Examination of Witnesses (Questions 40
- 59)
TUESDAY 13 JUNE 2000
MR JAMES
BARTY, PROFESSOR
IAIN BEGG,
MR ROGER
BOOTLE, PROFESSOR
WILLEM BUITER
AND DR
DANIEL GROS
Sir Michael Spicer
40. I just have a supplementary on that: that
depends on the goodwill of the European Central Bank, does it
not? They would not have to appear before national parliaments
at all; they have entire discretion as to who they appear before
as well as setting the rules.
(Dr Gros) I was not suggesting that the European Central
Bank has to go to every national parliament; on the contrary—that
national parliaments send observers to the European Parliament
so they can help the EP in its decision-making. It would be too
much for the ECB personnel to go around to fifteen national parliaments.
Sir Teddy Taylor
41. I have a question for Professor Buiter because
I think he is aware that there was a creation of panic in this
Committee and also throughout the country when he said in "Alice
in Euroland" on 17 March last year, "The legal framework,
institutional arrangements and emerging operational practices
of the ECB . . . are flawed and in urgent need of modification
. . . They could put the common currency's survival at risk.",
and now we find a document here called "Britain in Europe"
which some people would regard as rather enthusiastic propaganda
for the whole business. What I am really wondering is, in view
of the worries we all had, when you said that the common currency's
survival could be at risk because of the whole business being
flawed and in need of modification, what has changed your mind
and what changes have taken place in the ECB since you expressed
these rather alarming sentiments?
(Professor Buiter) I have not changed my mind. Even
when I wrote that, I still stated very clearly if you read the
rest of the article—
42. I read it all.
(Professor Buiter)—that, despite my reservations
on especially the accountability, openness and transparency of
the ECB, I favoured not just monetary union as it had taken place
but also a UK participation in that. I do think that no operationally
independent central bank can, in the long term, survive in a democratic
polity unless it is truly accountable to the duly constituted
Parliamentary body. Accountability, of course, requires transparency
and openness and, in my view, there were deficiencies and there
continue to be deficiencies as regards the openness and transparency,
and that would have to do with the publication of votes—indeed,
the practice of voting at meetings—and the publication of
a proper set of minutes related to the deliberations of the rate-setting
committee, the ECB Council. I think the ECB, without making any
formal change in its operating procedures, has showed great awareness
of the need to try and explain itself so something like what the
MPC achieves through its minutes is now achieved through extensive
briefings, both orally and in writing, about the deliberations
and the considerations that went to the decision. But they have
a very different model—a consensus model of decision-making—which
involves no voting, or only in exceptional circumstances, and
therefore basically decision-making by unanimity. We in the UK
have a model of collective decision-makers, individual accountability,
the practice of always taking individual votes. That is closer
to the kind of transparency that is required to make a non-elected
body of Eurocrats and technocrats acceptable, a body with a real
policy role in the current monetary arrangement in Euroland. These
arrangements are evolving. As we meet a year from now to comment
on the first 30 months of the ECB, the European Parliament, if
no other body, will have insisted on more effective accountability
of the ECB.
43. When you talk about the legal framework
and institutional arrangements, these have not changed at all.
If you think that the common currency's survival is still at risk,
why are you recommending other countries to get involved in it?
Were you overstating yourself here?
(Professor Buiter) Political legitimacy is necessary
for any institution to survive. To me, political legitimacy requires
a measure of openness, accountability and transparency that is
greater than the one currently in effect. That applies to many
institutions, not just in Euroland, but in national economies,
including the United Kingdom. No institution's viability can ever
be taken for granted.
44. What changes are required in the legal framework?
(Professor Buiter) This is specifically in connection
with the size of the deliberative body. There are 17 now. With
the four coming in there would be 21. With ten accession countries
it would be 31. That is two and a half football teams. It is too
large. There are going to have to be serious institutional reforms,
not just there but in the European Union institutions as a whole,
to get away from the automatic presumption that every nation automatically
has a seat on the board or the Council or whatever. We have to
go towards more qualified majority decision making there as well.
45. I thought the ECB did vote by majority.
(Professor Buiter) They do not vote at all, de
facto. These decisions are by consensus. They could vote if
they wanted to but that is a practice that they have evolved among
themselves, just as our practice of voting is not laid down in
the Treaty.
Mrs Blackman
46. Can we attribute the trend rate of growth
enjoyed by countries within Euroland to the euro by itself or
would they be enjoying similar rates of growth in any event, given
the retreat of the damage done by the emerging markets crisis?
