127. We return now to the question
we raised at the beginning of this Part of the Report. We have
been impressed by the political will demonstrated by the 11 in
achieving the present degree of inflation convergence and deficit
reduction. In the light of this political will we ask whether
arrangements for the ECB are generally conducive to stability,
growth and employment.
128. The ECB has been well-prepared.
Its forerunner, the EMI, has been actively engaged in bringing
matters to the point where decisions can be quickly taken once
the ECB is formally in existence. It is our impression that the
EMI has worked thoroughly and impressively at its task. The ECB
itself will be well-armoured in statutory independence. Its Executive
Board and Governing Council will contain the brightest and best
of the breed of central bankers. We are confident that the ECB
will be able to determine a sensibly pragmatic strategy for achieving
price stability defined in an acceptable way. Within the limits
of its role, as envisaged by the Treaty, we are optimistic that
the ECB can and will do a good job of achieving price stability
across the euro zone.
129. Turning to the management of fiscal
balances and the operation of the stability pact, it is to be
hoped that a powerful combination of intellectual conviction and
perceived self-interest over the medium term will lead to a workable
combination of national fiscal policies across the euro zone.
We do not expect the ultimate financial penalties available under
the stability pact to be imposed because we expect governments
to steer a more prudent course. There is some risk that a major
recession, if it occurred, would be associated in people's minds
with the actions of the ECB or with the constraints of the stability
pact. We cannot deny that then there would be a dangerwhich
we do not attempt to quantifyof political extremism causing
pressure for a Member State to withdraw from EMU. However, we
see this as a prospect which would only come about following prolonged
economic mismanagement probably resulting from a failure of political
will to make necessary domestic structural reforms.
130. Some of our witnesses considered
whether short-term strains in particular countries or regions
could or should be alleviated by some EC counter-cyclical fund.
We have to say that, at present, we see no political prospect
of this being agreed, even at a modest or token level although
we think that this should be given further consideration. The
perceived burdens of enlargement of the EU to the east and the
strains of reform of the Common Agricultural Policy and the regional
aid funds are, we think, sufficient to block any movement in this
direction for some years to come. However, we recognise that politicians
are often more creative than the treaties or rules that were agreed
by their predecessors in earlier and different circumstances.
Rules, including those governing the financial perspective of
the EC, can be amended in response to compelling needs. We would
not rule out at some time, after enlargement of the EU and after
EMU has bedded down, further consideration being given to a modest
enlargement of the EC Budget with some provision for short-term
counter-cyclical compensation payments.
131. The two principal potential economic
dangers to the success of the single currency that we see are
fiscal profligacyexcessive and unjustified budget deficitsand
failure to make structural reforms. The first danger, we think,
is much reduced by the prevailing and strengthening culture of
stability. Sustained efforts to reduce national debt ratios will
certainly be required by some countries. The greater potential
danger, we think, comes from the possibility of national failure
to make essential structural reforms. We think that Ecofin and
Euro-X and the Commission, at EU level, need to wage and sustain
a vigorous campaign for these reforms, perhaps as part of the
process of multi-lateral surveillance. The responsibility for
implementation of structural reform rests with national governments
who, in due course, will have to convince their electorates that
these reforms are required, with or without the single currency,
and will lead to greater economic health and prosperity.
132. There is also a political danger
that the pursuit of national interests may hamper the smooth functioning
of the ECB and the single currency. The manner of the appointment
of the first President of the ECB is a prime example.
133. The single currency will come
about for 11 countries and now seems certain to proceed on time.
This is an immense andfrom the perspective of only one
year agoa surprising achievement. It is the result of a
sustained investment of political will by the leaders of the countries
involved. The preparation process has called for, and received,
considerable effort and has already affected the lives of ordinary
citizens. Once adopted, the single currency is not absolutely
irreversible, although it is intended to be so. However, the political
and economic costs of failure would be such that we assume an
overwhelming political will to make it acceptable and successful.
The European Central Bank is an essential element in the operation
of the single currency. While the risks are considerable we do
not expect it to be allowed to fail.
134. The Committee considers that the
operation of the European Central Bank raises important questions
to which the attention of the House should be drawn, and makes
this Report to the House for debate.
21 Article 2. Back
The EFC is set up by the provisions of Article 109c(2). These
are summarised in paragraph 24 of this Report. Back
See Q 281. Back
See paragraph 32 above (Q 403). Back
See paragraph 105 above. Back
See paragraph 22 above. Back
Concern was expressed by Mr Volcker: see paragraph 94 above. Back