Examination of Witnesses (Questions 220-235)|
KELLY MP, MS
TUESDAY 7 OCTOBER 2003
220. It is not the President of the Council,
(Ms Owen) There is a lot more traffic of the ECB attending
meetings of the fiscal authorities. They can attend Ecofin. They
come to all the official level meetings I go tothe Economic
and Financial Committee. When it comes to the fiscal authorities
attending the ECB meetings that is provided forthat the
President of the Eurogroup (the head of the "ins") will
go; and in cases where the presidency of the EU is held by an
[odq]out[cdq] country, as happened recently with the Danes, then
it would be the next "ins" presidency that attendedin
that case the Greeks. The chair of the Eurogroup can attend the
ECB meetings, and the Commission can attend ECB meetings as well.
In practice that has not worked very well, and the Eurogroup have
not always attended all the meetings of the governing council.
There has been some suggestion in academic circles that that should
be more formalised, and that they should be required to attend
ECB meetings rather than have it optional at the moment. I think
it would be fair to say that we would probably support making
it compulsory. The other thing which does not work very well,
on that fiscal monetary coordination, is in terms of reporting
back from the people who attend the ECB meetings to the meetings
of the fiscal authorities. There is not a regular slot where they
report back on what happened at those meetings, that debriefing.
Lord Hannay of Chiswick
221. You would therefore contemplate with reasonable
equanimity that this increased dialogue between the monetary authorities
and fiscal authorities (which will inevitably be with the Eurogroup)
will inevitably be a dialogue from which we will be excluded?
(Ruth Kelly) No, I do not inevitably concede that
at all. I think it is very important there is continuous dialogue.
Obviously the Eurogroup have particular interest in making sure
that happens; but we all have an interest as well in making sure
the fiscal stance across Europe is optimal; which is why there
has been so much debate about the Stability and Growth Pact. That
is one aspect of the debate. The other aspect of the debate is
(Mr Woods) To the extent that these meetings are prepared
in the Economic and Financial Committee, the UK is represented
there, so we are party to those discussions.
222. Financial Secretary, if I could ask you
a little bit about the performance of the ECB in terms of economic
management of Euroland. Given that the Euroland economic performance
is pretty appalling measured by growth, inflation and unemployment,
with Germany in its third year of stagnation, and unemployment
in France approaching ten per cent, first of all, do you think
that the ECB has provided sufficient liquidity to guard against
deflation? Secondly, do you think the ECB is right to say that
the problems of unemployment in Europe are primarily structural,
and that the answer is for the governments to go in for structural
reform, and the Bank has very little role? The third point I would
like to raise with you is on exchange rates. The ECB did intervene,
apparently successfully, when the euro overdid the fall. Now with
the continuing and probably gathering momentum of weakness of
the dollar, the euro has become very highly valued in relation
to the dollar, which of course is having a considerable impact
and is likely to have a greater impact on the economy of Euroland.
Do you think that the ECB can or should try and do anything about
that in the way it did when the euro was undervalued?
(Ruth Kelly) There are a number of points to make
there. First of all, has the ECB pursued an optimal monetary policy?
Our view is that monetary policy should try and achieve low and
stable inflation over the medium-term. I think the track record
of the ECB shows that is what happened. It has been around two
per cent since its inception, despite a number of positive price
shocks. Has it provided for a stabilising role? Has it managed
to stabilise output and help support economic growth and employment
at a time of weakness in the European economy? The research that
we do and academics do using different modelsand the one
we often look at is something called the "Taylor Rule"has
shown that interest rates have led to more stable output than
would otherwise have been the case over that time. They have tended
to moderate any weakening of the European economy. Besides that,
what else should the role of the ECB be? I think that is actually
a huge challenge, both to achieve price stability over the medium-term
and, through doing so, moderate any volatility of output. In itself
that is sufficient definition, as it were, for the ECB. What should
the Member States do about weakening growth is a different question.
