Examination of Witnesses (Questions 20
- 39)
TUESDAY 13 JUNE 2000
MR JAMES
BARTY, PROFESSOR
IAIN BEGG,
MR ROGER
BOOTLE, PROFESSOR
WILLEM BUITER
AND DR
DANIEL GROS
20. What about the national banks, because we
understand they have the power to intervene?
(Dr Gros) No, they cannot intervene. The only body
that can intervene on the foreign exchange market is the ECB.
21. What about Japan?
(Dr Gros) No, no. I am saying on the euro. On the
euro, it is the ECB. It might technically be done via the national
central banks, the Bundesbank acting on the orders of the ECB,
but the decision rests solely and entirely with the ECB on interventions.
22. And this has not happened?
(Dr Gros) They have not intervened so far and they
were miles away from intervening. That is not really something
they are thinking about because they are not getting to the stage
where, as Professor Buiter said, the fall in the euro really seriously
is a menace to price stability. That would have to occur and,
secondly, they would have to do it with the US authorities together.
If it were perceived to be just a grasp for help by an ECB that
cannot get its own act together, that would be no use so I think
interventions for the time being are totally out of the question.
23. It says here "The report argues that
intervention by the ECB might in principle be effective in turning
the euro around if used at the right time, but it is hard to tell
when the time is right."
(Dr Gros) Exactly. If we came to a situation where
the euro was driven much, let's say, below 0.9 and—what
we emphasise a lot—if ordinary market conditions no longer
prevail.
24. Only in that situation?
(Dr Gros) Only in that situation and only if you have
both sides of the Atlantic basically co-ordinating their steps.
25. Finally, you say that the euro is likely
to stay weak for some time. Do you mean it will stay weak for
a time and then rise?
(Dr Gros) Most economists will agree that, if you
take a ten year or longer horizon, one presumes the euro will
go up.
26. Why?
(Dr Gros) Because most are estimates of what we call
fundamental equilibrium exchange rates. Those exchange rates which
are compatible with current account equilibrium show that the
dollar at present is hugely over-valued. The US is running a current
account deficit of close to 4 per cent of GDP; all estimates indicate
that, if the dollar stays where it is and if US growth stays normal,
that will continue into the definite future; the US already has
an indebtedness ratio compared with exports which is higher than
that of many less developed countries.
27. So your advice to the currency speculator
would be to sell dollars and buy euros?
(Dr Gros) Not today.
28. In the future?
(Dr Gros) I am just saying in ten years they will
know better. Two weeks is a long time for them. For economists
it is ten years and that is a completely different story.
Mrs Blackman
29. You all gave high marks for the ECB's performance
so far on the interest rates but many of you complained about
poor presentation—particularly in the first instance. To
what extent will the danger of poor presentation always be there
given the objective and the twin pillar approach? In other words,
is it inbuilt into the system? Is clarity and presentation going
to be a difficult issue?
(Mr Barty) I think that the ECB certainly had some
teething problems—there is no two ways about that. I am
not sure it is necessarily a function of the target they have
set themselves in the twin pillar approach. I think the 2 per
cent or less inflation target, which they are monitoring both
by an assessment of real economy an inflation data and by monetary
growth itself, is a very sensible, pragmatic way of doing it and
most central banks including the Bank of England, take a similar
approach. I think the problem comes from the fact that you have
seventeen people on the ECB's Governing Council; in order to get
a straight decision they have to come to some form of consensus
and that is quite difficult. We know from our own Monetary Policy
Committee, which has a smaller membership, how divided they can
be. Part of the reason why the ECB looked like it has been either
confused or lagging behind has been a function of the fact that
it has taken time to build a consensus to move monetary policy
in one direction or another. Now that is something I think they
do need to address over the medium term, in particular in relation
to the Committee's question on what happens if you expand the
membership of the euro area and Eastern European countries come
in. If every member of the euro area has a member on the governing
council that has a vote it could become extremely cumbersome indeed.
The executive council of the ECB is going to have to take a much
more dominant role and that is the only way they can really achieve
a situation where they offer more clarity to the markets.
(Professor Buiter) On the clarity of the objectives,
let me talk about the inflation target. Part of the lack of clarity
comes from the fact that ECB strongly denies having an inflation
target. It says we deem 0-2 per cent inflation on this particular
index consistent with price stability but, if you ask whether
this means that they pursue an inflation target of one per cent,
in the middle of the range, then the response is no, we do not
have an inflation target. So they have an inflation target that
dare not speak its name, and that does not help. And the twin
pillar part also does not help because the second pillar, the
monetary aggregate, is neither here nor there. We knew that the
Bundesbank, despite having a reference value on target for monetary
growth, had a long history of sensibly ignoring it when it did
not make sense, but that same reputation established over a period
of 30 plus years is not yet there. The same history of intelligently
dealing with an unintelligible indicator is not yet part of the
ECB way of doing things, so we either have to wait for a long
time until it becomes clear what the monetary aggregate, what
the indicator, the monetary reference value means or does not
mean, or hopefully they will bite the bullet and forget the nostalgia
for the Bundesbank and de-throne the monetary reference value
and come out of the closet with their inflation target. That would
really help clarify the issues.
