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12.7 am
Ms Diane Abbott (Hackney, North and Stoke Newington): I congratulate my hon. Friend the Member for Blaenau Gwent (Mr. Smith) on obtaining this Adjournment debate. I want to address my remarks to the issue of independent central banks--whether the European central bank or central banks in general.
Economists like to see themselves as pursuing a scientific discipline, but more often than not it seems like a species of faith healing. Every year, economists seize on some new cure-all for the long-term decline of the British economy. In the 1970s, the big issue that economists liked to talk about was the balance of payments. A few years ago, the important remedy for the decline of the British economy was meant to be fixed exchange rates and the exchange rate mechanism. A recurring fashion in recent years has been the fashion for independent central banks. In the context of European monetary union, it would be an independent European central bank.
I want to explode some of the myths about independent central banks--whether about the European central bank or about making our own Bank of England independent. The argument for an independent central bank is that it will be more effective in dealing with inflation--if it were a European central bank, it would be more effective on a Europewide scale. That has been repeated so many times by politicians--both Labour and Government--and by economists, pundits and newspaper columnists that it has taken on the status of fact.
However, there is no statistical or empirical basis for the belief that simply having an independent European central bank, independent of politicians, will have any effect on European inflation levels. In 1994, the Treasury and Civil Service Select Committee, on which I have the honour to serve, considered the role of the Bank of England and issues relating to independence.
Our special adviser, Andrew Wood, said that, even where price stability was a central bank aim, there was only a weak causal connection between central bank independence and low inflation. Another of our advisers said that there was no conclusive statistical evidence of a causal relationship between the status of the central bank and inflation performance. In other words, the main empirical argument for a European central bank that is independent of politicians--that somehow it would help to keep inflation low--has no basis in fact. Yet politicians and pundits, whether in the context of debates about Europe or the Bank of England, continue to pursue that argument.
One may ask, if that argument has no statistical basis, why people have become so fixated on the notion that a European central bank that is independent of politicians would somehow bear down on inflation. I believe that that is simple reverse causality: because the Germans, who have had an independent central bank since the war, have been so successful in keeping down inflation, people think that a European central bank would have the same effect in Europe.
Anyone who has studied the German economy and politics knows, however, that there are all sorts of underlying reasons why German politicians and the German public have been so willing to swallow the policies that keep inflation low. The reverse causality argument--which says that, because the Bundesbank has been so successful, Europe needs a European central bank that is independent of politicians--does not stand up statistically.
Moving away from the facts and figures, the chattering classes and the people who claim to know about economics reiterate constantly the idea that monetary policy is so important that it should be taken away from politicians. They claim that the temptation for politicians to debase the currency should be removed. The argument for central bank independence and for a European central bank has found some favour with those not just on the Government Benches but on my own side.
In that context, I remind the House of evidence given to the Committee by Sir Douglas Wass, who, as some hon. Members will know, is a former permanent secretary to the Treasury. On the question of a European central bank that is independent of politicians, he said:
That is the central argument against a European central bank. The statistical case that independent central banks bear down on inflation has yet to be made. The idea that one can extract monetary policy, with all its implications for unemployment, from wider political considerations seems quite wrong; in other words, decisions to do with the exchange rate and monetary policy are too important to be left to bankers--whether they are European central bankers or our own wonderful Eddie George.
I refer once again to Sir Douglas, because I think that, as an ex-permanent secretary to the Treasury, he might know more about the subject than anyone in the House. He said:
The arguments against an independent central bank--whether it is opposition to a European central bank or in opposition to giving independence to the Bank of England--are clear. There is no factual evidence to suggest that, if we had an independent European central bank tomorrow, it would be able to replicate Europewide the success that the Germans have had until recently in fighting inflation. It would be fundamentally undemocratic to take away from politicians and give to central bankers the important decisions that have such a wide-ranging effect on the whole community.
The Paymaster General (Mr. David Heathcoat-Amory):
The hon. Member for Blaenau Gwent(Mr. Smith) has chosen an important subject for his debate. He spoke with great clarity against the concept of a independent European central bank, chiefly on the ground of what he perceived as a lack of democracy.
The functions and powers of the European central bank are defined in the treaty of Rome, as amended--particularly as it was amended at Maastricht--which sets out the phased introduction and the steps on the way to full economic and monetary union in the European Union.
The bank is envisaged as being independent. It would be even more independent than the Bundesbank, which is frequently used as an example of a bank that is free of direct political interference. The object of making it independent is to ensure that it will deliver its primary objective--again as laid out in the treaty--of achieving price stability. One way of doing that is to ensure that political interference, particularly of a short-term nature, is minimised or eliminated altogether.
As the hon. Gentleman pointed out, that stage 3 of the economic and monetary union would entail the transfer of decision making about interest rates and monetary policy from the Bank of England and the Chancellor of the Exchequer to the European central bank. That would be an irreversible transfer of decision making.
The hon. Gentleman referred to the consequences of that. Although he gave a somewhat partial and one-sided view of the difficulties, he touched on important possible consequences and considerations that will have to be debated in the House and the country before we make a decision about that final transfer.
"It is not the job of central bankers to judge how far it is right to go in damaging the standard of living of some members of the community, or destroying the jobs of others, in order to bring inflation on to some particular path. These are broad matters as much of social welfare as of economics. The decisions of ministers may not escape criticism; they rarely do. But, that it is and should be their responsibility to make the decisions, seems to us to follow from the nature of the decisions and the way they work".
"It seems to us to be fundamentally mischievous for a significant element of the polity affecting these issues to be removed from the domain of a democratically elected and responsible government and handed to that of an appointed and unaccountable central bank".
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