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
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
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,
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