(Professor Buiter) One can conceive of a set of national
monetary policies in what is now the Euroland area that would
have achieved similar overall macroeconomic stimulus. Monetary
policy, on balance, has been rather loose in Euroland since the
start and appropriately so, but you could have mimicked that in
a technical way by having 11 national monetary authorities on
average loosening up. The degree of coordination achieved by having
this common institution would have been very hard to mimic. The
growth in Euroland is not just cyclical. The weakening of the
euro has helped. The low interest rates have helped to give a
conjunctural stimulus but despite those who insist on pointing
out the rigidities in Euroland there has been a history of reform
since the late eighties or the mid eighties that has made the
supply side receptive to this more relaxed monetary policy. We
are seeing the beginnings now, even in the least reformist areas
of Euroland, of an awareness of the need for measures to implement
supply side reforms that will ensure that an appropriate monetary
policy of the kind conducted by the ECB is translated into real
growth and low unemployment, rather than higher prices.
(Mr Barty) What entry into the monetary union does
for a number of these countries is to get them to focus on the
microeconomics. They no longer have real control over the macroeconomic
tools. They clearly do not have control over monetary policy.
Their ability to move on fiscal policy is limited by Maastricht
criteria. The evidence we have—it is slow at the moment—is
that countries are looking at their labour markets and saying,
"What do we need to do to free up labour markets?" Clearly,
it is the case in many European countries that their labour markets
are not as flexible as ours or those in the United States, but
I think we are going to move along that road. I think you will
see tax reforms coming through as well so from that perspective
monetary union has been a stimulus to force governments to look
at the microeconomic policies which in the past they had ignored
because they had been able to pull macroeconomic levers instead.
47. These kinds of structural reforms will ultimately,
one assumes, lead to more convergence along with the monetary
climate that is set strategically. Do you see real signs of convergence
at the moment amongst different economies? It is really achievable?
(Mr Barty) Over time you can see convergence between
the European economies. One of the pieces from one of my colleagues
at Deutsche Bank which went into this document shows that, if
you look at the correlation between French and German growth rates
through the course of the 1990s, it is almost 75 per cent. That
is a very strong correlation. A lot of those countries paid the
price for that. France in particular had the Franc fort
policy for a long period of time. It fixed its exchange rate to
that of Germany. They then mimicked the Bundesbank's monetary
policy and achieved convergence in that way. It is going to be
interesting to see how these countries sustain convergence over
time inside monetary union, but obviously as trade links between
the countries increase that should help convergence. The point
on microeconomic reform is that it does not necessarily increase
convergence. Liberalisation of financial markets can act in the
opposite direction and make some economies more volatile. If you
have microeconomic liberalisation, it increases the ability of
an economy to flexibly adjust to any macroeconomic problems and
that is where these micro reforms will help.
Sir Michael Spicer
48. Professor Begg, in the interesting article
which we have read entitled "Regional Adjustment Mechanisms"
you conclude: "EMU is unlikely to be threatened in the short
term by the inadequacy of regional adjustment mechanisms but as
an aspect of the Union it will need to be addressed. Either the
EMU itself will have to acquire new competencies together with
budgetary and administrative means to fulfil them or Member States
will have to recover some of their powers to intervene."
Which of these do you prefer? Which do you think is likely to
happen?
(Professor Begg) I will give you a typical economist's
answer: both. What happens under EMU is plainly you have lost
an adjustment mechanism, the exchange rate or independent monetary
policy, which are in practice the same thing. Therefore, you need
to work on how other adjustment mechanisms can be brought into
play to achieve the same ambitions. It may be that flexibility
on the supply side, which is much more a Member State or even
sub-national competence, is something that will have to be reinforced
under EMU as we try to reconfigure the policy framework. There
is also the case for some degree of top down fiscal stabilisation.
That necessarily means a European level financing power of some
sort. It need not be huge. Some of the work that has been done
by the Commission suggests that you can achieve European level
stabilisation from regional or national shocks with a relatively
small budget, of the order of 0.4 of a percentage point of GDP.
It is not the structural funds which are long term in their ambitions.
It is something more akin to what you find in the US through the
transfer of welfare benefits, which will attenuate a downturn
or relative upturn in state economies. That is the sort of thing
which has to be considered at least at European level. I know
it is anathema to many in Britain to say, "Let us give more
money to Europe to play with", but this is a macroeconomic
proposition, not one about giving them more money to spend.
49. Top down financial stability is a euphemism
for a new central taxation system?
(Professor Begg) Yes, but on a very limited scale.
50. If you accept that there is to be immobility
of labour between countries and therefore a continuation of pretty
massive structural deviations and variations within Euroland,
in order to compensate the countries that will be badly affected
by this, these funds are going to have to be quite substantive,
are they not?
(Professor Begg) No. The stabilisation function is
a macroeconomic proposition which can be done with relatively
little money. You should then simultaneously be working on freeing
up markets, ensuring that there is greater capacity for labour
mobility.