Our view would be very much that we need to concentrate across
the European economy on structural reform. We have a very clear
programme pursuing labour and capital market flexibility here
in the UK. We want to see that pursued throughout Europe; and
we published an economic reform White Paper to try and suggest
just that. We want to see much more emphasis on entrepreneurship,
research, development and innovation, all issues that were discussed
at the Lisbon Summit and agreed between Member States a few years
back. I think there are two slightly different roles that we see
being played by the ECB and by Member States. Had the ECB done
enough to combat deflation? Duisenberg has shown himself to be
sensitive to concerns about deflation. I think that is probably
one of the reasons why there has been more willingness on the
part of the ECB to try and clarify what they mean by price stability.
He has said in the past that he would be just as concerned about
inflation going below one per cent as he would about inflation
being over two per cent; which I think is a willingness to accept
that there are additional concerns about deflation. There have
also been further moves to clarify how they operate in practice
which contributed to that as well.
223. Although the ECB puts a lot of stress on
not targeting inflation, de facto they are moving towards
a symmetrical inflation target, do you agree?
(Ruth Kelly) Up to a point I think that is true.
224. That is basically, in a way, what Duisenberg
(Ruth Kelly) That is, I think, what Duisenberg has
been saying. The latest definition is just under two per cent,
which suggests that it is a more symmetrical approach to inflation.
Also in the Monetary Policy Review earlier this year the ECB explicitly
downgraded their monetary analysis to the second pillar rather
than the first pillar of monetary policy, and put much more emphasis
on other economic developments than it had in the past. The ECB
is showing itself very much to be a learning institution which
takes on board the concerns of both academics and Member States.
225. The point on exchange rates and the successful
intervention when the euro was fallingnow what do we do
about the euro?
(Ruth Kelly) I think we are all agreed, Member States
and the ECB, that it is not right to target the exchange rate;
that you cannot have an exchange rate target alongside a price
stability target. There are, however, occasions when you may want
to intervene in the markets, and that is a judgment callwhether
markets operate and whether, if you take an action, it will influence
perceptions. I would not like to secondguess the ECB as it tries
to evaluate the markets.
(Ms Owen) Perhaps I could just add something on the
first two questions. On the first question about the performance
of the ECB, it is important to draw a distinction between their
performance in targeting or achieving low inflation in the euro-area
as a whole. There are lots of ways you can assess that. You can
look at the actual inflation. In fact, in the last three years
actual inflation has been somewhat above the range they have wanted.
You can look at inflationary expectations, and those do seem to
have stabilised well. You can look at what the Minister talked
about with the Taylor rules, using the history of how monetary
policy reacts, to assess whether their performance has been appropriate.
There is beginning to be quite a bit of work there which suggests
their policy stance has, if anything, been a little bit looser
than it would have been had they adopted the Bundesbank's rules
of operation. They have, therefore, been more alive to the risk
of deflation than the Bundesbank rules might have been. I think
the second part of your question was very much about what the
challenge of EMU is in terms of the fact if you are looking at
the euro-area average you are, by definition, not looking at any
individual country. This is the challengethat the monetary
policy (except by accident) will never actually be right for any
individual country. Indeed, one of the things we emphasise in
the assessment in the chapter on flexibility is that inflation
will be an adjustment mechanism; because when a country loses
its own monetary policy and exchange rate it is looking to market
mechanisms for the economy to stabilise itself. You will expect
in the monetary union more variability in inflation than you would
previously. The challenge is to make sure, while you are dealing
with countries who will have higher inflation, you are also coping
with the needs of the countries with lower inflation and growth.
That is why we look in the monetary union to emphasise the importance
of countries themselves adopting more market mechanisms to help
them adjust, because monetary policy will not be helping them
individually as much as it used to do. That is where the emphasis
on structural reform comes from.
Lord St John of Bletso
226. Financial Secretary, do you have a view
as to who the lender of last resort should be in the Euro Zone?
