THE
LIMITED
ROLE
OF
MONETARY
POLICY
56. Dr Tietmeyer spelt out his perception
of the proper relationship between monetary policy and the other
levers for achieving a successful economic policy. He saw the
purpose of monetary policy as the creation of a sound and stable
monetary environment which would, in his view, provide the best
conditions for economic growth and reducing unemployment. He added
that a stable monetary environment also had positive effects for
social justice: the losers from inflation were always the poorer
people and those whose salaries were fixed. Price stability promoted
both economic development and social justice; but it was only
one of the conditions for a successful economic policy: fiscal
policy, wage policy, labour market conditions and other factors
were also important. But within a monetary union there was and
could be only one single monetary policy. He did not think that
in the end this would create damage: the ECB's policy decisions
would be taken in the light of the situation across the whole
of the euro zone. In the long run the cycle would be more or less
the same for the whole area and, in any case, structural problems
could not be solved by monetary policy. He contrasted the experience
in the United Kingdom, which, he said, had had excessive variations
in monetary policy with that in Germany which had followed a steady
longer-term orientated policy which had proved successful. He
hoped that this longer-term orientation would be the policy of
the ECB (QQ 248-249, 287).
57. Dr Gaddum amplified Dr Tietmeyer's
view by making explicit their position that in a monetary union
it remained a national responsibility to provide the flexibility
to deal with structural problems and asymmetric shocks. This would
be done partly by means of national fiscal policy but more especially
by the flexibilities of the labour and product markets—by
what in German was called ordnungspolitik (Q 250).
58. Dr Duisenberg, too, was clear that
dealing with problems of high or rising unemployment or of lagging
economic growth "is not and cannot be a primary concern of
the monetary authorities" (Q 200). He said that the central
bank community and academia were agreed that the unemployment
problem, which he recognised as the major problem facing the larger
economies in Europe, was very much a structural one: it had to
do with the rigidities of the product and labour markets and "simply
could not be solved by monetary measures" (Q 202).
59. Mr Wolf emphasised that the view
of economic policy embodied in the Treaty was that the best thing
the ECB could do was to deliver price stability: if it concerned
itself too much with stabilising the real activity of the economy
as well as prices it would deliver neither. He said this view
was central to the Treaty and was also the basis for the United
Kingdom's present macro-economic policy (Q 392). Mr Gordon Brown
made a similar point by saying that "to pursue policies for
low inflation is also a means of pursuing policies for high growth
and employment" (QQ 515, 518).
60. In response to a suggestion that
flexibility of labour markets was sometimes a euphemism for a
reduced share of GNP going to labour, Dr Tietmeyer said that this
was not his view: for him labour market flexibility meant wages
in line with changing productivity and, where structural change
introduced new industry, finding the appropriate labour costs
for that new industry (Q 289). Mr Gordon Brown, took a similar
line when he explained his view of labour market flexibility.
He said he did not mean just "tearing up every set of regulations
that exist, whether they are good or bad. What I mean is preparing
the economy for the future challenges, giving people the skills
that are necessary to enable them to get jobs wherever these jobs
are, allowing people to make the transition from jobs in older
industries to jobs in newer industries" (Q 506).
61. Challenged on the possibility for
the ECB to respond appropriately to a contractionary situation,
given its obligation to pursue price stability, Sir Nigel Wicks
pointed out that if economic activity was lower it would be expected
that inflationary pressures would also be lower and that this
might produce "some monetary response" from the ECB.
More generally, he, too, subscribed to the central bankers' view
that the pursuit of price stability was in no way inimical to
growth and employment—"indeed, the reverse", he
said, and he claimed that this was "not just an article of
dogma" but that studies demonstrated the usefulness of price
stability for economic activity generally. He pointed out that
the Member States which had had good economic performance over
a long period were those which had geared their monetary policy
to price stability: Germany, with its monetary policy run by the
Bundesbank, was an example (Q 101).
62. Mr Volcker expressed what he said
was "the general sense of economists today" and "the
general drift of politico-economic thinking": that central
banks had better give priority to price stability or their growth
objectives would be thwarted over a period of time (Q 459).
63. Mr Monks expressed similar views
when he said, "the emerging consensus which has embraced
not just the banking community but others as well, and increasingly
a fair slice of the European trade union community, [is] that
monetary policy pursued responsibly is an important part of laying
the conditions for long-term growth" (Q 179). He added that
the ECB would have to be sensitive to the implications for employment
of their interest rate decisions (Q 179).
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