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Friday, 25 May, 2001, 10:41 GMT 11:41 UK
Q&A: Britain and the ECB

As the debate over the euro heats up, even Labour's Gordon Brown has raised questions over how Europe manages interest rates. BBC News Online examines how significant the differences are.

If we joined the euro, what would happen to interest rates?

The 12 EU countries in the eurozone have their currencies, and their interest rates, managed by the European Central Bank (ECB) based in Frankfurt.

It sets one interest rate for the whole area, based on its objective of "price stability".

The ECB is independent of national governments, and its governing council is made up of the Governors of the central banks of each member country - who are supposed to be politically independent.

How does that differ from what happens in the UK?

The UK also has an independent central bank since 1997, with the Bank of England's Monetary Policy Committee (MPC) setting interest rates in the UK after its monthly meeting.

However, the Chancellor of the Exchequer has more influence over the Bank of England in two ways.

Firstly, he sets the target inflation rate for the Bank of England - currently 2.5% (compared to 2% in the eurozone, which is set by the ECB itself).

Secondly, he appoints the members of the MPC for short, two-year terms, and therefore has more influence over its composition. He can, for example, appoint so-called "doves" who worry less about inflation.

What is a "symmetrical" inflation target?

The other big difference is that the Bank of England has a "symmetrical" inflation target.

That is, it is supposed to pay just as much attention to a situation where inflation is too low - which might mean the UK is heading for an economic slowdown - as when inflation is too high.

That means that in recent months the Bank of England has been cutting interest rates as inflation is well below target, thus helping the UK economy.

Gordon Brown is worried that the ECB only needs to take action when inflation is too high - as it is modelled on the role of the Bundesbank, the German central bank, where the fear of inflation has historically been greater.

That has made it slow to respond to fears of a European recession.

He claims that other European finance ministers increasingly back his case for a symmetrical inflation target.

Is the ECB democratic and open?

The other difference between the ECB and the Bank of England is that the Bank of England publishes the minutes of its deliberations on interest rates - just two weeks after each decision is made.

This makes it easier for the financial markets and the public to judge which way interest rates are likely to move in the future.

The ECB holds occasional press conferences, but does not publish minutes. - although its President, Wim Duisenberg, does appear twice a year before the European Parliament.

And it is generally seen as communicating less well with markets and politicians.

Gordon Brown says the ECB lacks "accountability and transparency" and would like to see the ECB publish its minutes, and allow its officials to submit to questioning by national Parliaments.

ECB members counter that such a move could make setting interest rates more political and subject them to political pressure from their home countries.

What about the freedom to take decisions on taxes and spending?

Gordon Brown is also worried that the fiscal rules imposed on members of the single currency could limit the UK government's ability to borrow money for investment.

Under his "golden rule," the UK government is committed not to run a budget deficit on its current account over the economic cycle - but it is allowed to borrow more money for public capital projects like school buildings, hospitals and roads - an area of spending Gordon Brown would like to expand rapidly.

But members of the eurozone are committed to a "stability pact", which forces them to aim for a balanced budget at all times - and introduces financial penalties for deficits that exceed 3% of GDP (whether or not it is investment spending).

However, with the UK running a budget surplus, this problem is some time in the future - although Gordon Brown claims increasing support in Europe for his rule that exempts public investment from budget constraints.


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