Examination of Witnesses (Questions 100-120)|
TUESDAY 17 JUNE 2003
100. Coming on to the modalities, there is a
widespread feeling which I suspect you share that the proposed
system is too cumbersome, will make the situation worse and will
add to the fears which Roger Bootle earlier expressed. It would
be much better if one had some sort of advisory body which reflected
national inputs but had an executive council which took the decisions.
However, while this might be much more efficient, is it not likely
that the kind of people who would constitute that executive body,
the bankers, would be precisely the people who inherit the spirit
of the Bundesbank, who think in terms of low inflation targets
rather than slightly higher inflation targets and who might be
a little too cautious and too slow to act when action is needed?
How can one ensure that there is an input into an executive body
which counteracts what one suspects are the slightly too strong,
anti-inflationary tendencies of the executive?
(Professor Giavazzi) We are coming to
the core of the problem. There is a significant amount of discretion
in the way the ECB operates. The people who sit on central bank
boards are crucial for the way the discretion is utilised. There
are two aspects of the problem, that are both important. One is
the operating procedures. How do they decide? How do they vote?
Who votes? The second is how are they appointed and who appoints
them? On the appointment procedure, the political process is very
much lacking. We will know tomorrow if the current governor of
the Bank of France will be suited to become the next president.
Assume he is not. What is the procedure whereby a new president
is chosen? Mr Chirac will go to the meeting of heads of state
and will say, "Here is my alternative candidate" without
any scrutiny. It is very difficult at that point to say, "Who
is the alternative? Among whom are you choosing this person?"
We have recently had the replacement of a member of the board,
the Finnish lady whose name I have forgotten, with the deputy
governor of the Bank of Austria. Again, there has not been an
alternative. What was the process whereby the deputy governor
of the Bank of Austria was chosen? Most likely she is the best
candidate for the post, but I do not think there has been an open
scrutiny. Because individuals are so important, the way they are
selected is very important and here the political process falls
down. It is not the fault of the bank. It is the fault of the
way that the Council of heads of state, which is responsible for
the appointments, comes to a decision. They should have a nomination
list of three or four people for each post and a discussion. On
the second part, I think the bank has made an enormous step forward
with the recent appointment of the new vice-president, Lucas Papademos,
who is a wonderful economist in my view. The presence of Papademos
on the board has visibly changed the way the board operates in
the few months he has been there.
101. The logic of what the Professor is saying
is that nationality and the right of a particular country to nominate
should play no part in the thing. How do we get away from that?
(Professor Giavazzi) Procedures are important.
The new appointments on the executive board that sits in Frankfurt
should come at the end of a procedure with a nominating committee.
The heads of state could appoint a committee and individual countries
could come up with suggested names, but then have a procedure
where the names are discussed, one against the other. You cannot
get rid of nationality in Europe. But we do not want the situation
where the new president is hand picked by Mr Chirac, simply because
there is no procedure.
Lord Lea of Crondall
102. Given the many public appointments these
days, you could wind up with a position where the head of NATO,
the head of the European Commission, the head of the United Nations
and everything was French. On the other hand, we could on the
criterion or pure merit wind up in the position that all four
top jobs were French. Would our two witnesses not agree that instead
of just being pious about this problem of transparency of candidates
and criteria of selection it is quite difficult to write down
a note as to how far one can take account of gender, ethnic minorities,
regional balance and so on, because it is not the position, whether
Chirac nominates or not, that you can wind up with all the four
excellent candidates that get all the four jobs being French.
I think it is a bit of a challenge, not just to leave itwould
you agree?saying that there ought to be transparent criteria
but saying, "What are these transparent criteria?"
(Professor Giavazzi) The fact that it
is not easy does not mean we should not try. Let me give you an
example of what I consider a disaster, which was the procedure
whereby we selected a new managing director for the IMF two or
three years back. If you remember, the job had traditionally been
European. It had always been French. The Germans said it ought
to change; it ought to be German. Germany came up with a candidate.
Everybody else said no. We ended up with the second best candidate
who had to be German and, in my view, this candidate was inferior
to the previous one. Now we are stuck with someone who, in the
general view, is not the best person to run the IMF. The post
will expire in a year and a half and there is no procedure, so
once again we will end up with a new managing director of the
IMF chosen non-transparently. It is difficult to set down rules
for this committee but even the fact of having a committee where
people openly compare candidates is an enormous step ahead.
Lord Armstrong of Ilminster
103. So long as heads of state and government
retain the final decision on the appointment of the presidentand
I do not think they are going to let that gowe shall inevitably
have the process of political horse trading with heads of state
of government where one person says, "I want this job for
a Frenchman and if you give me that I will give you this other
job for an Englishman." I fear that we are not yet ready
in terms of political human nature for the more ideal system which
you propose. I wonder if you would like to comment?