Chairman
30. In other words, the MPC way of doing things
is better than the ECB?
(Professor Buiter) Well, on this particular matter
we have a very clear inflation target and we do not have a monetary
reference value, even though, of course, the behaviour of all
the monetary aggregate informs the decisions of the MPC—at
least I assume it still does.
31. Does anybody else have a view on this one?
(Professor Begg) I think we should separate some of
the presentational points we raised earlier about the external
value of the euro from the internal presentation. What we see
internally is that it has taken a little bit of time for the institution
of the ECB to gel, to work out what it is saying. Where the external
value has been particularly badly served is that you have separate
members of the ECB council and finance ministers saying different
things to the market and that has caused a lot of the disquiet.
Mrs Blackman
32. Just going back to Professor Buiter very
briefly, given that what you would like to happen may not happen,
even over the medium term, presumably you would subscribe to Mr
Barty's view that the executive has really got to get its act
together before going public?
(Professor Buiter) Yes. The problem will be overcome
even if they do not change formally to any explicit target, or
if they did not demote the monetary reference value. Simply, the
proof of the pudding would be in the eating, that is, in uncovering
what it really means but yes, clearly at the moment with seventeen
members on the Council, the size is already stretched, and if
we talk about enlargement, the current pre-ins joining let alone
the first batch of accession countries coming in, operationally
the thing would become completely unwieldy. So inevitably I think
you would either have to design a new mechanism for keeping the
size of the body overall down or the executive board will have
to take a much more dominant role. Even there you cannot have
six people singing six slightly different songs. It really has
to be either nobody saying anything or everybody talking from
the same report card.
Mr Plaskitt
33. Can I carry on with Professor Buiter for
a moment and ask you, in your view, to whom the ECB is accountable?
(Professor Buiter) To the European Parliament; that
is very clear in the treaties and there is a specific subcommittee
of the Economic and Monetary Affairs Committee that is charged
with the task of calling the executive to account. It is not actually
entirely clear; I do not think that the European Parliament necessarily
has the authority to call the national governors. It certainly
has not been done yet, and so there is I think a slight vacuum
there. The answer is, first, the European Parliament and through
them, of course, ultimately to the citizens of the EMU members
just as in our case here, in Britain, the MPC is accountable to
Parliament and through them to the British public as a whole.
34. But is it real accountability given Article
107 of the Maastricht Treaty?
(Professor Buiter) You mean the one that actually
sets the objectives.
35. It says that the ECB shall not seek or take
instructions from community instructions or bodies or from any
government or member state?
(Professor Buiter) Yes, but there is a difference.
That is true for every operationally independent central bank.
Not taking orders is not the same as being unaccountable. Being
accountable means to stand up in a public forum in front of elected
representatives of the citizens to explain what you have done,
why you have done it and why it makes sense—to justify yourself.
36. But in fundamental ways it is a different
model to the one we had in the UK where, for example, the Chancellor
can overrule and Parliament can change the guidelines?
(Professor Buiter) That is the reserve powers.
37. And they do not exist?
(Professor Buiter) They do not exist there. That means
that, even in terms of formal operational independence, the ECB
has a much larger measure of it than the MPC here because the
Treasury reserve powers have no counterpart in the Maastricht
Treaty. In addition, of course, the ECB has a much greater de
facto measure of target independence. In principle, the target
is price stability in the treaty—not chosen by the ECB—but
price stability is just a word and the concrete expression of
that in measurable, observable indices is left to the ECB so yes,
they have a greater measure of independence but even the full
measure of operational and targeting independence is not inconsistent
with accountability, as long as you have to justify yourself and
have to explain the reasons why you did or did not do what you
did.
38. Can I ask Mr Barty what changes would have
to be made to the system we have adopted here since 1997 in terms
of operational independence? What changes would we have to make
to that, if any, in the event of the decision to put sterling
inside Europe?
(Mr Barty) Just to meet the requirements of the Maastricht
Treaty, you would have to take away those reserve powers that
the Chancellor actually has. The Bank would also have to have
the right to set its own target. I think there are also some changes
that the foreign exchange rules as well would have to go through
and the Monetary Policy Committee itself would become an advisory
body to the Governor rather than a decision-making body. They
are the main changes.
Chairman
39. Dr Gros?
(Dr Gros) I want to apologise; I have to go to the
European Parliament to help them with their accounting exercise
but I want to say in this context that the European Parliament,
of course, cannot call national and central bank governors but
I believe that the accountability exercise of the European Parliament
would be much reinforced if national parliaments were to participate
in that work and send either observers or other people so they
can be informed and contribute their own opinion, which might
be distinct from the people that can be elected in their home
country, and I believe that applies not only to member countries
of the euro area but all member countries of the European Union
because all member countries will be affected by what the ECB
does in one way or another. Even if they have their own independent
monetary policy, it affects the exchange rate, growth and so on.
Therefore I would say there is a role for national parliaments
in helping the European Parliament to exercise its control.
|
