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Friday, 25 February, 2000, 13:43 GMT
ECB 'must be more accountable'
Wim Duisenberg: managing the euro
Wim Duisenberg: managing the euro
The European Central Bank should be reformed in order to make it more accountable to politicians and the public.

That is the conclusion of a report by an influential pressure group, the Centre for Economic Policy Research (CEPR).

They have set up a group to monitor the performance of the ECB, which sets interest rates across Europe for those countries which are members of the single currency.

That makes the ECB, which has only been in existence for a single year, one of the most important policy making bodies in Europe.

But the ECB suffers from two problems, according to Professor Charles Wyplosz, author of the report.

No clear goal

First, it does not have a clear goal. Its mandate is vague - "promote price stability".

So far the ECB has defined price stability as keeping inflation in the eurozone at a rate of between 0% and 2%.

But, says Mr Wyplosz, it would be far better if the political authorities set the target, either in the council of ministers (Ecofin) or in the European Parliament, leaving the ECB to implement the target.

That way, it would be clear what its objective was, and many of the confusions would be cleared up.

They believe that the system in the UK, where the governor of the Bank of England and the Monetary Policy Committee are given a concrete target by the Chancellor, means there is more accountability in the system, and more predictability.

That helps markets understand what the central bank is up to and leads to lower interest rates.

Conflict between nation states

The other problem in the operation of the ECB is that it is run by a committee made up of the central bank governors from all 11 countries - who may still pursue their own national interests rather than those of Europe as a whole.

The problem has been particularly acute this year because Europe's largest economy, Germany, has been mired in recession, while some other countries on the periphery, like Spain and Ireland, have been booming.

The researchers say that the ECB's behaviour in setting interest rates looks like it is being determined, on a statistical model, purely by events in Germany and Italy, the countries with the two weakest economies.

The result has been a huge boost to inflation, wages and house prices in countries like Ireland, which are already in the middle of an economic expansion.

Challenge of enlargement

The team proposes reducing the power of central bank governors on the committee by appointing just five on a rotating basis - who could be outvoted by six permanent members of the interest rate setting board of the ECB.

They say that once the EU expands into Eastern Europe, and doubles to perhaps 25 to 30 members, it will become impossible to have an ECB board which contains all central bank governors anyway - it would become too big and unwieldy.

But the report rejects the notion that the ECB should publish the voting record of each individual member of its board.

That, it says, would institutionalise the national differences by making it more obvious how, for example, Germany and France voted on an economic issue.

Mr Wyplosz says the clash earlier in the year with former German finance minister Oskar Lafontaine was good for the central bank.

Mr Lafontaine wanted the bank to cut interest rates in order to lower the value of the euro and boost exports.

But the bank resisted direct pressure - although it later moved on rates - giving it more credibility in the markets.

Struggle over the euro

The biggest problem the ECB faced during its first year was the fall in the value of the euro, especially against the dollar, but also against the pound.

That was not a problem in itself, according to the report's authors, as the weak euro helped exports and contributed to Europe's recovery from recession.

But the inconsistent attitude of the bank, which initially said it did not mind what level the euro reached, then appeared to change its mind, had upset the markets.

The report recommends that the bank takes no action to boost the euro, suggesting that it will recover when the US economy begins to slow down.

It points out that the Swiss franc, which is not linked to the euro, has also fallen substantially in relation to the US dollar.

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See also:

03 Feb 00 |  Business
ECB interest rate rise?
30 Dec 99 |  Business
The euro's troubled first year
27 Jan 00 |  Business
Euro hits new lows
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