(Mr Bootle) I was going to return to
Lord Lea's hypothetical situation whereby, the jobs being decided
on merit, the top four all went to Frenchmen. I should have thought
that was almost impossible. There is a difference between a situation
where the whole system was constructed in order to allow national
representatives at every stage voting in every way on the one
hand and on the other a system of checks against complete national
domination. We ought to have a system whereby if the best candidates
for the top two jobs were French those two candidates got the
jobs. It might be acceptable even if the top three went that way
but the top four probably is not acceptable. We have to build
in some way, formal or informal, of stopping that. That does not
necessarily mean that the way you do that is by having every country,
however large, with a vote, albeit in the ridiculously complicated
procedures being evolved under the voting modalities.
104. We seem to be cantering slightly round
the course but not approaching the winning post. I have two linked
questions. The size of the executive board. Professor, you spoke
about that just now but then very skilfully skirted away from
it. Are you satisfied with its present size in itself and are
you satisfied with its present size relative to the governing
council? Coming back most recently to Lord Armstrong's question,
I agree with Lord Armstrong. What roles do you see respectively,
in the context of the appointment of the president and members
of the executive board, for the Commission, the European Council,
the European Parliament and national parliaments?
(Professor Giavazzi) The body which makes
monetary policy decisions should be relatively small. We should
have outside presence as well. My ideal composition would be the
six members of the executive board plus five outsiders with the
President for casting a decisive vote. The five outsiders should
again be chosen not among central bankers, like the non-Bank of
England members of the Monetary Policy Committee. These 11 people
should make monthly policy decisions. National central bank governors
play an important role in bringing to the decision table information
about local conditions. They should participate in the meetings.
They should explain what the economic conditions are in Portugal
as opposed to Finland or Ireland, but they should not cast a vote.
The vote should be cast by the 11, in my view. We come to the
selection procedures. I think the appointment should stay with
the heads of state. Currently, the heads of state decide on a
proposal by the finance minister, by ECOFIN, and there should
be open hearings in the European Parliament and probably in the
Economic Committee of the European Parliament.
105. Those European Parliament hearings therefore,
in your opinion, would not be binding?
(Professor Giavazzi) In this country they are not
binding. The select committee could not turn down a member of
the MPC appointed by the government. I would go as far as giving
the committee of the European Parliament, like in the USA, the
possibility of voting against a proposed member. Going back to
Lord Armstrong's suggestion, I agree that it is difficult, but
if you look at what is happening in the European Commission the
top administrative jobs, notably recently the appointment of the
director general for economic and financial affairs, Mr Regling,
happened through a process of committee. The Commission, in the
case of Mr Regling, had appointed a committee which included both
insiders from the Commission and outside experts. These people
went through a list of potential candidates and came back to the
Commission with a list of three candidates who were deemed suitable
for the job. You may tell me that Mr Regling had to be German
but at least the process through which we got this particular
German candidate was far ahead of what we are seeing in the ECB.
(Mr Bootle) On the subject of the size of the executive
board, I would have thought that from an objective standpoint
there were no strong grounds for thinking that the board would
perform better if it were larger. It is already one member larger
than the Bank of England, for instance, and I do not see what
is to be gained by having it larger. The argument for having it
larger only exists in the context of the voting arrangements for
the whole governing council and that goes to the questions we
debated earlier on. It may well be that, given the proposals as
they are, the strengthening of the executive would be desirable
but that also leads to an even larger body which cannot make for
efficient decisions. In an ideal world, I would have thought six
or maybe even a lower number would be fine but in the context
of a different system of voting. I very much agree with the suggestion
of the Professor that there should be external members. There
is nothing magic about 11 but it is certainly not very different
from the situation we have in the UK. With regard to the question
of appointments and scrutiny, can I comment on the business of
candidates appearing before the European Parliament for approval
or the opposite? I do not think the UK experience in this regard
is a particularly happy one in that the MPC prospective members
are interviewed and questioned by a parliamentary committee but
the parliamentary committee does not have the capacity to overturn
the appointments. The result of that has been some considerable
embarrassment and undermining of the authority of prospective
MPS members to achieve not a great deal. I am tempted to suggest
that if there is that system there has to be some teeth and the
power to overturn an appointment.
106. In other words, with teeth would come responsibility?
(Mr Bootle) Yes.
107. At the moment they are the worst of both
(Mr Bootle) Exactly.
