Examination of Witnesses (Questions 210-219)|
KELLY MP, MS
TUESDAY 7 OCTOBER 2003
210. Welcome, Financial Secretary. Would you
like to introduce your team?
(Ruth Kelly) I think it would be easier
if they introduced themselves.
(Mr Woods) I am Robert Woods, Head of the Fiscal and
Macroeconomic Policy Team.
(Ms Owen) Sue Owen. I am Head of the Directorate that
deals with EMU policy, Euro Preparations, and I am now Deputy
on the Economic and Financial Committee.
211. Thank you. Is there anything you would
like to say at this point?
(Ruth Kelly) No, I am quite happy to get stuck in,
my Lord Chairman.
212. As you know, we have been doing this investigation
and we want to produce a report on the progress of the European
Central Bank. As I understand it, the Chancellor told the House
of Commons that the Government would continue to seek reform of
the ECB, but he did not actually say what reforms he was seeking.
I would be grateful if you would try and elucidate the Chancellor's
(Ruth Kelly) I think the key thing to recognise here
is that monetary policy and the way monetary policy works is an
evolving process. Indeed, when we looked at different monetary
policy frameworks as part of our work on the five tests, one of
the papers we produced alongside the assessment was a paper looking
at the Federal Reserve and the operation of the Federal Reserve
since its inception. The key lesson that emerged from that was
that the Fed had evolved over time. I do not think what the Chancellor
is saying is to look at the ECB and say, "That's not right,
something needs to be fixed". It is a question of recognising
that the ECB should evolve over time, should seek best practice
in all areas, and of course to look to see what other models exist,
and to have an influence to the debate and to seek a great debate
about how the most appropriate monetary policy framework could
213. Presumably the Chancellor has a certain
idea of his own in mind when looking at these other systems?
(Ruth Kelly) Yes and no. I think we have to recognise,
and it is absolutely right to recognise, that the ECB comes from
a completely different tradition from the Bank of England, for
instance. It imports a lot of its credibility because it is modelled
on the Bundesbank constitution, and that is a completely reasonable
way for the ECB to have developed. The Bank of England, when it
was made independent, had an extremely different task. It did
not have the credibility of the Bundesbank then as an example.
It had different questions of legitimacy. It could, as it were,
start from scratch. We could think about how to use the institution
as a mechanism of establishing credibility. We have pursued different
routes. However, our contribution to this debate is, firstly,
as an exemplar. The Bank of England as it operates in practice
influences the debate by its naturethe fact that it is
there and it is different. Secondly, we seek to influence the
debate by publishing extensively the academic literature on central
bank independence and so forth; and, of course, we contribute
to the debate in other ways. What we want to do always is to go
right back, as it were, to first principles and say, "How
can we have a system which maximises credibility, which is legitimate
and accountable and as transparent as possible?", while recognising
that there are very different traditions in which they operate.
Rather than seeking specific reforms, I think it is a general
approach that we want to deepen and develop the debate. To its
credit, I think the ECB also shares that view and is interested
in the ongoing policy debate, for instance, about whether the
inflation target should be symmetric; whether the medium-term
should be defining some of the questions your Committee has been
looking at; how the fiscal policy coordination works in practice;
and how accountability and predictability of decision-making can
be increased. All of these areas are ones on which academics have
published and are ones we are seeking to explore to deepen the
214. Would you agree with the view that in practice
there is very little difference in the way central banks operate,
and the only differences were rhetorical?
(Ruth Kelly) If you take the Bank of England and the
ECB, despite their very different cultures and traditions, they
have probably both operated in a fairly appropriate manner over
the past number of years. They have stabilised output more than
in previous times of economic weakness; they have maintained low
inflation throughout the period; and they seek through maintaining
price stability to underpin the economic policiesin the
case of the UK the UK Government, and in the case of the ECB of
the Euro Zone. I think it is probably fair to say that the Fed
operates in a fairly similar manner, despite the fact that it
is constitutionally set up in quite a different respect. Yes,
I would agree that, in practice, they have operated in fairly
similar ways, although obviously the manner in which that is expressed
(Ms Owen) One other thing to add there is, the ECB
in some ways does have a much more challenging and difficult task
from the Bank of England because it is dealing with the euro-area
which is made up of many different countries. If you think of
the issue of how you coordinate fiscal and monetary policy, in
the UK that is rather easier as a Treasury observer at the Monetary
Policy Committee and with a lot of exchange of information. In
the case of the euro-area the ECB do attend the sort of meetings
I attend, which are meetings of the fiscal bodies; and the fiscal
authorities have some way of being represented at ECB meetingsthe
Commission go and the Chair of the Eurogroup may also go. Whilst
there are a lot of similarities, there are some differences which
are more challenging.
Lord Hannay of Chiswick
215. May I ask two questionsthe first
arises from your answer. I welcome very much what you say about
this being an evolutionary process, and what we are looking for
is an evolutionary, evolving European Central Bank. Would you
not agree that to talk about our wanting to see reform of the
Central Bank is potentially rather misleading, frankly, in that
context? I would not be so crude as to ask you what date you think
we might become a member of the European Central Bank, that is
unknown, but if what we are asking for is that the Central Bank
evolve, and it is already evolving, then potentially it is misleading
to say we want it to be reformed, because many terrible things
are done in the name of the word "reform", and many
good ones. I think it is misleading. Secondly, and this is more
of a substantive question, the InterGovernmental Conference has
now opened and it is considering all the institutions of the European
Union. We were told, in testimony that was given to us, about
the way the Central Bank had come up with a solution to enlargement
(which could perhaps be politely described as a bit "counterintuitive"),
that they were forced into this solution because the terms of
the Nice Treaty, which gave them and the Member States the ability
to make changes, circumscribed that ability very tightly and did
not allow them to think more widely or more laterally of solutions
which might have been better, like a Monetary Policy Committee
with a governing council that was the oversight body of the Monetary
Policy Committee, and the Monetary Policy Committee would be much
less onerous etc. They said that this had been outwith their possibilities
because the Nice Treaty did not delegate that power to the Ecofin
Council, the Eurogroup or the ECB. My question is: what thought
is being given, in the IGC context, to somewhat enlarging the
scope for reform of that particular institution, the ECB, in the
futuregiven that I suppose many people hope that the constitutional
agreement will last for a considerable time without amendment,
and that it is very cumbersome indeed to get 25 ratifications
just because you want to change somewhat the way the ECB works.
