified
inflation target) and less precise than the formal inflation targeting
followed by the BoE, for instance, where there is an explicit
target and a time frame. Recent work by the IMF, however, tends
to prove that all three Central Banks have been successful in
shaping expectations. Hence, it seems that the most important
feature is a credible commitment to price stability.
The weak macroeconomic performance in the Eurozone,
particularly in Germany where inflation is at 1 per cent, prompted
a debate about the risk of deflation and the appropriateness of
the target of less than 2 per cent. The reference to 2 per cent
is not uncommon (it was Germany's implicit target and it has been
chosen by several inflation targeting central banks). It is intended
to target price stability while allowing a low level of inflation
that can facilitate relative price adjustments when there are
downward price rigidities. The ECB did not clearly state whether
there was a lower limit on its target, even though, in its definition
of price stability, the ECB refers to "a year-on-year increase"
which de facto excludes negative inflation. Furthermore,
another difficulty for the ECB comes from the dispersion of inflation
rates in the Eurozone. While the ECB is in charge of maintaining
price stability in the whole Eurozone, low inflation (on average
in the zone) coupled with a wide spread could push some members
The ECB attempted to address this issue by refining
its definition of price stability as "an inflation rate close
to 2 per cent but below". It indicates that it does not favour
inflation falling too low in any member state. (It must also be
recalled that the current weak activity has other causes that
monetary policy cannot solve.)
2. THE STRUCTURE
Regarding the structure of the ECB, UNICE does
not have a strong view on all the detailed questions. Nevertheless,
three principles should be applied. Firstly, the ECB's decisions
must be taken in the interest of the Eurozone as a whole. Secondly,
the decision-making process must be efficient and transparent.
Thirdly, the ECB's independence must be preserved.
From these principles, we can draw the following
For efficiency reasons, we support the decision
to limit the number of voting members in the governing council.
As long as a rotation scheme can ensure that all sensitivities
are represented, the Council is expected to take its decisions
in the interest of the Eurozone as a whole and therefore it should
not be a problem if not all members can vote at one time.
Transparency is very important both for the
efficiency and for the accountability of the ECB. In our view,
transparency means a clear effort at explanation of the rationale
of ECB's decision. In that regard the two-pillar strategy requires
the ECB to provide a more in-depth and comprehensive analysis
than inflation targeting.
On the other hand, we do not favour the publication
of the votes of individual members. Such a publication could put
undue pressure on some individual members in their own countries,
particularly if there were a conflict between the country's immediate
interest and the Eurozone's interest.
The ECB's independence is one key pillar of
the EMU. Hence, this independence must be preserved and the ECB
must continue to set the operational definition of price stability.
There are several fora (including the Macroeconomic Dialogue
involving social partners) where the ECB can explain its policy
and listen to various stakeholders' remarks, suggestions and even
criticisms. The flexible way in which the ECB strategy has been
applied suggests that the ECB was able to listen and to adapt
without going through a dramatic change that could entail credibility
costs, which could be particularly high if it were made in a tense
11 June 2003