Lord Armstrong of Ilminster
108. Some of those who have given evidence to
us on this, while favouring in principle a much more European
method of selection for members of the governing council, nonetheless
think that in the present state of things we have to have regard
to the need for some form of national representation on the governing
council. If one accepts that and therefore one accepts the decision
made for the voting modalities after enlargement, do you think
it would be helpful to add to the system some kind of advisory
body like the Monetary Policy Committee which would come out each
month, if you like, with a public report as to what they consider
is the right course of action to take on the interest rate, while
the formal decision would have to remain to be dealt with according
to the decision that has just been taken? In other words, you
would get the expert opinion which the Monetary Policy Committee
would provide and any departure from that by the executive board
on the governing council would have to be justified.
(Mr Bootle) There are some attractions
to that idea but, because of the technical qualifications of the
independent committee, one would expect that that would make members
voting on interest rate decisions on the governing council circumspect
and narrow and national considerations whose individual considerations
over and above the pursuit of the target as specified in the eurozone
as a whole would determine interest rate decisions. However, it
seems to me that this would carry some very serious dangers, undermining
the authority of the ECB governing council. There would be occasions
presumably when the advice was not followed and again greatly
complicating the whole process of decision making and lessening
the authority of the bodies in question. I said earlier on that
I thought there was a serious danger that when you over-complicate
or confuse you make monetary policy less effective. This was going
to be a serious problem potentially when we came to face deflation.
Imagine the position we could have if this advisory committee
came out with a completely different set of advice from the decisions
taken by the ECB. I think that would be quite disturbing for the
public and I do not think it would go in the direction of strong
109. My question is one to which I expect the
answer yes but, since we go on what the witnesses say and not
what the Committee Members say, I want to put it to you, following
up your joint view that Parliament could have which would be like
the American advice and consent procedure. If one faces the disadvantages
which exist, the need to balance national interests and the kind
of IMF situation the Professor mentioned before, is it not much
less likely that you would get a Horst Goehler position if they
had to submit it to Parliament and knew that Parliament could
be bloody minded and reject the candidate? Is this not likely
to be a discipline which would tend to improve the prospects of
a committee type solution, with good candidates being put forward,
people who would stand up to criticism by the Parliament and could
not just be somebody put forward by one of the people at the European
Council simply because this would solve the domestic, political
(Professor Giavazzi) I fully agree. If
you have to go through a vote of a parliamentary committee, they
are going to put up candidates above any doubt whose qualifications
are excellent and half-way candidates would not be put up.
110. What do you feel about the recent decision
of the European Council to amend the voting system of the governing
(Professor Giavazzi) I agree that it
is a bad process because it brings us to a voting group that moves
up to 21 individuals with a rotation mechanism. It has not yet
been specified how frequently it will rotate. It depends for how
long some countries will go without a vote. The whole idea of
21 people making a decision with this very strong national bias
goes against good practice in monetary policy. I think one should
put limited blame on the ECB. What they were allowed to do under
Article 5 of the Nice Treaty was extremely limited, changing a
line of the statute of the bank. The ECB council is right when
they say, given what they were allowed to do, this was the maximum
they could do. One could reply that they could have said, "We
will not do anything because the remit is not wide enough"
but they could not do much given the Treaty. It is a political
problem and it is not entirely the ECB's fault. I still believe
there is some confusion on this but my understanding is that the
proposal by the ECB has not been fully accepted yet. There is
a negative vote by the Economic Committee of the European Parliament.
There is a very sceptical opinion expressed by the Commission
and I think the issue is still wide open.
111. Despite the fact that the Council has agreed
(Professor Giavazzi) The Council agreed but it also
said this should also be considered by the Convention along with
proposals for the composition of the Commission, which leaves
open the possibility that in the IGC the issue could be opened
again. That is the interpretation of many people around Europe.
(Mr Bootle) I agree with what the Professor has said.
The aspect that particularly concerns me is the whole business
of rotation. I am concerned about the interpretation of policy,
the way it is understood and the ability of policy to influence
public opinion, to give conviction and to bring confidence. You
are not going to have a completely consistent set of thinking
or voting when you have a system of rotation. There could be some
awkward situations whereby decisions were undone, directions changed,
because of a change in the composition of the voting group. That
I do not think inspires confidence by the general public. It tends
to consolidate the impression of decisions being made according
to arcane rules. Decisions could emerge in which one could have
not very much faith. One could not necessarily trace through a
series of events and arguments and link them clearly with the
decision in the way that you can with the MPC. You can see a history
evolving in the way people's thinking has gone and the element
of rotation undermines that.
112. What do you feel about the idea that the
ECB should publish minutes of the meetings of the governing council?
(Professor Giavazzi) I think minutes would be important
but one should however realise that if you read the minutes of
the Federal Open Market Committee of the Fed you will not learn
very much because you can always write minutes in a way that shows
everybody is happy.