On the structure and governance of the Bank, if there were to
be independent Monetary Policy Committees, should the non full-time
executive members be independent experts, such as with the MPC,
or rotating national governors from the Central Bank?
(Ruth Kelly) On the question of the lender of last
resort, we would like to see more clarity in the arrangements.
To make it explicit, how and when liquidity is provided, I think
would be an advance. On the question of the board of the ECB,
there is a strand of academic literature which suggests that the
way forward is through full-time experts. I think the risk of
the current system is that you have a degree of regional bias
in the decision-making body, with individual representatives of
Member States veering towards a view more closely in line with
what is appropriate in their own State, rather than taking a Euro-wide
view. I would emphasise that in the Treaty they are absolutely
mandated to take a broad view across the Euro Zone area. Nevertheless,
the risk of regional bias or, indeed, the perception that there
may be regional bias could persist. At some degree, the introduction
of rotating Central Bank governors is an advance from that point
of view. It is less likely that regional bias will creep in. Of
course, there may be other ways of achieving the same end, and
in future this may evolve further.
227. Going back to your earlier remark that
you would like to see the Bank of England being used as an exemplar,
would you like to see the ECB publishing its minutes of the meetings
of the governing council? Should they publish the results of votes
of the council? Should individual positions be identified, or
should it just be the balance of votes? How do you feel about
(Ruth Kelly) It is not that I want to see the Bank
of England as an exemplarI think the mere fact that it
exists and has an extremely good track record means that it is
a different model people naturally look towards. When debates
happen in Europe the UK is often asked its view without any politics
entering into it. It is just natural to ask the UK about the development
of monetary policy. There has been a study done recently, I believe,
which ranked the transparency of six central banks, and the Bank
of England came top and the ECB actually came next. The ECB is
quite a transparent body. It does have regular press conferences.
In the last few years it has started to publish forecasts and
projections in its bulletins. The President of the ECB does appear
in front of the European Parliament committees, and so forth.
It is quite transparent, but has a slightly different way of achieving
transparency from the Bank of England. We have just been talking
about the possibility of regional bias, and there are pros and
cons of publishing minutes, votes and individual positions. Some
people would say it helps expose the arguments that take place
in the EC governing council and therefore aid credibility, understanding,
legitimacy and accountability of the ECB. Others will say that
the risk of regional bias would increase if members of the governing
board stay themselves accountable to their national governments,
or national systems in some respects. There have been proposals
for anonymously publishing the minutes without identifying individual
members. We have found here in the UK that publishing the minutes
is a very useful contribution to the debate. I do not want to
say that in some respects the ECB is an untransparent body. It
has slightly different ways of achieving a great deal of transparency
in its actions.
(Ms Owen) One of the things we did, and you probably
read this in the policy frameworks EMU study, was to have a look
at evidence of the extent to which the markets were surprised
by decisions that the ECB and the Bank of England made. That showed,
on balance, that the markets had correctly anticipated decisions.
We inferred from that they felt they were getting enough information
about the way the Bank worked at the moment. One other risk that
some academics have highlighted if you were to publish votes,
is that the real debate would start to happen in fora other than
the general council. That is just a risk.
228. It would be possible to publish minutes
without votes, as the Minister was saying?
(Ms Owen) Yes.
229. You have mentioned several times that the
task of the ECB is much more difficult than that of the Bank of
England; it faces complex problems and these are going to get
infinitely more complex after enlargement. I want to come back
to the question of structure and the governance of the Central
Bank after enlargement. There are proposals which have been made
which are really a terrible dog's breakfast. There is a proposal
which seems almost certain to lead to weak compromise and indecisiveness.
What one wants is an input from all governments but surely we
need an executive, a body selected on the basis of expertise,
that can be decisive in its approach to these complex problems?
Why on earth is HMG supporting a dog's breakfast? What on earth
is the justification?
