Select Committee on European Union Written Evidence

Memorandum by Miss Silvia Pepino, Vice President, Economic & Policy Research, JPMorgan

  1.   How has the Bank's two-pillar monetary policy strategy worked since the start of the stage three of EMU and the introduction of the euro on 1 January 1999?

  At first blush, it might appear that the ECB's policy strategy has worked well. Since the beginning of 1999, HICP inflation has averaged 2 per cent (the ceiling of the ECB's comfort zone), GDP growth has averaged 2 per cent (close to the region's potential), and M3 growth has averaged 5.8 per cent (not far above the 4.5 per cent reference value). But these averages hide quite a lot, and my critique of the ECB's behaviour over the past four years would emphasise the following points:

  First, the ECB has been very poor at communicating the reasoning behind its decisions; much of this has to do with its desire to give a high priority to M3.

  Second, The ECB has pointedly ignored the second part of its mandate, as outlined by article 105 of the Maastricht Treaty. It is not appropriate for the ECB to argue that the second part of its mandate is met by simply sticking to the first half of the mandate.

  Third, despite the requirement of the Maastricht Treaty, the ECB Governing Council refuses to take decisions on the basis of a simple majority vote. Consensus driven institutions will inevitably respond more slowly than ones driven by majority voting.

  The ECB spends a disproportionate amount of time criticising European governments, either for their fiscal policy stance or for the absence of structural reform. Yet, the ECB is very sensitive to any governments commenting on monetary policy. This asymmetry is inappropriate. The ECB should spend more time analysing the impact of its monetary policy, and should recognise more explicitly the important role of monetary policy in managing the business cycle.

  2.   Is the ECB's inflation target too low? Should the ECB adopt a symmetrical inflation target? What risks does such a target carry? Should the period over which the ECB is committed to meeting its inflation target be made more explicit? As well as an inflation target, should the ECB also have a target rate of growth of money GDP?

  Yes, the inflation target is too low. A 2 per cent average for the region will inevitably lead to very low inflation, or possibly deflation, in some countries. Of course, the inflation target should be symmetrical. For most of its life, the ECB's inflation objective has been very poorly defined. By having a better specified, symmetric inflation objective, the ECB would automatically be forced to maintain a satisfactory growth rate.

  3.   What would be the effect of the recent decision of the European Council to amend the voting modalities of the Governing Council?

  On the one hand, an enlarged EMU would be forced to make decisions on the basis of majority vote, which would be a clear improvement over the current consensus approach. But, on the other hand, the requirement to retain national representation means that the governing council will become a very large cumbersome body. It would have made more sense for the ECB to staff its Governing Council on a European basis rather than on a national basis, as essentially happens in the UK.

  4.   What would be the optimal solution to the problems posed to the workings of the Governing Council by enlargement? Is there a conflict between national interests and European interests? If so, how might these be reduced? What should be the relative size of the Executive Board in relation to the Governing Council? Should there be an independent monetary policy committee, along the lines of the MPC of the Bank of England?

  The optimal solution to the issue of enlargement is to abandon national representation. The ECB decision making body should then be comprised of a group of individuals from across the region, regardless of nationality. This would seem to be consistent with the Maastricht Treaty which requires members of the governing council to make decisions on the basis of the region as a whole. I think a body like the MPC would be a very good model, in the sense that outside representatives on the decision making body can bring a different perspective.

  5.   What should be the roles of the European Council, the European Parliament and national parliaments in appointing the President and the other members of the Executive Board?

  I think the European Council should select the candidates, and the European Parliament should have the opportunity to examine and potentially veto the candidates. I do not think national parliaments should play a role.

  6.   What has been the effect of the press conference held immediately after the meetings of the Governing Council? Should the ECB publish unattributed minutes of meetings of the Governing Council? Should the ECB publish the results of votes of the Governing Council? Would identifying individual positions cause problems in a multi-national organisation? How might any such problem be overcome?

  I think the press briefing can be viewed as an alternative to minutes. Which one is better can be debated. The minutes from the MPC can sometimes be confusing, although it is helpful to see all the arguments. At the ECB press briefing it is sometimes hard to distinguish whether the President is expressing his own views or those of the whole Council. Certainly, the press briefing does not give any sense at all of the range of views that likely exist on the Governing Council.

  7.   Should the ECB continue to set its own inflation target? What alternatives are there?

  At the moment, the ECB has both goal independence (the ability to set its own target) and instrument independence (the ability to set policy to meet the target). In contrast, the Bank of England only has instrument independence. In my view, the ECB should be in the same position as the Bank of England. The inflation target should be set by Ecofin and the ECB should then be free to set policy to meet that objective, and then be accountable to both Ecofin and the European Parliament for its performance.

  8.   What is the experience of the testimonies of the ECB before the European Parliament? Does the European Parliament sufficiently call the ECB publicly to account? To what extent has the ECB been ready to listen, to explain and, if necessary, to learn?

  I think the European Parliament does a very good job of holding the ECB to account. Committee members ask well informed and penetrating questions.

5 June 2003

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