113. Lord Armstrong has a great deal of experience
(Professor Giavazzi) The teeth come in the actual
vote. Knowing the votes would be important because we would know
that they vote. Nobody has said how they vote. In the current
system without an independent committee, I would be worried about
publishing individual votes. I would not want the papers the next
day to say, "Spain voted in favour and Italy voted against."
With an independent committee, I think votes should be published.
(Mr Bootle) I strongly believe that there should be
published minutes with records of votes. The main reason is to
properly engage a discussion between the ECB and commentators
and experts outside the ECB. In this country I think policy has
been greatly improved by this. We understand much better the way
the MPC is thinking and, dare I say it, I think also the MPC's
thought processes are improved by having this sort of interchange.
It is extremely healthy. What emerges out of that is a much stronger
decision making process in which people can have much more faith
and confidence. I realise there are difficulties because of the
national tradition again, but they have to be overcome and the
way to overcome them is to say somehow or other the national representation
principle has to be jumped.
114. You get over that by saying they do not
represent the nation. Therefore, they do not say, "Spain
voted X and Italy voted Y"?
(Mr Bootle) Exactly.
115. That would be your ideal situation?
(Mr Bootle) Yes.
Lord Armstrong of Ilminster
116. You would have the votes attributed, would
(Mr Bootle) I would, yes.
117. It might be an acceptable half-way house,
given the problems that we still have about nationality, to publish
the minutes but without attributing votes. Aggregates perhaps
but not the names.
(Mr Bootle) That would be some sort of
progress but it all depends on the way the minutes are written.
The important thing is I do not think there should be any shyness
about controversy. These are difficult issues and there should
not be any worry about revealing that some members were extremely
worried about deflation and others were not. We should see what
the arguments and what the reasons are for decisions.
Lord Lea of Crondall
118. I have to put the reaction that both of
our friends are wanting their cake and eating it at the same time.
Do we not have a trade-off situation here? It is not just a question
of being able to hit them all. Lord Marlesford asked you a question
on the hypothesis that we would get away from nationality. That
is one way of looking at it but if you want ownershipI
think you were both hinting: let's be adult and show that we have
an ownership of this through transparencyit is more responsible
for the Spanish person to have to be seen to be doing what he
is doing, albeit he is Spanish or because he is Spanish, either
way; but as maximum transparency, as roughly as the Monetary Policy
Committee of the Bank of England, because you do not get the sort
of embarrassment that would be implied by the Spanish voting this
way and the Germans voting that way. Unfortunately, is there not
a trade-off between the sort of ownership of the national responsibility
you get through that sort of transparency and the downside which
is that it is clearly very difficult? The Professor said he would
not want the names of the countries to be mentioned. Within the
present system where there are national nominations, you do have
that dilemma and it can only go one way or the other on a trade-off,
but you just cannot have everything.
(Professor Giavazzi) The current situation
should be to help the bank improve. In the case of inflation forecasting
and projection, they should be convinced to move in the direction
of an inflation report. Minutes would be helpful. We may not learn
very much but the minutes would be a move in the right direction.
Having the outcome of the vote without the individuals singled
(Professor Giavazzi) Because we would know. It makes
a big difference, if the last decision was taken with 10 against
8, or 17 against 1 or 18 in unison: if we know the vote, we know
what they think around the table. I would have a different view
about the ECB if I knew that the last decision was a marginal
one. In the current set-up where you still have the central bank
governors, I would be worried about publishing individual votes
because of the press reaction the next day. This allows you go
to all the way up to step minus one, which is to have the votes.
We would learn a lot. For example, think about the decision ten
days from now. The market would have a lot of information, knowing
whether the last decision was marginal or unanimous.
Lord Armstrong of Ilminster
120. The trouble is, in my experience, if you
record the numbers of votes each way anonymously, the speculation
the next day is such that within 24 hours or possibly six hours
everybody knows who voted which way. I do not know that anonymity
is going to be sufficient to provide the kind of protection that
we think we need. I do not know if you have any thoughts about
that. There are ways in which minutes can record the arguments
to and fro on one side without attributing them to any particular
person. Secondly, I should be unhappy if the process of counting
heads and saying "this is the consensus" may sometimes
be a very useful way of resolving the problem. Would you not regret
if every time a decision was made it had to be on the basis of
10 to 8, 12 to 16 or whatever, rather than by some kind of consensus?
(Professor Giavazzi) It is not the experience
of this country. In the years since you have had the Monetary
Policy Committee, at the beginning there was a lot of concern
about dissenting votes, but now markets, the press and the public
have come to understand even the last decision, which was quite
amazing, where all the outside members of the MPC voted one way
and the "internal" members in a different wayI
did not feel that the reaction was one of big surprise. People
have learned to live with the system and accept that there are
Chairman: I would like to thank you both for
a very stimulating hour. Thank you very much indeed.