51. We are talking about labour markets between
countries. Nobody is suggesting that any kind of freeing up is
going to result in greater labour mobility between countries.
(Professor Begg) In the paper, we itemise nine different
mechanisms which come into play. I would not want to rely on any
of them singly but rather put together an entire package which
give you greater scope for adjustment.
52. You have been honest and said there will
need to be some new central taxation system, in your view. That
is clearly on the record. Would anybody disagree with that?
(Professor Buiter) Yes. I do not think that, for stabilisation
purposes, any central, federal level fiscal policy is necessary.
Anything that can be done by a federal level, by a European stabilisation
authority using nation specific transfer payments or whatever,
can be achieved equally well from a stabilisation point of view
by national or even sub-national government entities having automatic
fiscal stabilisation or discretionary fiscal instruments at their
disposal. It is a very different issue if you talk about serious
redistribution between regions or nations of Europe or if we talk
about long term structural reform which you wish to subsidise
out of centrally raised and centrally provided funds. That is
a matter of political priorities, a matter of political cohesion,
but there is nothing that Brussels can do for national stabilisation
that nations cannot deliver equally well themselves.
53. If that is the case and there could be,
in your view, greater freedom given, from a stabilisation point
of view, to national fiscal authorities, would that not run counter
to the requirements that monetary and fiscal policy at central
European level should be at least in coherence and in sync with
each other?
(Professor Buiter) No. It would be desirable to have
a mechanism for coordinating Euroland wide fiscal and monetary
policy. It is not being coordinated now. What has to be decided
at the centre is the balance between the average fiscal stance
in Euroland and the Euroland wide monetary policy. That still
leaves individual nations or sub-national entities to divide the
average stance among the nations in a way that corresponds to
their possibly different cyclical positions.
54. You have accepted that it would be desirable
as part of the monetary union to have a central fiscal authority?
(Professor Buiter) No. I think there has to be coordination
to make sure that the sum of the fiscal stances of the 11 Members
adds up to something that makes sense from the point of view of
the balance of monetary policy and fiscal policy.
55. The coordinating body would have to have
some authority. You could not just have a coordinating body which
had no authority.
(Professor Buiter) It would have to be a coordinating
body which would have the authority to set a total deficit space
in Euroland, but there does not have to be an independent, central
tax or transfer mechanism.
Sir Michael Spicer: That is not accepted
by the rest of your colleagues, I do not think.
Chairman
56. Do we not have the Maastricht criteria already?
Is that not a coordinating structure?
(Professor Buiter) I would not say that is the coordinating
mechanism. That is simply a response to the perceived fear by
the founders of national governments left to their own devices
being prone to excessive debt and deficit spirals. It is a set
of ceilings. To use nationally differentiated fiscal stabilisation,
nations would have to be sufficiently far below these norms that
there is enough room on the upside not to hit the ceilings when
times get rough. In principle, the national, fiscal stabilisers,
both automatic and discretionary, can operate once a country locates
itself, as Britain is now already, sufficiently far south of the
Maastricht and Stability and Growth ceilings not to be bound by
them in the course of cyclical fluctuations.
57. You said that you thought that, for stabilisation
purposes, it was not required to have a central, fiscal taxation
gathering authority, but that you thought there might be political
reasons in terms of distribution of income for having such an
authority. Are they not two sides of the same coin? If you have
great disparities of wealth and economic well-being between different
parts of a single monetary union, can it really be the case that
that monetary union can remain as a stable entity?
(Professor Buiter) We have had very wide disparities
in levels of income and wealth within the United Kingdom without
the country blowing apart.
58. The United Kingdom authorities do have and
indeed use the means very extensively to distribute moneys from
one part of the country that they consider to be wealthy to other
parts of the country. That is exactly what happens. That is why
there is some element of stability within the country.
(Professor Buiter) I agree that there is a political
argument that, if an area is going to have a certain degree of
political integration and common institutions, that will be accompanied
by effective political pressure for a greater redistributive element
and greater common support for desirable structural projects and
things like that. That is not a matter of economics but of society.
I fully accept that. If integration means anything, at some point
it will mean that you want to express the common identity by some
sort of fiscal means. It is not a stabilisation issue.
Mr Fallon
59. Can we move from fiscal coordination to
economic policy coordination? Are you able to comment on the adoption
within the broad economic policy guidelines of the power of ECOFIN
now to review Member States' public expenditure programmes? Do
you see that power being used increasingly?
(Professor Begg) No. I do not think ECOFIN or any
other European body is ever going to say, "Here is what you
may or may not spend your money on." What they may say is,
"We are concerned about your fiscal balance", which
is purely the difference between the two aggregates of public
expenditure and taxation. They would never get into the detail.
|