Could you say whether the Government is giving any thought to
using the IGC in a constructive way? I recognise not being a member
of the single currency puts us in a slightly difficult position,
but I would have thought there could be some general desire to
make use of this occasion to build in some more potential flexibility?
(Ruth Kelly) Just on your first point, about whether
or not it is misleading to talk about reform of the ECB, not at
all. I think the Chancellor has been really explicit in saying
that this is not a sixth test as to whether we join in or not.
In our general work on policy frameworks we are deeply engaged
in looking at Central Bank independence and debates around that.
Of course, we seek to continually improve our understanding of
those areas; and, by doing so, will clearly influence others in
a European context as well. On the point about the IGC, in all
of this, I really should have said at the outset, it is not for
us to lecture the ECB about how they run their affairs. As you
rightly point out, we are not members of EMU at the moment and
we have to be sensitive to that fact. We influence the debate
in other waysof course, through dialogue, but also just
by having a very well functioning model in the UK, and by engaging
in an academic debate and publishing academic literature on these
subjects. You talk about the ECB governing council and how it
is modelled and what it will look like following enlargement and
so forthagain, we have to be quite careful about our relationship
with this dialogue because we are not members of EMU.
216. You have supported the current solution,
despite the fact that it could be pretty cumbersome?
(Ruth Kelly) What we have said is that it is satisfactory
from our point of view. We do understand that it is probably the
case that the Fins are likely to raise in the IGC the possibility
of an enabling clause being inserted, which would allow members
to revisit how the board is comprised in future without having
to amend the Treaty and going through the whole process all over
again. Our attitude to that as a government is, "Let's wait
and see what is actually proposed, and we'll look at anything
on its merits". Of course, we are open to dialogue on areas
just such as this.
217. You mentioned that the Bank of England
and ECB have reached their position by different routes, and we
understand that. One of the big differences is that the Chancellor
of the Exchequer did set the limits, so there was some outside
accountability. It is that absence of outside accountability that
does concern me. They decide the issues and then implement them.
Should the same body be able to do both: decide the issues and
administer them without any outside involvement? Your colleague
mentioned that the fiscal authorities have some way of being represented,
but is that really enough? Particularly as there are going to
be 25, with this kind of to-ing and fro-ing, is that proper accountability
or is it just ideas that can come from anywhere? What bothers
me is what is the body that could produce this outside influence
that perhaps has rather more significance than anything we have
seen so far?
(Ruth Kelly) You are absolutely right to point to
the fact that we come from very, very different traditions. I
think that, by and large, explains the difference in approach
between the Bank of England and the way the ECB was set up and
constituted. I think it was almost inevitable for reasons of legitimacy
and acceptability, particularly in Germany, that price stability
was embedded in the constitution of the ECB in a manner very similar
to that of the Bundesbank. Over time the ECB has shown a willingness
to evolve; has clarified its objectives; has clearly shown a willingness
to listen to the academic debate, both when it comes to defining
an inflation target, being sensitive to risks of deflation, and
showing how it is going to operate over the medium-term; and becoming
more forward-looking for instance. I think that is very encouraging.
What is very important in a situation where that independence
of target-setting is embedded in the constitution is that there
should be very clear mechanisms for communicating between the
monetary and fiscal authorities. If there is one area where we
really see a need for improvement it is in that debate.
218. You are talking about the inflation target?
(Ruth Kelly) I am talking about the debate between
the ECB and the fiscal authorities in Europe. It is very simple
in the UK, relatively speaking, because we have one MPC; we have
the Government; the Government sets its own policy objectives
and it sets the inflation target; and there is a completely shared
understanding of objectives. The Treasury representative sits
on the MPC Board as a non-voting member, an observer, and he explains
the Government's approach to fiscal strategy and can report back
so that fiscal authorities really understand what the monetary
policy reaction will be to a change in fiscal stance and so forth.
It becomes a much more predictable process. Particularly when
you do not necessarily have the relative simplicity that we have
in the UK. With the more complex environment in Europe the communication
between monetary policy and fiscal policy becomes even more important.
There are mechanisms for that to happen at a European level, but
the ECB has guarded its independence very, very closely. There
is an argument which says they should be much more forthcoming
about the future direction of monetary policy and how they interpret
the fiscal authorities' reactions, stances and so forth; and that
you would thereby produce a better monetary/fiscal policy mix.
I think that is a very important area. In some senses I think
you could say that the Member States have been so preoccupied
with the Stability and Growth Pact and so forth that in a way
this debate is one that has yet still to happen, but I am sure
that it will happen over time.
219. You said the mechanisms for communication
and co-ordination between fiscal and monetary policy are not in
place in some sort of way. I did not quite understand that.
(Ruth Kelly) The President of the Council attends
ECB meetings, as far as I understand. ECB representatives come
and debate with Member States. The ECB traditionally has viewed
its role as listening rather than engaging, I think it would be
fair to say.