(Ruth Kelly) We clearly need a body which is composed
of experts. I think you can have that debate about whether national
central bank governors are experts or not; but actually there
must be an argument that they are. They do come from right across
the Euro Zone and they are mandated to take a euro-wide view in
the constitution. It is a totally valid point: could it be made
better; and could it be made to work more efficiently? I do not
think it is right to write-off the way it operates.
230. Under proposals for enlargement it will
make it much more difficult?
(Ruth Kelly) In some respects the proposals for enlargement
will improve the current situation because, as we talk about regional
bias and people becoming entrenched in their positions in the
ECB Board, there is a potential for that to weaken after enlargement
given the rotating nature of representation. The proposals were
also ones which would allow the UK to maintain a significant degree
of input were we ever to be members of the euro. By and large,
we are satisfied with them as an improvement on the current position,
recognising the reality of enlargement. Of course, there may well
be areas and ways in which this can improve in the future.
(Ms Owen) I think the difficulty here is finding something
better. You do have to balance the size of the group and the numbers
voting with the legitimacy arguments. In the US in the Federal
Reserve not everybody attending the meeting gets a vote. Of the
12 Regional Feds, the New York Fed always get a vote because of
their importance in the financial sector; but of the remaining
it does rotate. At the end of the day the ECB and the Federal
Reserve do look to do things by consensus. Everybody will attend
the meeting and be able to speak, so there is that safeguard there
231. Under the Treaty, the ECB of course, had
to get complete unanimity in the Governing Council for any proposal
it put forward. Although one could think of better ways of doing
it, there was no other way which could have been agreed unanimously
in the Governing Council.
(Ruth Kelly) We have to recognise the realities under
which the ECB operates.
232. One point on the draft constitution produced
by the Convention. I understand there has been some concern by
the ECB that there is no mention of price stability or non-inflationary
growth. Is HMG arguing on the details in the draft constitution
for changes relating to the ECB?
(Ruth Kelly) It is not for us to tell the ECB how
to operate at the moment. I think it is a pretty fundamental point.
We can influence the debate indirectly, but we are not going to
tell the ECB how to operate.
233. I am sorry, you misunderstand me. The debate
is on the constitution. The constitution covers everything, including
the ECB. The role of HMG in the negotiation of the constitution
(Ruth Kelly) Absolutely. I take your point. We do
accept that price stability ought to be part of it. We are happy
to support that proposal.
(Ms Owen) I think most Ecofin ministers have also
supported the ECB in having price stability included as an objective.
234. There is another point that concerns me.
There is no reference to any desire for independence of National
Central Banks. What is your position on that?
(Ms Owen) We think that clarification would be helpful.
Lord Hannay of Chiswick
235. Could I just go back to this business of
the IGC and the price stability and so on. If I understood it
rightly, the concern which has been expressed is not that the
ECB will have in any way been weakened by what is or is not said
in a constitutional agreement because, of course, one of the things
a constitutional agreement does is to carry through the whole
Maastricht structure into the new treaties. The ECB will not be
affected one way or the other. The question is surely whether
the European Union as a whole, involving countries which are in
the ECB and EMU and those who are not in the ECB and EMU, should
state that it is one of its objectives to achieve price stability
etc etc. I imagine it is one of the objectives of the British
Government to so state it, and there is only one way to make that
quite clear and that is to have it in the constitutional agreement;
not to have it in a bit of the constitutional agreement which
refers to countries which do not include us at the moment?
(Ruth Kelly) Yes, you are absolutely right, and we
are supporting clarification of this.
(Mr Woods) The price stability objective is in the
1998 Bank of England Act. This sets out the price stability objective.
Chairman: I have to say, it has been extremely
helpful to us. In quite a short time we have covered the whole
of this bit of our waterfront, as it were. You have highlighted
a number of points and you have answered a number of our questions.
Thank you very much indeed. Exemplary witnesses!