One Money, Many Countries

National influence in the Governing Board of the European Central Bank should be reduced in favour of the Executive Board. The European Parliament should have a greater role in the appointment of the Board and – as a European political authority – set the ECB’s inflation target. The ECB should not be concerned about a ‘weak euro’ on the forex markets. These are among the conclusions in the second report in the Monitoring the European Central Bank (MECB) series published by the Centre for Economic Policy Research.

The report argues that the Bank had a successful first year, for example in coping with asymmetries between the different economies that make up the euro-zone. But the ECB suffers from an endemic problem as an EU institution: it has been given economic tasks at the European level with a design adapted to national political interests. Therefore, the report does not support the demands for the publication of voting records and minutes which focus on individual (read national) differences – a least not until reforms have made the ECB goal-dependent.

The Bank has not yet had to deal with banking crises in the single currency area, so its ability to maintain financial stability remains untested. MECB2 says that the collision between European integration and national politics creates problems also in this area: a centralised approach is desirable but politically unachievable in the short to medium run. In the meantime, the report favours a truly decentralised approach, transferring more monitoring and evaluation functions to the market. Such decentralisation would be based on Europe-wide disclosure principles and supported by incentives to promote financial soundness. The ECB could use its legal rights to get this process going.

On the euro exchange rate, which fell sharply against the dollar in 1999, the report says: ‘It is less plausible than before to treat the dollar as a natural yardstick.’ The Swiss franc has shown similar trends to the euro, but nobody regards it as weak, so ‘Lamenting a weak euro is patently unjustified.’ But the report notes that European long-term interest rates are still heavily influenced by conditions in the United States. That, and the fall in the euro against the dollar, suggests that market participants are not convinced that the ECB will treat the euro-dollar exchange rate with benign neglect.

There has been widespread criticism of many aspects of the ECB’s operations. It has been seen as lacking in transparency and accountability, especially when compared with the Bank of England. Thus it decides what price stability means in practice without any political counterweight. The ECB is seeking to be judged on how it achieves its stated goals rather than explaining how it intends to meet those goals. According to the report, ‘The monetary policy framework, with its emphasis on “two pillars”, seems better designed to conceal strategy than to help the public understand it. Not only do the words fail to reveal the ECB’s reasoning, but they do not always match its deeds.’ The two pillars are a money growth target and a number of unspecified indicators including the exchange rate and asset prices. The report comments, ‘the ECB’s strategy is unavoidably seen as obscure, often even archaic.’

In the longer run, the Bank suffers from two handicaps in gaining political legitimacy. In setting its goals the ECB’s actions are open to political debate; the chains of delegation from citizens to the Governing Council are long and complex, with no possibility of issuing instructions.

On the technical side, the report says the TARGET wholesale payments system has delivered on its promises. But retail payments remain far too costly due to antiquated and anti-competitive banking practices.

Notes for Editors:

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The Authors:

Carlo Favero is affiliated to IGIER at Università Bocconi, Milan and is a Research Fellow in CEPR’s International Macroeconomics research programme. Xavier Freixas is Professor of Economics at Universitat Pompeu Fabra, Barcelona and a Research Fellow in CEPR’s Financial Economics research programme. Torsten Persson is Professor of Economics at the Institute for International Economic Studies, Stockholm University and a Research Fellow in CEPR’s International Macroeconomics and Public Policy research programmes. Charles Wyplosz is Professor of Economics at the Graduate Institute of International Studies, Geneva and Co-Director of CEPR’s International Macroeconomics research programme.